Inventory Management

“Holding the right amount at the right time is difficult!”

Where do we hold inventory?

- Suppliers and manufacturers
- Warehouses
- Retailers

Types of Inventory
- WIP (Work-in-progress)
- Raw materials
- Finished goods

Why do we hold inventory?

- Economics of scale
- Uncertainty in the demand side (product life-cycle, high competition)
- Uncertainty in the supply side (quantity, quality, cost, delivery times)
- Lead time
- Capacity limitations
Why is inventory management important?
- Distribution and inventory costs are quite substantial

Issues in Inventory Management

- Uncertain demand makes demand forecast critical for inventory related decisions  inadequate
demand forecasting is one of the biggest problems:
o What to order?
o When to order?
o How much is the optimal order quantity?
- Approach includes a set of techniques
o Inventory policy
- SC Factors in Inventory Policy
o Estimation of customer demand
o Replenishment lead time
o The number of different products being considered
o The lengh od the planning horizon
o Service level requirements
o Costs
 Order cost:
 Product cost
 Transportation costs
 Inventory holding cost or inventory carrying cost:
 State taxes, property taxes and insurance of inventories
 Maintenance costs
 Obsolescence cost
 Opportunity costs
- Variety of techniques for Inventory M.
o Economic lot size model
o Demand uncertainty
o Single period models
o Initial inventory
o Multiple order opportunities
 o Continues review policy
o Variable lead times
o Periodic review policy
o Service level optimization
(ver slide 14-17)
The effect of demand uncertainty
o Most companies treat the world as if it were predictable:
 Production and inventory planning are based on forecasts of demand made far in
advance of the selling season
 Companies are aware of demand uncertainty when they create a forecast, but they
design their planning process as if the forecast truly represents reality
o Recent technological advances have increased the level of demand uncertainty
 Short product life cycles
 Increasing product variety
The effect of demand uncertainty – Forecasting principles
- The forecast is always wrong (it is difficult to match supply and demand
- The longer the forecast horizon, the worse the forecast (It is even more difficult if one needs to predict
customer demand of r a long period of time)
- Aggregate forecasts are more accurate ( More difficult to predict customer demand for individual SKU’s ,
Much easier to predict demand across all SKU’s within one product family – Risk polling effect)
Example: (short time lifecycle products)
- One ordering opportunity only
- Order quantity to be decided before demand occurs

Singles period models – snowtime sporting goods (slide 22)

- Fashion items have short life cycles, high variety of competitors
- Observations:
o The optimal order quantity is not necessarily equal to forecast, or average demand
o As the order quantity increases, average profit typically increases until the production quantity
reaches a certain value, after which that average profit starts decreasing
o As we increase the production quantity, both risk and reward increases
Multiple Order Opportunities (slide 39)
- Two policies
o Continuous review policy (slide 41)
o Period review policy (slide 50)