Chapter 2 - Inventory, Stock Analysis and Classifying Products - Part 2

Chapter 2: Inventory, Stock Analysis and Classifying
Products (PART 2)
MSc. Nguyen Hoang Huy

Email: nhhuy@hcmiu.edu.vn
Room: A2.603
International University
Vietnam National University HCMC
Materials
1. Arnold, Tony J. R., Chapman, S. N., Clive, L. M.

Introduction to Materials Management, 7ed. Pearson:
2016 (Chapter 8, 9, 10, 11)
2. Richards, G. (2017). Warehouse management: a

complete guide to improving efficiency and minimizing
costs in the modern warehouse. Kogan Page Publishers
(Chapter 2, 3)
2
Contents
1. Product classification
2. ABC analysis
3. Product coding
4. Product handling groups
5. Inventory management: why hold stock?
6. Inventory costs and service
7. Lead time
8. Inventory and statistics
9. How much stock should be held?
10. Replenishment methods
1. Product classification
Warehouses contain the following three types of

inventory:
• Fast-moving: items that sell out almost as fast as
they're produced
• High-value: items that sell infrequently
• Hybrid: products that sell moderately quickly
Warehouse management that need carefully classify
their products are better able to efficiently stock
inventory.
4
2. ABC analysis
Individual items of warehouse which is called stock keeping
units (SKUs)
The ABC inventory classification is applied to determine the
importance of items and thus allowing different levels of
control based on the relative importance of items.
This method is based on the theory of Pareto’s law. the
relationship between the percentage of items and the
percentage of annual dollar usage follows a pattern in
which three groups can be defined:
• Group A About 20% of the items account for about 80% of the
dollar usage.
• Group B About 30% of the items account for about 15% of the
dollar usage.
• Group C About 50% of the items account for about 5% of the
dollar usage.
5
2. Steps in Making an ABC Analysis
1. Determine the annual usage for each item.

2. Multiply the annual usage of each item by its cost to
get its total annual dollar usage.
3. List the items (decreasing order) according to their
annual dollar usage.
4. Calculate the cumulative annual dollar usage and the
cumulative percentage of items.
5. Examine the annual usage distribution and group the
items into A, B, and C groups based on percentage of
annual usage.
6
Example problem
A company manufactures a line of ten items. The usage
and unit cost are shown in the following table, along with
the annual dollar usage. The latter is obtained by
multiplying the unit usage by the unit cost.
a. Calculate the annual dollar usage for each item.
b. List the items according to their annual dollar usage.
c. Calculate the cumulative annual dollar usage and the
cumulative percentage of items.
d. Group items into an A, B, C classification.
Answer
Answer
Control Based on ABC Classification
Using the ABC approach, there are two general rules to
follow:
• Have plenty of low-value items. C items represent about
50% of the items but account for only about 5% percent
of the total inventory value => supply should always be
on hand
• Use the money and control effort saved to reduce the
inventory of high-value items. A items represent about
20% of the items and account for about 80% of the value.
They are extremely important and deserve the => tightest
control and the most frequent review.
Control Based on ABC Classification
• A items: high priority. Tight

control including complete
accurate records, regular and
frequent review by
management
• B items: medium priority.
Normal controls with good
records, regular attention, and
normal processing.
• C items: lowest priority.
Simplest possible controls—
make sure there are plenty.
3. Product coding
Each company will have a method of identifying products
through some form of coding system
The coding system maybe unique (ex: Shell group-10
number coding) or industry standards (ex: food industry-
bar code labelling)
• The reasons for it are universal:
• Provides a unique identifier per product line/item.
• Prevents duplication of stocks
• Provides standardisation
• Simplifies product identification for all suppliers, customers and
users.
• Can help in determining stock locations
• Assists in pricing and costing: for example, with food
supermarkets’ EPOS systems
4. Product handling groups
The matrix could also be
extended to account for any
specific product characteristics.
For example:
• temperature control:
needing separation and
zoning
• security: needing specific
lockable/safe areas
• hazard rating: needing
segregation and possible
temperature control and Matrix can be constructed to show the different
special fire protection products with their individual characteristics
• any other requirements that

mean that products cannot be
kept together.
5. Inventory management: why hold
stock?
If product flow is important, why then should we be
holding stock in the warehouse?
• To decouple supply and demand.
• As safety/protection
• In anticipation of demand
• To provide service to customers (internal and
external
5. Inventory management: why hold
stock?
Turnover of inventory will also mean sales and profits
to a trading business; therefore, the faster the
inventory turns, the greater will be the profitability
The key aspects to be considered in inventory
management are:
• Determining the products to stock and the location
in which to stock them.
• Maintaining the level of stock needed to satisfy the
demand (by forecasting of demand).
• Maintaining the supply
• Determining when to order (the timing).
• Determining how much to order (the quantity).
6. INVENTORY COSTS AND SERVICE
The aim of inventory management is therefore to
achieve the required service level at an acceptable
cost
This is a question of finding the balance between cost
of holding stock and the cost of providing the required
service at the level desired by the customer or
consumer
A key aspect in inventory management is dealing with
uncertainty, not only with the supply and the customer
or consumer demand, but also whether the
uncertainty is ‘real’ (or is it caused by institutionalized
and out-dated/ill-informed procedures and lack of
communication
INVENTORY COSTS
The following costs are used for inventory management
decisions:
• Item cost.
• Carrying costs.
• Ordering costs.
• Stockout costs.
• Capacity-associated costs.
Example Problem:
A company carries an average annual inventory of $2,000,000. If it
estimates the cost of capital is 10%, storage costs are 7%, and risk
costs are 6%, what does it cost per year to carry this inventory?
Answer:
Total cost of carrying inventory = 10% + 7% + 6% = 23%
Annual cost of carrying inventory = 0.23 * $2,000,000 = $460,000
7. Lead time
Lead time (LT) is a critical component in making inventory

decisions,
Example:
If 70 items are used per week and the supply LT is 2
weeks, then the quantity to order to cover the demand
during the supply LT (called the lead time demand) is 140
items.
Types of lead time:
18
7. The problem of lead time
variability
The main issue to be resolved with lead time is not its length of time
but the uncertainty and variability that can occur
• If lead time (LT) is halved from 12 to 6 weeks but the lead time
variability (LTV) stays the same at 4 weeks, then
19
7. The problem of lead time
variability
While we shall be looking at inventory improvements later, the
following are some ways to reduce demand and supply lead time
variability:
Demand LTV Supply LTV

– Predictable – Predictable LT
orders/size/make up – Get correct quantity first time
– Predictable order times – Get correct quality first time
– Data accuracy on what – Data accuracy on what is
customers want/when/price supplied/price.
– Is it ‘end’ demand or
institutional/‘Forrester’
demand?
20
8. How much stock should
be held?
• we need enough to cover for the difference between

the input and output rates. This is called the bulk or
the quantity (Q) stock.
• If there is some uncertainty with supply, we need to
have cover for the expected use during the supply
lead time This is called safety stock (SS) and is held
to cover the supply.
• If there is some uncertainty with demand, we need
enough to provide availability until the next delivery.
This is also called safety stock, being held to cover
the demand.
8. How much stock should
be held?
9. Replenishment methods
• How much demand is expected during the supply lead
time?
• How long will replenishment (the supply lead time) take?
There are two methods that can be used to check to see if
an order should be placed:
 At a specific time period (ROP): This is called periodic
review but it is also called the periodic inventory time-
based method
 At a specified remaining level of stock (ROL): This is
called continuous review and is also called the
perpetual inventory action level method and the fixed
order quantity method
24
25
Replenishment for independent demand: the ‘how much to order’ decision
The fixed/constant order quantity (FOQ)/continuous review-

variable order time (VOT) interval options first, we find that:
• Each time there is an issue/withdrawal from stock, the stock
position is reviewed to see if a replenishment order is needed.
• The same quantity is ordered each time, but it is ordered and
delivered at varied times, e.g. 10 tonnes in weeks 1, 3 and 4.
Suppliers are therefore expected to deliver, when needed, with
any quantity required.
• The quantity to be ordered can use the economic order quantity
(EOQ), less the free stock. EOQ finds the optimum order
quantity, at the balance between the cost of placing and the cost
of holding an order
• The decision on whether to order is triggered by the ROL.
Replenishment for independent demand: the ‘how much to order’ decision
• fixed/constant order quantity (FOQ)/continuous review-variable order time

The
(VOT) interval, we find that:
• The stock position is reviewed at a fixed time to see if a replenishment order is
needed. As this is at a fixed time, it can then facilitate more regular deliveries
from suppliers.
• A variable quantity (VOQ) for each order is placed at the same time
• The time period (FOT) setting can be influenced by EOQ (for example, the
annual demand quantity is divided by the EOQ to give the number of orders per
annum), with the high annual usage items being ordered more frequently.
• The maximum level for more stable demand/SLT can be determined by the
EOQ. For more uncertain demand/SLT, the maximum level is determined by the
Average of demand x Supply lead time, plus the safety stock (DV x S/L x), plus,
an additional allowance of Average demand x Review period (for demand before
the next review period).
• The quantity ordered (VOQ), i.e. the ‘up to level’, is the maximum stock level,
less the free stock.
28
29
30
31
32
Safety stock = sigma (std deviation) * safety factor
33
Remember: the units of D, R and L
34
35

Chapter 2 - Inventory, Stock Analysis and Classifying Products - Part 2

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Chapter 2 - Inventory, Stock Analysis and Classifying Products - Part 2

Caricato da

Copyright:

Formati disponibili

Chapter 2: Inventory, Stock Analysis and Classifying

MSc. Nguyen Hoang Huy

1. Arnold, Tony J. R., Chapman, S. N., Clive, L. M.

2. Richards, G. (2017). Warehouse management: a

Warehouses contain the following three types of

1. Determine the annual usage for each item.

• A items: high priority. Tight

• any other requirements that

Lead time (LT) is a critical component in making inventory

Demand LTV Supply LTV

• we need enough to cover for the difference between

The fixed/constant order quantity (FOQ)/continuous review-

• fixed/constant order quantity (FOQ)/continuous review-variable order time

Potrebbero piacerti anche