Supply Chain Management 03 - Inventory Management

Supply Chain Management
Mohammad Tawfik
#AcademyOfKnowledge
http://SCM.AcademyOfKnowledge.org
AEMN328
Logistics and Transportation
Logistics and Transportation
(Supply Chain Management)
Inventory Management
Inventory Management
Mohammad Tawfik

Mohammad Tawfik
#AcademyOfKnowledge
Inventory
Inventory

Mohammad Tawfik
#AcademyOfKnowledge
What are Inventories?
●
Inventories are goods or materials that are in
any stage of readiness that are being held for
future sale

Mohammad Tawfik
#AcademyOfKnowledge
Reasons for Inventories
●
Transactional efficiency
●
Speculation
●
Hedging

Mohammad Tawfik
#AcademyOfKnowledge
Types of Inventories
●
Based on stage of completion
– Raw material
– Work-In-Process
– Finished goods

Mohammad Tawfik
#AcademyOfKnowledge
Types of Inventories
●
Based on reason for keeping
– Cycle inventory due to batching
– Anticipation inventory for seasonality
– Safety stock to buffer against uncertainty
– Pipeline inventory that is on-order or in-transit
– Strategic inventory to position for better negotiation

Mohammad Tawfik
#AcademyOfKnowledge
Inventory
Inventory
Management
Management

Mohammad Tawfik
#AcademyOfKnowledge
Back to Zeco :)

Mohammad Tawfik
#AcademyOfKnowledge

Mohammad Tawfik
#AcademyOfKnowledge
What inventory does Zeco have?

Mohammad Tawfik
#AcademyOfKnowledge
The most important question that YOU need to
answer is:
WHY do I need inventory?
WHY do I need inventory?

Mohammad Tawfik
#AcademyOfKnowledge
The motive for inventory:
●
Transaction motive
Transaction motive: Economies of scale is
achieved when the number of set-ups are
reduced or the number of transactions are
minimized.
Donglei Du

Mohammad Tawfik
#AcademyOfKnowledge
Imagine having to buy sugar 10 times a day each
for 1 kg!

Mohammad Tawfik
#AcademyOfKnowledge
●
Precautionary motive
Precautionary motive: hedge against
uncertainty, including demand uncertainty,
supply uncertainty
Donglei Du

Mohammad Tawfik
#AcademyOfKnowledge
What if you get to buy sugar, and your supplier is
out of it!!!

Mohammad Tawfik
#AcademyOfKnowledge
Or worse …
Customer have to wait until you purchase the
sugar each time a cup of coffee is ordered!!!

Mohammad Tawfik
#AcademyOfKnowledge
●
Speculative motive
Speculative motive: hedge against price
increases in materials or labour
Donglei Du

Mohammad Tawfik
#AcademyOfKnowledge
Imagine having to say:
“Sorry sir, but the coffee price have changed
because the sugar price went up an hour ago”

Mohammad Tawfik
#AcademyOfKnowledge
What is the purpose of inventory management?

Mohammad Tawfik
#AcademyOfKnowledge
Purpose of Inventory Management
●
The objective of inventory is to achieve
satisfactory levels of customer service while
keeping inventory costs within reasonable
inventory costs within reasonable
bounds
bounds.
Donglei Du

Mohammad Tawfik
#AcademyOfKnowledge
●
Level of customer service:
– (1) in-stock rate
”Yes sir, coming right-away”
”Yes sir, coming right-away”
– (2) number of back orders
”Sorry sir, you need to wait until we buy the sugar”
”Sorry sir, you need to wait until we buy the sugar”
– (3) inventory turnover rate: the ratio of average cost of
goods sold to average inventory investment
”Since we use sugar all the time, let’s build a sugar factory”
”Since we use sugar all the time, let’s build a sugar factory”
Donglei Du

Mohammad Tawfik
#AcademyOfKnowledge
●
Inventory cost: cost
cost of ordering
ordering and carrying
carrying
trade-off
Donglei Du

Mohammad Tawfik
#AcademyOfKnowledge
Inventory Metrics
●
Macro level metrics
●
Inventory Turnover Ratio or Inventory Turns
– = Cost of Goods Sold / Average Inventory (over a certain period)
●
Periods(days/weeks/months) of Inventory
– = Average Inventory / Cost of Goods Sold
●
Inventory Turnover is the reciprocal of Periods of Inventory

Mohammad Tawfik
#AcademyOfKnowledge
Example
●
To make sure that he never runs out of stock,
Zeco decided to keep 1 day-worth of supplies,
all the time, in the store.
●
What is the inventory turnover ratio of Zeco
cafe?

Mohammad Tawfik
#AcademyOfKnowledge
Solution
●
Inventory Turnover Ratio or Inventory Turns
– = Cost of Goods Sold / Average Inventory (over a
certain period) = 1/1.5 = 66.7%
●
Periods(days/weeks/months) of Inventory
– = Average Inventory / Cost of Goods Sold = 1.5/1 =
150%

Mohammad Tawfik
#AcademyOfKnowledge
Question!
●
In the case of Zeco Cafe, can the average
inventory become zero?
●
If yes, how?
●
If no, what is the minimum average inventory
period in any given period?

Mohammad Tawfik
#AcademyOfKnowledge
Order Quantity

Mohammad Tawfik
#AcademyOfKnowledge
Inventory Related Costs
●
Transaction costs for each order
– Ordering
– Receiving
– Costs of transporting

Mohammad Tawfik
#AcademyOfKnowledge
Inventory Related Costs
●
Holding costs (depend on how much average
inventory)
– Storage costs
– Cost of working capital

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#AcademyOfKnowledge
Economic Order Quantity

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#AcademyOfKnowledge
The simplest case
●
Demand is known with certainty
●
Demand (D) is constant
●
Order is received instantaneously

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#AcademyOfKnowledge
Ordering
●
Order Cost = Number of
Orders * (Shipping Cost +
Ordering Cost + Receiving
Cost)
●
Inventory Cost = Holding
Cost * Average Inventory +
Storage Cost

Mohammad Tawfik
#AcademyOfKnowledge
Ordering
●
Total Cost = C*D/Q + H*Q/2 + S
●
To minimize cost, differentiate and equate by
zero
●
Q(optimum) = sqrt(2*D*C/H)

Mohammad Tawfik
#AcademyOfKnowledge
Practical Considerations
●
Difficult to accurately assess costs
●
Suppliers insist on minimum order quantities
●
Suppliers only supply in package quantity

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#AcademyOfKnowledge
Assignment #3
Assignment #3

Mohammad Tawfik
#AcademyOfKnowledge
AlYomn Steel Sales
●
According to the demand data provided in the spreadsheet:
– What is the average monthly demand?
– What is the standard deviation in the monthly demand?
– If the transportation cost is LE2400, the cost of working capital is 15%
annual returns, warehouse cost is free, receiving cost LE250. What
would the optimum ordering quantity be?
– If the steel is subject to deterioration rate of 1% per month, how much
would the optimum ordering quantity be?
– Download the data spreadsheet from this link

Mohammad Tawfik
#AcademyOfKnowledge
References
References

Mohammad Tawfik
#AcademyOfKnowledge
References
●
Supply Chain Logistics, Rudolf Leuschner, Ph.D.
https://www.coursera.org/learn/supply-chain-logistics?specialization=supply-
chain-management
●
Supply Chain Operations, Rudolf Leuschner, Ph.D.
https://www.coursera.org/learn/operations?specialization=supply-chain-man
agement
●
Supply Chain Planning, Rudolf Leuschner, Ph.D.
https://www.coursera.org/learn/planning?specialization=supply-chain-manag
ement
●
Supply Chain Sourcing, Rudolf Leuschner, Ph.D.
https://www.coursera.org/learn/sourcing?specialization=supply-chain-manag
ement

Mohammad Tawfik
#AcademyOfKnowledge
References
●
Supply Chain Management Strategy, Rudolf Leuschner, Ph.D.
https://www.coursera.org/learn/supply-chain-management-strategy
●
Operations Management: Analysis and Improvement Methods, Udatta
Palekar, PhD
https://www.coursera.org/learn/operations-management?specializatio
n=value-chain-management
●
Operations Management: Strategy and Quality Management for the
Digital Age, Udatta Palekar, PhD
https://www.coursera.org/learn/process-improvement?specialization=
value-chain-management

Mohammad Tawfik
#AcademyOfKnowledge
References
●
“What does a Supply Chain Engineer do?”, StepStone,
https://www.stepstone.be/career-advice/article/supply-chain-engineer/
●
“Supply Chain Engineer job description template”, Hiring Resources,
https://recruitee.com/hiring-resources/job-description-templates/supply-chain-e
ngineer/
●
“What is supply chain management (SCM)?”, TechTarget®
https://searcherp.techtarget.com/definition/supply-chain-management-SCM
●
“Supply chain management”, WikiPedia,
https://en.wikipedia.org/wiki/Supply_chain_management
●
“The three flows of supply chain”, Nifemi Aluko,
https://kpakpakpa.com/spotlight/the-three-flows-of-supply-chain/

Mohammad Tawfik
#AcademyOfKnowledge
References
●
“Consumer Behaviour, Brand Management, Marketing and Psychology”,
Brandalyzer,
https://brandalyzer.blog/2016/03/23/the-five-major-flows-in-supply-chain/
●
“Top 3 Strategies To Improve The Supply Chain Performance In Your Business”,
Darren Woolard,
https://www.dmg-freight.com/top-3-strategies-to-improve-supply-chain-performance
-in-business/
●
“5 Ways to Increase Supply Chain Performance”, Zoe Meeken,
https://www.business.org/software/supplier/ways-to-increase-supply-chain-perform
ance/
●
“7 Tips for Effective Inventory Management in Global Supply Chain”, TradeGecko,
https://www.tradegecko.com/blog/7-tips-for-effective-inventory-management-in-a-gl
obal-supply-chain

Mohammad Tawfik
#AcademyOfKnowledge
References
●
“Supply Chain Management: Inventory Management”, Donglei Du
●
“Business-Plan Forecasting”, Steven D. Peterson, Peter E. Jaret, Barbara
Findlay Schenck
●
“Excel Sales Forecasting For Dummies”, Conrad Carlberg
●
“Sales Forecasting: A Practical Guide”, Mark Blessington
●
“Sales and Operations Planning The How-To Handbook”, Thomas F.
Wallace and Robert A Stahl
●
“Introduction to Financial Forecasting in Investment Analysis”, John
Guerard

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