1. Inventory Management

2. ❖PLEASE
COLLECT YOUR COURSE
MATERIAL FROM REPROGRAPHY
SECTION.

3. Reactive Methods
❖
Reactive inventory system responds to channel member’s
inventory needs by the drawing the product through the
distribution channel.
❖
Reactive system waits for customer demand to pull the product
through the system.
❖
Order quantity is a function of safety stock levels and
predetermined maximum level

4. Reactive Methods
I
ROP
OQ
D
I
- 250
ROP - 200
OQ - 400
Distribution
Center
-
45
50
200
5
Wholesaler A
I
ROP
OQ
D
- 80
- 75
- 200
- 14
Wholesaler B

5. Reactive Methods Assumptions
❖
All customers, market areas, products contribute equally to
profits
❖
It assumes infinite availability at the source
❖
It assumes infinite inventory availability at the supply location
too
❖
Performance-cycle (lead time) is constant
❖
Customer demand patterns are relatively stable and consistent
- doesn’t apply for lumpy demands
❖
Each distribution center’s timing and quantity of replenishment
orders are determined independently of all other sites,
including the supply source

6. Planning Methods - Multistage
Inventory
❖
Fair Share Allocation
❖
Distribution Requirements Planning (DRP)

7. Fair Share Allocation
PLANT WAREHOUSE
Inventory 600 units
Safety Stock 100 units
DISTRIBUTION
CENTER 1
DISTRIBUTION
CENTER 2
DISTRIBUTION
CENTER 3
Inventory 50 units
Daily use 10 units
Inventory 100 units
Daily use 50 units
Inventory 75 units
Daily use 15 units

8. Fair Share Allocation
❖
Common Days’ supply DS = (Aj + ∑Ij) / ∑Dj , Where
❖
DS = Common days’ supply for distribution center inventories
❖
Aj = inventory units to be allocated from plant warehouse
❖ Ij
= inventory in units for distribution center j
❖
Dj = daily demand for distribution center j
❖
Amount to be allocated to each distribution center is given by,
❖
Aj = (DS - (Ij / Dj)) * Dj

9. Inputs to DRP
❖
Sales forecast by SKU at each ISL (Inventory Stocking
Location)
❖
Customer orders for current and future delivery - Outstanding
purchase orders or manufacturing orders
❖
Available inventory for sale by SKU at each ISL
❖
Logistics, manufacturing and purchasing lead times
❖
Modes of transport and deployment frequencies
❖
Safety stock policies by SKU at each ISL
❖
Order quantity by SKU at each ISL

10. DRP - Marketing Benefits
❖
Improved service levels - On time deliveries and customer
complaints
❖
Improved and effective promotional plans
❖
Improved ability to anticipate shortages of right items
❖
Improved inventory coordination with other functions of firm
❖
Customers finally benefit due to all of the above

11. DRP - Logistics Benefits
❖
Reduction of DC’s freight costs due to coordinated shipments
❖
Reduced inventory levels as what product when it is needed is
determined
❖
Decreased warehouse space requirements
❖
Fewer back orders leading to reduction of freight costs
❖
Improved inventory visibility

12. STRATEGY DEVELOPMENT
PROCESS
❖
Product / Market Classification
❖
Segment Strategy Definition
❖
Operationalized Policies and Parameters

13. PRODUCT / MARKET CLASSIFICATION
Product
ID
Annual Sales
(000’s)
1
45000
2
35000
3
25000
4
15000
5
8000
6
5000
7
4000
8
3000
9
2000
10
1000
% total
sales
Cumulative
Sales%
Products%
Category

14. PRODUCT / MARKET CLASSIFICATION
Product
ID
Annual Sales
(000’s)
11
12
13
14
15
16
17
18
19
20
0
% total
sales
Cumulative
Sales%
Products%
Category

15. SEGMENT STRATEGY
DEFINITION
Forecastin
First-line
Service
g
classification objective
procedure
Apromotional
A - regular
B
C
99%
Review
period
Aggregate
Perpetual
Schedule
Replenish
Inventory
ment
mgmt
monitoring
DRP
Daily
98
Sales
history
Perpetual
DRP
Daily
95
Sales
history
Weekly
DRP
Weekly
90
Sales
history
Biweekly
ROP
Biweekly