JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY

HEPL 3103 STRATEGIC INVENTORY MANAGEMENT

Course purpose January- April, 2022

This unit is designed to help students understand Strategic inventory Management function in
any business organizations both private and public organization. The course will introduce
students to all issues/ elements in the Strategic inventory Management. Current revolutions in
Strategic inventory Management and any development in this field will also be considered

Expected learning outcomes

At the end of this course the learner should be able to:-

-To develop an understanding of the role of Strategic inventory Management as a
functional area of management and a professional area;
-To introduce the body of the theory and analytical tools developed for Strategic
inventory Management and to show how they can be used to support operations
management decisions;
-To identify and evaluate some of the tasks, tools, and underlying principles of modern
Strategic inventory Management
-To how new strategic purchasing and supply management concepts can be included in
tandem with ICT towards holistic forecasting.
Course Contents

1. Introduction, Strategic implications in the inventory management

2. Integrated control concept, production planning, and forecasting models

3. Stockholding strategies, customer focused basic service capability

4.Methodss for improved inventory management

5.Principles of warehousing (storage) and functionality

6. Stores facilities layout/ throughput, handling and distributions channels

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7, ICT support tools and code of Ethics

Reference

.Amazon Customeron (2014). Purchasing and Supply Management (McGraw-Hill/Irwin Series

Operations and Decision Sciences) 14th Edition. ISBN: 9781317819202

2.Pazirandeh, A. (2016). Procurement in humanitarian supply chains. In G. Kovacs, et al. (Eds.),

Supply Chain Management for Humanitarians: Tools for practice, Kogan Page: ISBN-10:
0133800202, ISBN-13: 978-0133800203: 978-0131730427 , ISBN-10: 0131730428

3.Sunil Chopra (Author), Peter Meindl (2016).Supply Chain Management: Strategy, Planning,
and Operation (6th Edition) 6th Edition by : ISBN-13: 978-0133800203, ISBN-10: 0133800202

4..Sunil Chopra, S. & Meindl, P. (2012). Supply Chain Management (5 th ed.). England: Pearson Education
Ltd. ISBN-13: 978-0132743952, ISBN-10: 0132743957, ISBN-13:

5.McKeller, J. (2014). Supply Chain Management Demystified. Canada: McGraw-Hill. ISBN-10:

0071805125 , ISBN-13: 978-0071805124

Edmundo G., F.L.L. Luiz, and A. Edmundo. (2010). “Forecasting Oil Price Trends Using Wavelets and
Hidden Markov Models.” Energy Economics, Vol. 32. pp.1507–1519.

Introduction

Inventory management involves keeping track of your stocked goods, making sure that the right
products are in the right place at the right time, and at the right cost. Strategic
inventory management makes your whole organization more efficient, but it's an ongoing
challenge for most companies. Inventory management involves keeping track of your stocked
goods, making sure that the right products are in the right place at the right time, and at the right
cost. An effective inventory management system allows you to react quickly to market demands
and ensures you don’t have too much or too little stock, both highly undesirable scenarios.
Strategic inventory management makes your whole organization more efficient, but it’s an
ongoing challenge for most companies. Consider implementing these five inventory management
strategies to improve efficiency and increase revenue.

1. Use ERP software designed for inventory management

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It’s common for small businesses to start out using spreadsheets to manage their inventory. As
they grow, they may move to a simple inventory management software that allows them to order
and track items more effectively. But the shift to an ERP solution designed for inventory
management will take you miles further, allowing you to manage your supply chain and order-
to-cash processes in a single system. You can even choose to incorporate additional technologies
to further optimize inventory management, including:

a) Barcode scanning systems; Barcode scanning allows you to process incoming

inventory, as well as data from cash registers and point of sale systems if you have a
retail component to your business.

b) Advanced radio frequency systems; Radio Frequency Systems (RFIDs) guarantee

efficiency by automating warehouse control end-to-end, making them popular with
companies with thousands of orders to move every day.

2. Automate your inventory management system

Even in a small company, relying on manual inventory management – humans counting things –
can be bad for business. Even the most diligent employee can get it wrong, leading to educated
guesses and a high margin for error – which in turn leads to upset customers and potentially lost
sales. Manual inventory counts are also time-consuming, frustrating for your staff and drain
precious manpower resources that could be dedicated to more productive work. The right
inventory ERP system can take care of this onerous task with much greater accuracy and
efficiency. With all relevant purchasing and sales order data in the same system, inventory levels
are tracked and updated in real-time. So, when a customer calls asking if a product is in stock,
you can answer immediately with a quick check. Take the Inventory System Assessment

3. Use data analytics to optimize inventory management

Having access to real-time inventory data and analytics gives you accurate product and sales
forecasts in an instant. You can use this data to predict market demand and scale your inventory

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up or down at the right time, resulting in increased profits. Predictive data analytics has several
benefits including:

a) Increasing cash flow by reducing the inventory investment

b) Improving customer service by providing more accurate product availability

c) Predicting the right inventory quantities to meet demand

d) Improving profit margins by limiting the discounting or scrapping of old stock

Having accurate sales forecasts allows you to market your business more effectively to specific
customer segments. You can do this through a targeted advertising campaign that ensures the
right people are finding out about your business at the right time. The benefit of adopting this
tactic is that your campaign will produce its own data analytics. This means you can refine your
approach with each campaign that you run, evolving your strategy at each stage and making sure
that your available inventory matches the demand of your customer base.

4. Forecast effectively with sophisticated planning tools

The most important part of efficient inventory management is accurate forecasting so you can
make informed predictions and ordering decisions. For example, is your company doing a
promotion that may increase product demand? Do seasonal events, like Christmas or vacations,
affect demand? What products sell quickly, and which do you sell the most of? Accuracy in
forecasting can have a huge impact on profitability. There are two main inventory forecasting
models:

a) Quantitative forecasting involves using past sales data to predict future demand. The
more data you have, the more accurate the prediction will be.

b) Qualitative forecasting relies on the knowledge of experienced experts to predict demand

based on less measurable factors like potential demand and market forces.

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While the latter method is more of an art than a science and takes a while to finesse, the former
method can be easily used when you have the right systems in place. A comprehensive ERP
solution will provide visibility into all data that impacts your forecasts, helping you plan more
effectively and boost profits.

5. Integrate Mobile Technology

Using mobile technology to give your staff easy access to your inventory ERP system can
improve efficiency dramatically. Mobile apps are a lifeline for salespeople, giving them real-time
inventory data and accurate shipment information. They can also help warehouse workers
control and track inventory, and manage assets, shipments and operations at any time, from any
location. Having immediate access to this crucial information drives efficiency at all levels of the
supply chain and results in higher customer satisfaction. Today’s modern ERP solutions offer a
range of mobile app access depending on your needs. Do some research to ensure your chosen
ERP solution has the mobile access your team needs to be effective. Maximize your inventory
management strategies with an ERP system. Efficient inventory management strategies are only
one piece of the puzzle. Having the right systems in place lay the foundation to deliver the best
results. An ERP solution allows you to reduce your inventory investment, optimize your product
mix more effectively and improve customer service. Taking a firm grip on your inventory
management strategy – and the systems that support it; will increase efficiency and help you
increase sales. Implement the tips described above and watch your business become a
streamlined, profit making machine.

Types of Inventory
5 Basic types of inventories are raw materials, work-in-progress, finished goods, packing
material, and MRO supplies. Inventories are also classified as merchandise and
manufacturing inventory. Other such classifications on various bases are goods in transit,
buffer stock, anticipatory stock, decoupling inventory, and cycle inventory

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Types of Inventory
There are three types of businesses such as trading or merchandising, manufacturing, and
service. Out of these, services are not inventorial. Here, the first classification of
inventory is based on the nature of business – Merchandise and Manufacturing Inventory.

Merchandise Inventory
It is the inventory of trading goods held by the trader.

Manufacturing Inventory
It is the inventory for manufacturing and selling of goods. Based on the value addition or
stage of completion, the manufacturing inventories are further classified into 3 types of
inventory – Raw Material, Work-In-Progress, and Finished Goods. Another type is MRO
inventories which are to support the whole manufacturing and administrating operation.

Raw Materials
These are the materials or goods purchased by the manufacturer. The manufacturing
process is applied to the raw material to produce desired finished goods. For example,
aluminum scrap is used to produce aluminum ingots. Flour is used to produce bread.
Finished goods for someone can be raw material for someone. For example, the aluminum
ingot can be used as raw material by utensils manufacturer. The business importance of
raw material as an inventory is mainly to protect any interruption in production planning.
Other reasons can be availing price discount on bulk purchases, guard against market
shortage situation.

Work-In-Progress (WIP)
These are the partly processed raw materials lying on the production floor. They may or
may not be saleable. These are also called semi-finished goods. It is unavoidable
inventory which will be created in almost any manufacturing business. This level of this
inventory should be kept as low as possible. Since a lot of money is blocked over here
which otherwise can be used to achieve better returns. Speeding up the manufacturing

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process, proper production planning, customer and supplier system integration etc can
diminish the levels of work in progress. Lean management considers it as waste.

Finished Goods
These are the final products after manufacturing process on raw materials. They are sold
in the market. There are two kinds of manufacturing industries. One, where the product is
first manufactured and then sold. Second, where the order is received first and then it is
manufactured as per specifications. In the first one, it is inevitable to keep finished goods
inventory whereas it can be avoided in the second one.

Packing Material
Packing material is the inventory used for packing of goods. It can be primary packing
and secondary packing. Primary packing is the packing without which the goods are not
usable. Secondary packing is the packing done for convenient transportation of goods.

MRO Goods
MRO stands for maintenance, repair, and operating supplies. They are also called as
consumables in various parts of the world. They are like a support function. Maintenance
and repairs goods like bearings, lubricating oil, bolt, nuts etc are used in the machinery
used for production. Operating supplies mean the stationery etc used for operating the
business. Here is our detailed post on MRO Inventory .

Other Types of Inventories:

Materially, there are 5 types of inventories only as explained above. Following types of
inventories are either the reasons to hold those 5 basic inventory or business requirement
for the same. Some of them are suitable strategies for certain businesses.

Goods in Transit
Under normal conditions, a business transports raw materials, WIP, finished goods etc
from one site to other for various purpose like sales, purchase, further processing etc. Due
to long distances, the inventory stays on the way for days, weeks and even months

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depending on distances. These are called Inventory / Goods in Transit. Goods in transit
may consist of any type of basic inventories.

Buffer Inventory
Buffer inventory is the inventory kept or purchased for the purpose of meeting future
uncertainties. Also known as safety stock, it is the amount of inventory besides the
current inventory requirement. The benefit is smooth business flow and customer
satisfaction and disadvantage is the carrying cost of inventory. Raw material as buffer
stock is kept for achieving nonstop production and finished goods for delivering any size,
any type of order by the customer.

Anticipatory Stock
Based on the past experiences, a businessman is able to foresee the future trends of the
market and takes certain decisions based on that. Expecting a price rise, a spurt in
demand etc some businessman invests money in stocking those goods. Such kind of
inventory is known as anticipatory stock. It is normally the raw materials or finished
goods and this strategy is executed by traders.

Decoupling Inventory
In manufacturing concern, plant and machinery should always keep running/operating.
The act of stopping machinery, costs to the entrepreneur in terms of additional set up
costs, repairs, idle time depreciation , damages, trial runs etc. The reason for halt is not
always the demand of the product. It may be because of the availability of input. In a
production line, one machine/process uses the output of other machines/process. The
speed of different machines may not always integrate with each other. For that reason, the
stock of input for all the machines should be sufficient to keep the factory running. Such
WIP inventory is called decoupling inventory.

Cycle Inventory
It is a type of inventory accumulated due to ordering in lots/sizes to avoid carrying the
cost of inventory. In other words, it is the inventory to balance the carrying cost and

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holding cost for optimizing the inventory ordering cost as suggested by Economic Order
Quantity (EOQ).

Forecasting: Strategic Inventory Management

Efficient inventory management could provide a competitive advantage. Traditionally viewed by
manufacturers as a way to become lean and reduce costs, inventory management could be a new
competitive weapon in the battle for customers. The survey of more than 160 manufacturers
shows 27% of companies consider inventory management as a way to gain market share through
superior service and product availability. One reason for the shift in thinking is global sourcing,
which is putting more pressure on companies to improve their inventory processes because of
increased lead times, variability and inventory carrying costs, according to the study.

Respondents also cite a need to improve return-on-invested capital to reduce order-to-delivery

cycle times as one of several reasons for re-evaluating their inventory management systems.

If a company aims to operate successfully it must have proven and efficient inventory
management controls in play. From enabling the business to maintain accurate inventory levels,
to on-point forecasting and seamless supply chain integration, inventory management exerts a
major influence on the profitability of any business. This is why it is vital for a business; large,
medium or small; to have a cutting edge inventory management system in place, driven by a
sound inventory management strategy. Failing to do so will most likely result three key areas of
loss; wasted time, wasted resources and wasted money. What follows are the fundamental
building blocks upon which a successful inventory management strategy can be built.

1. Gather essential data

There is no way to map out an effective inventory management strategy until you have a very
clear assessment of your current inventory situation. If your business has been relying on
spreadsheets or manually compiled inventory records, then chances are you are dealing with an
inaccurate and outdated data picture of your current inventory levels. This is particularly
dangerous because inaccurate inventory levels form the baseline for every poor decision to

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follow – from forecasting and purchasing, to storage and sales. For instance, if your inventory
levels are off you will either over or under forecast demand. When this occurs the business will
end up facing one of two unwanted outcomes or possibly both:

Overstocked and out of cash

Taking on excess inventory that is not actually needed results in an overstock issue. This occurs
when a business is left holding too much unnecessary stock due to inaccurate forecasting, ill-
informed inventory levels, or a sudden reduction in market demand. Overstock places
considerable burden on a business’s cash flow due to the inflated labor and storage costs, as well
as increased risk due to loss from theft, damage and obsolescence. No business can expect to
operate profitably if its cash flow is tied up in excess inventory.

Under stock, missed sales and lost customers

Conversely, if in-demand inventory levels are mistakenly thought to be adequate, the purchasing
department will end up placing a re-supply order that will not be sufficient for expected demand,
or worse yet, fail to place a re-supply order at all. This leaves the business unable to fulfill
customer orders due to not having the right inventory on hand, which results in lost sales, lost
customers and lost reputation, not to mention lost income.

Invest in the right data delivery tool

The solution then, and an advised strategic starting point, is to gather all the essential inventory
data required – current inventory on order, on stock and in distribution and sales. This needs to
be done with precision/ exactness/ accuracy, in real-time and, most importantly, accessible by all
department process managers to ensure clear communication and cooperation. Cloud-based
inventory management software is indispensable if a business is serious about gathering the
essential data of its inventory system with the intent to formulate a strategy to carry itself
forward proactively.

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. Identify areas of loss

Gathering the essential data will allow the business to gain a data-driven appreciation of exactly
where it stands from an inventory level perspective. This appreciation is invaluable when it
comes to carrying out the next step of the strategic process – identifying and eradicating the areas
of loss.

Seen and unseen dangers

What having a cloud-based SaaS (Software-as-a-Service) inventory management system in place

does for a business is that it allows process managers to identify the key areas of loss, on both a
seen and an unseen level. Most clearly identifiable will be those areas where inventory is
disastrously high and where high rates of obsolescence are occurring. Obsolete inventory needs
to be liquidated as fast as possible to free up much needed cash flow, reduce storage and labor
costs, and free up space for inventory that is actually needed. Also, it will become apparent
where customer service targets are constantly going unmet due to stock-outs. Inventory
management software is perfectly suited to this task, especially so in the case of a business that
deals with a wide variety of products , in that it can be automated to notify the supply chain
manager when and which inventory is high or low, and thus ensure timely re-ordering. Once the
business has the ability to accurately track, trace and account for every item of inventory moving
through the supply chain, unseen areas of loss will become apparent too. These unseen areas or
causes of loss can include theft, corruption and simply bad business practice. This is especially
useful in situations where multiple warehouses are being operated in multiple locations – both
domestic and internationally.

3. Practice proactive, data-driven inventory management

A business that has an effective inventory management software system in place is best
positioned to carry the business forward proactively. Protocols and systems can now be
implemented to address the main areas of loss and weakness in the supply chain, as well as
positively drive the business forward by reliance on timely, accurate and integrated data.

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Fluctuating stock levels can be automated to best meet fluctuating customer demand. Stock
picking can be structured in accordance with inventory needs i.e., the oldest inventory gets
picked first and forecasting will be achieved with far greater accuracy, ensuring inventory levels
remain optimal.

Planning insights, that simply would not be available to a business operating on outdated and out
of sync inventory management systems can be fully taken advantage of. Sales history, inventory
on stock and open orders can now be tracked and analyzed to ensure demand forecasting is
driven by correct data. A final strategic advantage inventory management software affords
businesses is the ability to carry out far more effective pricing strategies. Now, the landed costs
of inventory can be calculated accurately, ensuring that losses due to guesswork based pricing
strategies do not occur. This way margins can be relied upon, and the overall proficiency of the
business to operate as profitably as possible is maximized.

The objectives for business success are generally very simple; to grow the business profitably by
meeting customer service targets and reducing costs as much as possible. Having an efficient and
effective inventory management system in place is what enables businesses to meet these
fundamental objectives. A good inventory management strategy leads to an organized fulfillment
center. An organized warehouse results in more efficient present and future fulfillment plans.
This also includes cost-savings and improved product fulfillment for businesses utilizing
the warehouse for managing inventory.

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 THE BENEFITS AND IMPORTANCE OF MANAGING INVENTORY

The importance of inventory management cannot be stressed enough for e-Commerce and online
retail brands. Accurate inventory tracking allows brands to fulfill orders on time and accurately.
And as brands grow out of small warehouse space and into larger facilities, so does the need to
efficiently manage inventory.

The Importance of Managing Inventory: Benefits of an Effective System

An effective inventory management system is the cornerstone of successful eCommerce and

online retail brands. With a strategic plan in place that optimizes the process of overseeing and
managing inventory, including real-time data of inventory conditions and levels, companies can
achieve inventory management benefits that include:

a) Accurate Order Fulfillment; Imagine this scenario: A customer places an order and an
e-Commerce brand receives the order. The brand sends it to the warehouse only to
discover that the product is out of stock. Or just as bad, the e-Commerce brand ships the
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 wrong item. This isn’t an uncommon story if inventory is poorly managed. Taking the
time to develop a more robust plan can help brands avoid inaccurately filled orders, high
return volumes and a loss of customer base.
b) Better Inventory Planning and Ordering; It’s difficult to gauge which products are
needed if there isn’t a clear way to tell what products are already stocked. If online
retailers don’t properly manage the inventory they already have, they can easily
overstock items, and some of these items might not be strong sellers. Detailed inventory
management mitigates these issues, allowing warehouse managers to refresh inventory
only when needed. It’s both space and cost-effective.

c) Increased Consumer Satisfaction; Customers that shop online are eagerly awaiting their
orders, and there’s nothing worse than when their orders arrive not-as-described, late or
damaged. When that happens, buyers are less likely to purchase from the brand again. On
the other hand, good inventory management leads to orders being fulfilled more quickly
and shipped out to customers faster. The enhanced processes can help e-Commerce and
online retail brands build a strong repertoire with consumers – and keep them coming
back for more.

More Advantages of a Good Inventory Management Strategy

There are so many great advantages that can result from managing inventory properly. Here are
some additional benefits to keep in mind:

a). Improved Accuracy of Inventory Orders

Accuracy of product orders, status, and tracking are critical to good inventory management. An
effective fulfillment partner will have real-time software and systems in place to make sure no
product is left untracked throughout the fulfillment process.

b). Organized Warehouse

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A good inventory management strategy leads to an organized fulfillment center. An organized
warehouse results in more efficient present and future fulfillment plans. This also includes cost-
savings and improved product fulfillment for businesses utilizing the warehouse for managing
inventory.

c). Increased Efficiency and Productivity

With proper inventory management in place, less time and resources are spent invested in
managing inventory and can be allocated to other areas. Technology is often used to speed up
tracking and fulfillment operations, ensuring inventory records are accurate.

d). Save Time and Money

Due to improved ordering accuracy, efficiency, and product flow, good inventory management
results in saved time and money.

e). Repeat Customers

Effective inventory management and control protects from incorrect or damaged goods being
shipped to customers. This helps improve customer experience, protect from issues such as
refunds, and achieve more repeat buyers.

The Principles of Warehouse Distribution and Centre Design

The principles won’t make you into a seasoned designer, but they will help you understand the
salient aspects of the design task, and how to think about and plan your facility for optimal
performance.

1). Determine the objective of the facility

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The first step must involve defining the objectives and goals of the facility. What is it there for,
what market does it service, is it part of a network, what types of goods will be stored, what is
the anticipated life of the facility, will it be a green fields site, or an existing facility? To press
the point, it is useful to write the objectives down so that all associated parties remain cognizant
of the expected outcome – especially if timing, budget or resource issues during the project life
tempt stakeholders to compromise operational or design goals.

2). Define volumes and functional requirements

The famous British Physician Dr Thomas Fuller once said: “Get the facts, or the facts will get
you. And when you get them, get them right, or they will get you wrong”. This is an important
lesson that was also affirmed by my learned web colleagues, and certainly one that has guided
my own work throughout my career. Quite simply, the facts needed are:

a) Quantities of products to be

b) The throughput velocities, including incoming goods, customer orders, interfacility transfers,
dispatches and

c) The nature of orders and specific picking requirements, e.g. is picking performed in
containers, pallets, cartons, inners, or single units? Now if you are thinking that this is easy, think
again. This is one of the hardest and most time consuming components of a design project. Why?
Rarely do enterprises have such data readily available. Designers must therefore ‘mine’ it from
the enterprise as best they can. In cases where data is piecemeal or nonexistent, the designer must
draw from his/her own experience to fix assumptions around volumetric estimates. This can be
particularly challenging when heavy scrutiny is placed upon the designer to prove the concept,
and is best performed with collaboration and agreement from the stakeholders involved.

d) What functions need to be provided for? It’s imperative that the designer understands all of
the functions that are to be included on the site footprint, e.g. warehouse, offices, gantry cranes,
loading docks, forklift charging areas, dangerous or hazardous goods, cool or cold rooms, clean
rooms, manufacturing or packaging operations, staff facilities, etc. Equally important is that

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relative dependencies between functions are determined so that the designer can correctly frame
functional proximities for best flow and operation by staff.

3). Match storage modes, it systems and mechanized technologies with volumes

Once the data has been analyzed, the designer is ready for equipment selection. Be it static
racking equipment, mezzanines and the like, or mechanical equipment such as conveyors,
carousels, stacker cranes etc., all equipment and systems must be applied according to their
purpose, limitations and fit with the volumes handled. For instance, it is a waste if an automatic
storage and retrieval system is installed, when a conventional racking system will suffice.
Conversely, if the facts point to justification of a high-velocity automated system, it is foolish to
ignore them for the sake of a more conventional system. A critical aspect of equipment selection
is that the designer has expert knowledge of available equipment and technologies, and how to
apply them. This is a complex area that deserves careful consideration and the novice designer is
well advised to seek advice from materials handling equipment and software suppliers, builders,
and industry specialists to ensure that their design is well founded, robust and practical.

4). Flow

This aspect incited some interesting comments from my web conference colleagues. From their
wise counsel and my own experience, I suggest that the skilful designers apply two immutable
laws of flow.

a) One-way flow

The best warehouse operations are those that apply this whether straight, clockwise, counter
clockwise, up or down, make sure it flows in a one-way direction. But here’s a tip. Be cautious
when dealing with international customers, where cultural and religious beliefs point to specific
requirements.

b) Flow vs. capacity

The second rule of flow is that free movement has priority over storage capacity. If you are
pressed with a choice, the pundits agree that it’s better to hold flow sacrosanct, compared with

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building more stock or storage equipment. Why? Long after the warehouse construction has been
completed, a team has to operate efficiently and safely in the warehouse year after year. If the
design compromises on the size and quantity of aisles, for sake of more stock holding, beware:
this can cause sub-optimal performance over the life of the facility.

5). Close to zero materials handling movements

A simple rule that says it all: Keeps the product handling by people to a minimum. Ideally this
would be from 3-5 touches of the product while goods are the in the warehouse. Sadly, I have
witnessed operations that handle goods up to 8 to 10 times. Normally there is severe design or
building constraints applicable to such situations. But the outcome is evident in the maxim:
‘more touches, more cost’. Take note!

6). Evaluate your options

The developed concept design options must be evaluated to ensure that the objectives are
achieved. The two common approaches to assessment are:

a) Quantitative analysis: return on investment, payback, cost per order to supply, cost per cubic
metre to name just a few.

b) Qualitative analysis: reviewing the advantages and disadvantages of options considered.

Ideally the evaluation is best performed both individually and in a team workshop environment.
It’s amazing what can be revealed when a team collectively focuses its attention at a project.
Despite the meticulous job the designer may have performed, a workshop can often reveal a late
insight, idea, or missed detail that can significantly impact upon the end design.

7). Consult Widely

The design process is multifaceted, and normally involves executives, managers, and operators;
not to mention equipment suppliers, builders, architects, and councils. As part of the
development process all should be regularly consulted as to planning and legal requirements,
operational needs, preferences, ideas and opinions. In my experience, no one party has all the
background and knowledge to implement a DC project. The best implementations typically

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feature a cohesive and dedicated team charged with managing the project from early design
phases through to completion.

Forecasting Tools used for Production Planning

As the name suggests, production planning is simply a projection of future business--or
production-; activity. Many companies rely on certain mainstay products to drive company
profits. To ensure that those products continue to serve its purpose, the company must rely on
effective production planning. The process of production planning contains a number of steps,
and forecasting is an essential step, because it requires that the company project its production
needs into the future. Forecasting might seem purely hypothetical, but companies can utilize
forecasting tools to provide as much accuracy as possible.

1). Select a method of forecasting for production planning. Available methods include the
moving average, exponential smoothing and regression analysis. The moving average takes
into account production averages over a period of time and looks specifically at the average of
each production period against how that average has changed. Exponential smoothing weighs
the average of the most recent forecast against the current demand for the product. Regression
analysis uses a chart to view the moving average as a single line of change over time.

2). Determine a time period to study. Forecasting is most effective over the short term, rather
than the long term. This is because long-term forecasting can quickly become inaccurate when
customer demand changes or market trends adjust unexpectedly. The best time period will
reflect previous company activity and what changes the company has seen over time; quarterly,
bi-annually. Bear in mind that the best forecasts for production planning tend to reflect shorter
amounts of time.

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3). Choose reports on previous company activity to help with projecting future production.
Projecting for the future requires looking into the past, and companies can utilize previous
production results to make forecasts for the future. Companies can look at specifics for
customer demand over certain periods of time–for instance, if demand drops during some
months and rises during others–and apply this information to the forecasting method that has
been selected.

4). Pick market trends to apply to the forecast. Market trends must work alongside expectations
of customer demand. The market will play a role in dictating the extent to which customer
demand will increase or decrease. If trends indicate that the market for a certain product is
about to expand, the company might use this to increase production, but if trends indicate a
decrease in market interest, the company might reconsider production needs.
Experienced Inventory Management and Control System

It’s beneficial for e-Commerce and online retail brands to partner with third-party logistics (3PL)
providers that understand the importance of managing inventory. An experienced 3PL company
has the tools, equipment, and software necessary to simplify inventory management and increase
warehouse efficiency. As a result, your brand receives the benefits of a well-optimized inventory
management and control system.

Don’t Overlook the Importance of Inventory Management

Inventory management or control is crucial to a successful brand and business. Simplify your
inventory management with the help of an experienced fulfillment and logistics company. An
industry leader in strategic e-Commerce fulfillment and logistics solutions, Dotcom Distribution
improves inventory management processes for a variety of online retail brands. Through a
precise combination of innovative technology and experienced warehouse personnel, we provide
robust inventory management and support that is proven to increase overall efficiency and
customer satisfaction.

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Integrated inventory management systems

Small to medium sized companies are often best served by integrated inventory management
systems like Finale Inventory, which include the order management system, warehouse
management system, and stock control system all in one. Small businesses often use Quick
books or other accounting software in combination with an integrated inventory management
system. Businesses have different needs. Some only use the order management system for
purchases; others only for sales. Manufacturers sometimes only use the warehouse management
system features. You may not need all the features that a system provides, but the features to
consider are:

1). Order management system. Purchase orders, split orders, re-order points, sales orders,
quotes, invoices, returns, customer managed inventory, vendor managed inventory, etc..

2).Warehouse management system. Shipments, split shipments, shipping documents, bills

of lading, picking, packing, transferring, receiving, building, kitting, bills of materials,
warehouse sub-locations, multiple warehouses, bins, etc...

3). Stock control system. Quantity on hand dashboard, customizable reports, transaction
history, units of measure, lots/batches, serial numbers, stock takes, reservations,
integrated mobile barcode solution, etc..

Advantages and Disadvantages of JIT Inventory

Just-in-time inventory management works by keeping stock levels low; you order just what
you need, as closely as possible to when you need it. This approach to inventory management
is an essential element in the philosophy of lean manufacturing, which is based on using
information and strategy to run a business as efficiently as possible.

a) Cash Flow Management

Just-in-time inventory helps you to manage cash flow. When you stock up and buy
inventory in bulk, you may get better prices, but you're likely to buy more than you
need for your present purposes. Your working capital will then be tied up in materials
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 that just sit on the shelf for the foreseeable future and you may not have the cash you
need for day-to-day expenses such as rent and payroll.

b) Reduces Clutter and Waste

Just-in-time inventory reduces the clutter that is an inevitable result of keeping too
much stock on hand. With reduced clutter, you'll have space to operate more efficiently.
Just-in-time inventory management also reduces waste because the farther out you
predict demand and purchase inventory, the greater the likelihood you'll buy items that
won't be used. Customer tastes shift, products are discontinued and stock can
deteriorate in storage, especially if it is perishable. Buying just what you need for
present purposes helps you to sync more accurately with demand.

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Disadvantage:

a) Requires Thought and Strategy: If you cut it close on inventory purchasing, you may
be unable to take advantage of an exciting unexpected opportunity because you
have insufficient stock on hand and it'll take too long to get the parts you need.
Because just-in-time inventory cuts it close on purchasing, it increases the
likelihood of running out of items and losing sales. If a manufacturer doesn't
have sufficient quantity of an item you need, you won't have much time to find an
alternative. Just-in-time inventory requires more thought and strategy than
traditional inventory management.

b) Proactive Management Helps: Many of the disadvantages of just-in-time inventory

management can be tempered with finesse and careful planning. Develop
relationships with suppliers who can get you the parts you need as quickly as
possible. Create systems that provide the most current possible information about
what you have in stock, so you can make sure you always reorder on time.
Inventory records should be updated every time a part is used or a piece of
merchandise is sold, and should also indicate the critical points at which your
inventory will drop too low and you'll lose money due to missed sales

Critical Strategies of improving Inventory Management

Warehouses play a critical role in the success of any supply chain. However, there are common
inventory management problems that collectively decrease a warehouses’ overall efficiency. For
example, inaccurate quantities, multiple databases and poor product identification all work
together to increase confusion and mistakes. Below we introduces five proven methods to
improve inventory management.

1) Categorization; Warehouses can hold thousands to tens of thousands of parts. Therefore,

a concise and user friendly categorization system is needed. Some warehouses prefer to
use the selective inventory control method of ‘ABC classification.’ That is, inventory
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 parts are categorized according to their value and documentation requirements. For
example, ‘A’ items are the highest value items and need to be carefully controlled, while
‘C’ items have minimal value and need only simple records. Keep in mind that every
product and therefore SKU will have a unique supply and demand variability pattern.
Therefore, SKU variability can be managed through the ‘ABC classification’ system.
Avoid using a one-size-fits all approach to SKU tags. Regardless of the method, all
inventory parts should be neatly categorized with clearly labeled selections. Consider
establishing exact syntax for parts labeling.
2) Warehouse Management System (WMS); No warehouse is complete without a user
friendly warehouse management system. The most basic WMS will have a flexible
location system, user customized parameters for tasks and built-in integration with data
collection devices. A WMS will increase inventory accuracy and storage capacity while
reducing cycle times and labor costs. A WMS program also typically offers excellent
inventory scheduling options. In addition to this, these software programs are excellent
inventory optimization tools that automatically monitor and manage supply and demand
variability.

3) Integrate Mobile Technology; Many salespeople can actually have apps on their
mobile phone that interfaces with the WMS. Mobile devices allow easy access to real-
time, accurate inventory data and information. This can improve customer service and the
overall supply chain speed. In addition to this, salespeople are able to immediately
request replenishment requests when they notice low inventory levels in their stores.
Finally, mobile technology can directly improve inventory management through being
connected to the mobile POS system. That is, when customers attempt to buy an item
online, they will automatically be informed of product availability limitations.

4) Upgrade the Shipping System; Proper inventory management depends on the ability of
the warehouse system and employees to process and handle products and packages.
Shipping systems that cannot cope with current number of products and packages should
be upgraded. As a result, many product handling and packing warehouses prefer to
upgrade their conveyor systems. This could involve mobile conveyor machines that offer

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 flexibility and convenience. As an alternative, they could be an integrated system of
strategically placed conveyor machines. Keep in mind that adding a conveyor machine is
an excellent way increase inventory management and overall warehouse efficiency.

5) Supplier Relationships; Certain supplies will be chronically late or deliver inaccurate

shipments. Often times, warehouse staffs are too busy to individually respond to these
random problems. However, warehouse management should closely monitor supply
performance. In fact, the WMS can provide detailed, customized reports on supplier
shipments. Consider using the WMS to audit supplier performance every quarter. This
will assist with identifying unreliable suppliers and provide opportunities for
improvement. Consider rewarding high performing suppliers with the chance to sell
more, while reducing the amount of poor performing suppliers.

Inventory systems management

Basic concepts

For wholesalers, distributors, and retailers, the "stuff" that the business keeps track of is products
bought from suppliers and sold to customers. For manufacturers, stuff includes the parts or
ingredients that go into making the products, in addition to the products themselves. For
restaurants, stuff includes the ingredients and supplies that go into the food served. For service
businesses that rent items to customers or for businesses that need to keep track of their own
equipment, stuff includes the assets that remain in the possession of the business but change
location (asset tracking software). There are many different kinds of stuff used by different kinds
of businesses, but the basic concepts of inventory management are remarkably similar across all
of them.

The top level concepts involved are suppliers, purchases, stock, transfers, work orders, sales, and
customers. Reading left-to-right, you can follow the path from which products or parts are
purchased from suppliers into company stock, assembled, and sold through sales to customers.
The block diagram varies slightly for different types of businesses: wholesale and distribution,

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manufacturing, and retail and restaurants. However the inventory control system concepts are the
same.

Intermediate concepts

At the next level of detail, the concepts of inventory management address situations that occur in
the real world. Purchases and sales, for example, may be shipped across multiple shipments, or a
shipment may not contain what is specified in the sales or purchase order. Introducing the
concept of shipments as distinct from purchases and sales accommodates these situations.
Inventory management systems in small and medium sized businesses are often separate from
the company's accounting system. If you use Quick books or Excel for your accounting, then the
purchases and sales are the interface points between inventory and accounting. Introducing
quotes and invoices to the sales completes the main concepts for order management software,
and lays out the files that can be imported and exported between your inventory and accounting
system.

In the simplest of scenarios, stock levels are merely quantities of items, but in practice stock
levels is sometimes a bit more involved. Stock is stored in different warehouses, and within those
warehouses in bays, or aisles or bins. Keeping track of stock levels entails keeping track of
quantities per location. Items may be stored individually or packed into cases or handling units.
Many businesses keep track of not just quantities of stock with inventory tracking software, but
also the packing. Some types of products have expiry dates, or serial numbers, or other properties
identified by lot or batch. Thus stock may not just be quantities of a particular product, but of a
particular lot.

Detail concepts

Deeper levels of detail address such topics of price discounts, tax authorities, multiple addresses,
and so forth. You can imagine, though, how each level of detail fits into the framework above it.
With these levels of detail in hand, you can navigate the subjects of inventory management and
focus on the details that are most pertinent to your business.

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Production Planning and Control
The production planning problem is formulated as a linear programming model whose decision
variables include production quantities, inventory levels, and overtime requirements. Keywords
are: demand forecasting, highly seasonal demand, ARIMA method, production planning, linear
programming and pressure container factory. Production planning is required for scheduling,
dispatch, inspection, quality management, inventory management, supply management and
equipment management. Production control ensures that production team can achieve required
production target, optimum utilization of resources, quality management and cost savings.
Planning and control are an essential ingredient for success of an operation unit. The benefits of
production planning and control are as follows:

1) It ensures that optimum utilization of production capacity is achieved, by proper

scheduling of the machine items which reduces the idle time as well as over use.
2) It ensures that inventory levels are maintained at optimum levels at all time, i.e. there is
no over-stocking or under-stocking.

3) It also ensures that production time is kept at optimum level and thereby increasing the
turnover time.

4) Since it overlooks all aspects of production, quality of final product is always maintained.

Production Planning

Production planning is one part of production planning and control dealing with basic concepts
of what to produce, when to produce, how much to produce, etc. It involves taking a long-term
view at overall production planning. Therefore, objectives of production planning are as follows:

a) To ensure right quantity and quality of raw material, equipment, etc. are available during
times of production.
b) To ensure capacity utilization is in tune with forecast demand at all the time.

A well thought production planning ensures that overall production process is streamlined
providing following benefits:

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 a) Organization can deliver a product in a timely and regular manner.
b) Supplier are informed will in advance for the requirement of raw materials.

c) It reduces investment in inventory.

d) It reduces overall production cost by driving in efficiency.

Production planning takes care of two basic strategies’ product planning and process planning.
Production planning is done at three different time dependent levels i.e. long-range planning
dealing with facility planning, capital investment, location planning, etc.; medium-range
planning deals with demand forecast and capacity planning and lastly short term planning
dealing with day to day operations.

Production Control

Production control looks to utilize different type of control techniques to achieve optimum
performance out of the production system as to achieve overall production planning targets.
Therefore, objectives of production control are as follows:

a) Regulate inventory management

b) Organize the production schedules

c) Optimum utilization of resources and production process

The advantages of robust production control are as follows:

a) Ensure a smooth flow of all production processes

b) Ensure production cost savings thereby improving the bottom line

c) Control wastage of resources

d) It maintains standard of quality through the production life cycle.

Production control cannot be same across all the organization. Production control is dependent
upon the following factors:

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 a) Nature of production( job oriented, service oriented, etc.)
b) Nature of operation

c) Size of operation

Forecasting Methods

1) Qualitative forecasting techniques

An approach to forecasting that is based on intuitive or judgmental evaluation. It is used

generally when data are scarce, not available, or no longer relevant. Common types of
qualitative techniques include: personal insight, sales force estimates, panel consensus,
market research, visionary forecasting, and the Delphi method. Examples include
developing long-range projections and new product introduction.

2) Quantitative forecasting technique

An approach to forecasting where historical demand data is used to project future

demand. Extrinsic and intrinsic techniques are typically used.

3) Graphical forecasting methods

The use of visual information to predict sales patterns typically involves plotting
information in a graphical form. It is relatively easy to convert a spreadsheet into a graph
that conveys the information visually. Trends and patterns of data are easier to spot, and
extrapolation of previous demand can be used to predict future demands.

4) Trend forecasting models

Methods for forecasting sales data when a definite upward or downward pattern exists.
Models include double exponential smoothing, regression, and triple smoothing.

Strategies of Inventory Management

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Inventory management is one of the most critical functions in any organization. An effective
inventory management system enables organizations to react swiftly to market demands and also
bring in substantial cost reduction through optimal stock holding. An inventory that falls short
translates to lost sales opportunities, while a surplus inventory entails unnecessary operational
costs in terms of handling, transportation and storage. A Supply Chain research study shows U.S.
companies have an average inventory versus sales ratio of 1.43. This means for every dollar of
sales made, the company holds $1.43 worth of inventory. Among small businesses, 46% did not
have an automated inventory management system. The following strategies can help companies
improve and optimize their inventory management for better results:

1). Inventory Management Tools

There are many tools and platforms available in the market today; both enterprise level and
cloud based ; that automate the inventory management process and minimize the need for
manual intervention. The right tools can bring precision into the process and prevent errors that
happen due to human oversight. Also, they help manage inventory across various channels like
physical stores, online stores and mobile apps.

2). Data Analytics

Data analytics is increasingly being used in optimizing inventory management. It helps

companies to look at inventory from an organizational level instead of a branch level. It uses real
time data to predict market demand, which can help companies scale their inventory up or down
on time, resulting in profits and cost benefits. Inventory managers can utilize the unique insight
derived from data analytics to move or reallocate inventory and capitalize on market
opportunities.

3). Product Segmentation

It pays to take a granular look into your inventory to segment products based on their
characteristics like market appeal, profitability, and supply versus demand pattern. The rate at
which a depleting inventory is replenished can be decided based on this segmentation. This

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strategy helps in maximizing profits and minimizing operational costs on less profitable
products. The more criteria a company uses to classify its products, the more refined and
profitable is its inventory management.

4). Mobile Inventory Management

Mobile applications that interact with inventory real time can be used by store managers and
associates to accurately track stock, improve customer service and plan offers and promotions.
Mobile inventory management allows tracking and update of inventory at the most rudimentary
level, apart from providing real time inventory information, product details, brand information,
etc., to the store associates. Having ready access to such information empowers store associates
to engage better with customers, encourage purchase decisions and generate leads.

5). Inventory Optimization Software

Inventory optimization software takes an organizational level view of the inventory instead of a
localized branch or store level view. It uses historical data to determine probability of demand,
which helps inventory managers to maintain optimal level of inventory and reduce risk of
product obsolescence. The inputs from the optimization software can also be used to revise
inventory management policies to make them more effective. Suppliers should be audited
periodically to ensure consistent, timely and accurate delivery. The categorization of a product
should also be frequently reviewed to accommodate recurring changes in demand and supply.
Companies that have an effective and efficient inventory management process will be better
equipped to meet sales opportunities and generate high profits.

Types of Inventory Risk

Inventory risk is the potential for a loss due to inventory planning and control failures.
Inventory risk is managed with a standard risk management process of identifying,
analyzing, treating and monitoring risk. The following are common types of inventory
risk.

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 a). Input Shortage; A lack of inputs such as materials and parts that causes downtime for
operational processes such as a production line.
b). Shrinkage; Inventory that disappears or expires.

c).Excess Inventory; Excess inventory can result from marketing issues, poor sales forecasts
and inventory planning failures. It often needs to be heavily discounted to sell. For example, a
fashion brand produces a model of shoe in 3 colors. A month into the season, one color has
barely sold at all and needs to be discounted to clear shelves for the next line.

d).Supply Shortfall; A product generates more demand than expected and is quickly
sold out. This can represent a lost revenue opportunity if the window for sales is
limited. For example, a popular toy at Christmas may generate intense demand that
collapses in January.

e).Value Loss; Each day a product, part or material sits on the shelf it may loose value.
Value can fall quickly due to a new product launch by a competitor or volatile
commodity prices.

f).Inherent Risk; A control failure that results in an incorrect inventory count. For
example, a firm finds that it has millions of dollars in missing inventory when it
performs a year-end audit.

h).Channel Inventory; Inventory that is shipped to distribution partners represents a

special class of inventory risk. In some cases, partners have the right to return unsold
inventory, resulting in a flood of returns when something doesn't sell. Excess inventory
in a channel can also damage future sales as partners stop ordering.

Principles of VMI (Vendor Management Inventory)

In VMI, both parties have to discuss and negotiate on the terms and conditions of the contract and
formalize the relationship in a written agreement. The following are the basic principles/parameter to be
included:

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a). SL expectation,

b). Agreed inventory limits,

c). Frequency of replenishment,

d). Agreed payment of services,

e). Stocktaking responsibilities,

f). Obsolescence cost sharing,

g). Regulatory in parameters and forecast review,

h). Duration of agreement and

i). Termination clause

Benefits and issues of VMI

a) Decrease required inventory levels Improve service levels Decrease work duplication Improve
forecasts.
b) Manufacturers enjoy lower inventory investments (raw and finished).
c) Better scheduling and planning Better market information Closer customer ties and preferred
status.
d) Retailers have fewer stock-out with higher inventory turnover.
e) Better market information.
f) More optimal product mix.
1. Store staff have good knowledge of most product lines offered by the entire range of
vendors.
2. They can help the consumer choose from competing products for items most suited
to them and offer service support being offered by the store.
g) Data entry errors are reduced due to computer to computer communications. Speed of the
processing is also improved.
h) A true partnership is formed between the Manufacturer and the Distributor. They work closer
together and strengthen their ties.
i) The overall service level is improved by having the right product at the right time.
Issues are: Expensive advanced technology is required; Supplier/retailer trust must be developed;
Supplier responsibility increases. Expenses at the supplier often increase; EDI data must be well
defined and Data integrity is necessary.

Principles of Inventory Management

The following are the key principles of inventory management: demand forecasting, warehouse
flow, inventory turns/stock rotation, cycle counting and process auditing. Focusing on these five
fundamentals can yield significant bottom-line savings.

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1. Demand Forecasting: Depending on the industry, inventory ranks in the top five business
costs. Accurate demand forecasting has the highest potential savings for any of the principles of
inventory management. Both over supply and under supply of inventory can have critical
business costs. Whether it is end-item stocking or raw component sourcing, the more accurate
the forecast can be. Establishing appropriate max-min management at the unique inventory line
level, based on lead times and safety stock level help ensure that you have what you needs when
you need it. This also avoids costly overstocks. Idle inventory increases incremental costs due to
handling and lost storage space for fast-movers.

2. Warehouse Flow: The old concept of warehouses being dirty and unorganized is out dated and
costly. Lean manufacturing concepts, including 5S have found a place in warehousing. Sorting,
setting order, systemic cleaning, standardizing, and sustaining the discipline ensure that no
dollars are lost to poor processes. The principles of inventory management are not any different
from other industrial processes. Disorganization costs money. Each process, from housekeeping
to inventory transactions needs a formal, standardized process to ensure consistently outstanding
results.

3. Inventory Turns/Stock Rotation; In certain industries, such as pharmaceuticals, foodstuffs and

even in chemical warehousing, managing inventory down to lot numbers can be critical to
minimizing business costs. Inventory turns is one of the key metrics used in evaluating how
effective your execution is of the principles of inventory management. Defining the success
level for stock rotation is critical to analyzing your demand forecasting and warehouse flow.

4. Cycle Counting; One of the key methods of maintaining accurate inventory is cycle counting.
This helps measures the success of your existing processes and maintain accountability of
potential error sources. There are financial implications to cycle counting. Some industries
require periodic 100% counts. These are done through perpetual inventory count maintenance or
though full-building counts.

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5. Process Auditing; Proactive error source identification starts with process audits. One of the
cornerstone principles of inventory management is to audit early and often. Process audits should
occur at each transactional step, from receiving to shipping and all inventory transactions in
between. By careful attention to each of these critical core principles, your business can increase
efficiency and reduce costs.

Material handling is the movement, protection, storage and control of materials and products
throughout manufacturing, warehousing, distribution, consumption and disposal. ... Inventory
management and control.

Benefits of Inventory Management

There are many benefits of inventory management, some obvious and some not so obvious. The
bottom line is, if you have machinery or equipment under your command and don't use a
computerized maintenance management system (CMMS) or some sort of inventory management
software, you are doing yourself, your assets, and your company a serious disservice.

Know Thyself (And Thy Inventory)

Before you can reap the benefits of inventory management, you first have to know what exactly
is in your inventory. More than that, you need a system to manage that inventory. Inventory
software such as a CMMS will help you know what exactly is in your inventory of machinery
and equipment and begin to set up a true system to ensure that it works, gets maintained, and
performs efficiently. By its very nature, one of the benefits of inventory management is the
ability to track every aspect of your assets, giving you valuable information and insight into your
equipment.

Schedule Maintenance

Once you implement a system, you can then begin scheduling routine and preventative
maintenance, issue work orders to your staff, and track that the maintenance was actually
performed. This, in turn, helps ensure your equipment stays healthy and maximizes its life
expectancy.
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Avoid Inventory Imbalances

No matter your setting, your inventory consists of more than just machines and equipment -
spare and replacement parts are also included in your assets, and an inventory management
system is vital to tracking the number and location of these parts. Knowing how many parts you
have and where you store them prevents you from ordering parts you already have, lowering
your cost and increasing your company"s profits. Being able to quickly locate those parts
through your system (instead of trying to remember where you stored them) also helps you get
back up and running quickly in the event of equipment failure - the sooner you can find those
parts, the faster you can fix your machines!

Staff Appropriately

By studying your work order history and your maintenance schedule, you can usually accurately
predict how much staff and how many man-hours you can anticipate needing during the year.
With this number in mind, you can then schedule your employees appropriately and not just have
workers standing around twiddling their thumbs. Or maybe you will find that your problem isn't
over-staffing but under-staffing instead. Missing a routine maintenance here or there happens -
but when you begin missing them frequently due to not having enough staff, things can go south
very quickly.

Keep Order

If you have ever set foot in a facility without an inventory management system, it was probably
fairly obvious. Facility managers that do not use a proper maintenance system usually have
trouble keeping track of assets and executing work orders, so things tend not to be kept in their
places and wear and tear shows in various places around the facility. This not only looks bad, but
it can also be a safety hazard as well. Keep organized, and use a CMMS to help you do so!

Avoid Lawsuits and Regulatory Fines

As stated above, if your warehouse or facility is not in order, it can lead to safety hazards, which,
in turn, can result in lawsuits, injury, and fines associated with not following regulatory rules. In
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addition, properly managing your inventory (which includes keeping records of your - and your
staff"s - activities) helps document your actions in the event of one of the above situations.

Cut Costs and Increase Profits

Last, but certainly not least, on our list is the fact that proper inventory management can help you
cut costs and increase your profits. And at the end of the day, that's what business is all about!
Establish the true cost of the inventory. The true cost of inventory is often not fully understood.
Some firms think only about the “cost of capital.” So, for example, a firm with $15 million in
average inventory and an 8% cost to raise money (the blended rate of return needed to pay
stockholders, bondholders, and/or private parties to borrow money) sees a carrying cost of $1.2
million per year. Sounds simple, but the actual cost is much greater due to other considerations:

• Direct investment costs. These costs include insurance for the inventory, shrinkage and
pilferage costs, obsolescence losses, and the fundamental cost of capital.

• Holding the inventory. Physically keeping inventory comes with several costs such as
building rent or depreciation, heat and utilities, and janitorial and security costs to clean and
protect the building and its contents. Companies should also consider taxes and the cost of
capital for the land.

• Handling the inventory. Once the inventory is in place, there are costs that come with its
movement such as handling equipment, employee costs, and freight and transportation. Consider
the forklifts, pallet trucks, and vehicles that must be used to move inventory from A to B.
Additional costs for inventory include back-end expenses involved with accounting staff to
measure and manage the inventory and the time spent by managers to fix inventory issues. With
all these additional costs included, the total cost of holding inventory can reach 30% of the
inventory’s book value. Going back to the example of $15 million in inventory, a company can
see true holding costs of $4.5 million a year – much higher cost than originally thought. After
establishing costs, it’s vital to determining the right amount of inventory to carry. Right-sizing
inventory. Finding the right inventory level involves balancing several factors. Too much
inventory raises the holding costs, but too little means possible shortage and not meeting

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customer demand. The following are four elements that together should be judged to determine
the right levels of inventory.

• Expected demand. Past usage is a way to determine how much inventory is needed in a year,
but it isn’t foolproof. You also need to examine upcoming sales or marketing initiatives and how
they will drive demand. And to forecast for key components (like packaging), you need review at
the SKU level, which takes time and diligence. Knowing overall demand helps you determine a
yearly buy, but not the amount to carry at any given time.

• Order frequency. If you can order frequently, then you require less carried inventory because
you can do replenishments often. But placing more frequent orders may reduce your purchasing
scale, with higher per-piece pricing and freight costs. The other side is not being able to order
frequently, which means you need a greater inventory level on hand to satisfy demand.

• Lead times. If you’re lucky and can order an item one day and receive it the next, then you
don’t much need to worry about lead times. However, this isn’t always the way ordering works,
and lead times can vary due to supplier issues, the type of product, and the location of suppliers.
You need precise planning to handle longer lead times, which leads some firms to hold more
inventory as a hedge.

• Uncertainty. When you have uncertainty in the supply chain, you need to carry extra inventory
as a safety net. If you can’t manufacture or fill product due to components being out of stock,
then you risk brand failure and lost profits. You need to align safety stock levels with supply-
chain uncertainty to act as an insurance policy against unforeseen issues or mistakes in your own
inventory management. Identifying inventory costs and levels is just the beginning when it
comes to inventory optimization. Diligent companies can ultimately reduce expenses and free up
cash with careful analysis, honed capabilities, and a supply chain with aligned partners.

Distribution and Distribution Requirements Planning

A supply channel is composed of three structures. At one end of the channel is the manufacturer.
The manufacturer focuses on the development and production of products and originates the
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distribution process. The terminal point in the channel is the retailer who sells goods and services
directly to the customer for their personal, non-business use. In between the two lies a process
called distribution, which is more difficult to define. One involved in the distribution process is
labeled a "distributor." The does not manufacture its own products but purchases and resells
these products. Such a business usually maintains a finished goods inventory."

One ultimately could maintain that distributors include all enterprises that sell products to
retailers and other merchants and/or to industrial, institutional, and commercial users—but do not
sell in significant amounts to the ultimate customer. According to this definition, most
companies that are involved with the disbursement of raw materials and finished products
belong, in one sense or another, to the distribution industry. By adopting this definition,
distribution is expanded to cover nearly every form of materials management and physical
distribution activity performed by channel constituents, except for the processes of
manufacturing and retailing. Distribution involves a number of activities cantered around a
physical flow of goods and information. At one time the term distribution applied only to the
outbound side of supply chain management, but it now includes both inbound and outbound.
Management of the inbound flow involves these elements: Material planning and control,
Purchasing, Receiving, Physical management of materials via warehousing and storage and
Materials handling

Management of the outbound flow involves these elements: Order processing, Warehousing and
storage, Finished goods management, Material handling and packaging, Shipping and
Transportation

Distribution channels are formed to solve three critical distribution problems: functional
performance, reduced complexity, and specialization. The central focus of distribution is to
increase the efficiency of time, place, and delivery utility. When demand and product availability
are immediate, the producer can perform the exchange and delivery functions itself. However, as
the number of producers grows and the geographical dispersion of the customer base expands,
the need for both internal and external intermediaries who can facilitate the flow of products,
services, and information via a distribution process increases.

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Distribution management also can decrease overall channel complexity through sorting and
assistance in reutilization. Sorting is the group of activities associated with transforming products
acquired from manufacturers into the assortments and quantities demanded in the marketplace.
Reutilization refers to the policies and procedures providing common goals, channel
arrangements, expectations, and mechanisms to facilitate efficient transactions. David F. Ross
describes sorting as including four primary functions:

1. Sorting is the function of physically separating a heterogeneous group of items into

homogeneous subgroups. This includes grading and grouping individual items into an
inventory lot by quality or eliminating defects from the lot.
2. Accumulating is the function of combining homogeneous stocks of products into larger
groups of supply.

3. Allocation is the function of breaking down large lots of products into smaller salable
units.

4. Assorting is the function of mixing similar or functionally related items into assortments
to meet customer demand. For example, putting items into kit form.

As the supply chain grows more complex, costs and inefficiencies multiply in the channel. In
response, some channels add or contain partners that specialize in one or more of the elements of
distribution, such as exchange or warehousing. Specialization then improves the channel by
increasing the velocity of goods and value-added services and reducing costs associated with
selling, transportation, carrying inventory, warehousing, order processing, and credit.

Role of the Distribution Function

There are a number of critical functions performed by the channel distributor. Ross describes
these functions as:

1. Product acquisition. This means acquiring products in a finished or semi-finished state from
either a manufacturer or through another distributor that is higher up in the supply channel.

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 These functions can be performed by independent channel intermediaries or by the
distribution facilities of manufacturing companies.
2. Product movement. This implies significant effort spent on product movement up or down
the supply channel.

3. Product transaction. Distributors can be characterized as selling products in bulk quantities

solely for the purpose of resale or business use. Downstream businesses will then sell these
products to other distributors or retailers who will sell them directly to the end customer, or
to manufacturers who will consume the material/components in their own production
processes.

Following are the separate elements contained within the three critical functions of distribution:

 Selling and promoting. This function is very important to manufacturers. One strategy
involves the use of distribution channels to carry out the responsibilities of product
deployment. In addition to being marketing experts in their industry, distribution firms
usually have direct-selling organizations and a detailed knowledge of their customers and
their expectations. The manufacturer utilizing this distributor can then tap into these
resources. Also, because of the scale of the distributing firm's operations and its
specialized skill in channel management, it can significantly improve the time, place, and
possession utilities by housing inventory closer to the market. These advantages mean
that the manufacturer can reach many small, distant customers at a relatively low cost,
thus allowing the manufacturer to focus its expenditures on product development and its
core production processes.
 Buying and building product assortments. This is an extremely important function for
retailers. Most retailers prefer to deal with few suppliers providing a wide assortment of
products that fit their merchandizing strategy rather than many with limited product lines.
This, of course, saves on purchasing, transportation, and merchandizing costs.
Distribution firms have the ability to bring together related products from multiple
manufacturers and assemble the right combination of these products in quantities that
meet the retailer's requirements in a cost-efficient manner.

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  Bulk breaking. This is one of the fundamental functions of distribution. Manufacturers
normally produce large quantities of a limited number of products. However, retailers
normally require smaller quantities of multiple products. When the distribution function
handles this requirement it keeps the manufacturer from having to break bulk and
repackage its product to fit individual requirements. Lean manufacturing and JIT
techniques are continuously seeking ways to reduce lot sizes, so this function enhances
that goal.

 Value-added processing. Postponement specifies that products should be kept at the

highest possible level in the pipeline in large, generic quantities that can be customized
into their final form as close as possible to the actual final sale. The distributor can
facilitate this process by performing sorting, labeling, blending, kitting, packaging, and
light final assembly at one or more points within the supply channel. This significantly
reduces end-product obsolescence and minimizes the risk inherent with carrying finished
goods inventory.

 Transportation. The movement of goods from the manufacturer to the retailer is a critical
function of distribution. Delivery encompasses those activities that are necessary to
ensure that the right product is available to the customer at the right time and right place.
This frequently means that a structure of central, branch, and field warehouses,
geographically situated in the appropriate locations, are needed to achieve optimum
customer service. Transportation's goal is to ensure that goods are positioned properly in
the channel in a quick, cost-effective, and consistent manner.

 Warehousing. Warehousing exists to provide access to sufficient stock in order to satisfy

anticipated customer requirements, and to act as a buffer against supply and demand
uncertainties. Since demand is often located far from the source (manufacturer),
warehousing can provide a wide range of marketplaces that manufacturers, functioning
independently, could not penetrate.

 Marketing information. The distribution channel also can provide information regarding
product, marketplace issues, and competitors' activities in a relatively short time.

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DRP

The need for more detailed distribution planning led to the emergence of distribution
requirements planning (DRP) during the 1970s. DRP is a widely used and potentially powerful
technique for helping outbound logistics systems manage and minimize inbound inventories.
This concept extended the time-phase order point found in material requirements planning
(MRP) logic to the management of channel inventory. By the 1980s DRP had become a standard
approach for planning and controlling distribution logistics activities and had evolved into
distribution resource planning. The concept now embraces all business functions in the supply
channel, not just inventory and logistics, and is termed DRP II.

DRP is usually used with an MRP system, although most DRP models are more comprehensive
than stand-alone MRP models and can schedule transportation. The underlying rationale for DRP
is to more accurately fore-cast demand and then use that information to develop delivery
schedules. This way, distribution firms can minimize inbound inventory by using MRP in
conjunction with other schedules.

One of the key elements of DRP is the DRP table, which includes the following
elements:Forecast demand for each stock-keeping unit (SKU), Current inventory level of the
SKU, Target safety stock, Recommended replenishment quantity and Replenishment lead time

The concept of DRP very closely mimics the logic of MRP. As with MRP, gross requirements
consist of actual customer orders, forecasted demand, or some combination of both; scheduled
receipts are the goods the distributor expects to receive from orders that already have been
released, while goods that already are received and entered into inventory constitute the on-hand
inventory balance. Subtracting scheduled receipts and on-hand inventory from gross
requirements yields net requirements. Based upon the distributor's lot-sizing policy and receiving
behavior, planned order receipts are generated. Firms may order only what they need for the next
planning period or for a designated time period. Known as economic order quantity (EOQ), this
involves a lot size based on a costing model. Alternatively, firms may be limited to multiples of a
lot size simply because the supplying firm packages or palletizes their goods in standard
quantities. Also, some distributors may require some time interval between the arrival of goods
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on their docks and the entry of the goods into the inventory system. For example, a firm may
have a staging area where goods remain for an average time period while awaiting quality or
quantity verification. Hence, planned order receipt may be during the planning period when the
goods are needed, or they may need to be received earlier depending on time requirements.
Order release is then determined by offsetting the planned order receipt by the supplier's lead
time

Packaging Inventory Management

Managing any inventory of products can be hard work. This is particularly true of your
packaging inventory management. Having too much stock ties up working capital and creates the
additional (often significant) cost of safely storing your packaging.The packaging inventory
management service was originally created due to an ever increasing number of companies like
yours feeling the cost pressures of maintaining large warehouses, struggling to cope with
fluctuations in demand, and the difficulties inherent with the management of large inventories of
differing packaging items. On entering into a service level agreement on how to manage the
entire production, storage and distribution processes of your packaging with minimal further
input from you. With the manufacturing programme carefully managed, finished packaging
products are stored in a clean, safe environment until required.

Online packaging systems are; Fast, safe and secure access with any web browser,Less
paperwork and less administration,24 hours monitoring of stock levels, Calculation of earliest
possible deliveries, Viewing of previous orders, Add delivery and special instructions to orders
and Exceptionally intuitive and easy to use

Distribution Channel Management

Distribution channel management is the collective set of activities and operations B2B firms
employ to get their product to market via channel partners as efficiently and effectively as
possible. These include but are not limited to the following business impact areas: Sales
Forecasting, Channel Marketing Management; Inventory Management; Incentive Program

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Management; Revenue Recognition; Financial Compliance and Risk Management and Data
Integrity

On a day-to-day basis, many channel-centric companies are overpaying commissions to partners,

losing business due to stock outs, under-collecting royalties, and missing out on huge new sales
opportunities. Many are also at risk for noncompliance penalties due to records that aren't audit-
ready, specifically regarding timely closing and revenue recognition. Most companies are
constantly struggling to address all this ever-growing complexity with inefficient, piecemeal
approaches and an overworked staff who is always a couple steps behind the curve. Current
systems are incomplete in data reconciliation, automation, analytics and integration with other
enterprise applications. They often succumb to believing whatever their partners say and paying
claims without question in order not to rock the boat.

Worse yet, some companies have simply adopted a culture of acceptance that the
complexity, inefficiency and profit leakage in their go-to-market channels are just “necessary
evils” that can’t be resolved. So they’ve settled into a pattern of ignoring the issues and accepting
the losses.

Gain Real-Time Channel Visibility

Instead of accepting distribution channel underperformance as a fact of life, many companies

have turned to using the holistic and proactive channel management software and solutions from
Entomo to gain real-time visibility, coherent understanding and proactive control over all of their
channel operations. Entomo’s SmartHub platform of cloud-based channel management
applications brings it all together and puts you back in charge.

Information Technology (IT)

Information technology (IT) has become a vital and integral part of every business plan. From
multi-national corporations who maintain mainframe systems and databases to small businesses
that own a single computer, IT plays a role. The reasons for the omnipresent use of computer
technology in business can best be determined by looking at how it is being used across the

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business world. An important aspect of good inventory management is effective use of
information. Knowing how to use information effectively also enables a manager to decide what
data to collect, buy and store, and what information technology to invest in. Note that
information has no value, if it is not used effectively. For example, an inventory manager can
obtain order progress information through the use of a tracking technology. If this information is
not used to improve replenishment decisions, then neither the information nor the technology
used to obtain it has any value. In this chapter, we provide some examples of how information is
incorporated into classical inventory management problems.

The second important aspect of good inventory management is to quantify the value of
information. A manager may need to invest in a technology that collects and stores information
relevant for effective inventory management. The cost of obtaining information is often not
difficult to analyze. Quantifying the benefits, however, requires thorough analysis and modeling.
Consider, for example, the recent tracking technology known as Radio Frequency Identification
(RFID). Quantifying the cost of RFID implementation is relatively straightforward. But the
benefit of this technology for the management of inventory is not clear. Comparing inventory
models with and without the information obtained through RFID enables an inventory manager
to quantify the value of RFID.

The third important aspect of good inventory management is to coordinate decentralized

operations. The coordination of information and inventory management have become
increasingly more difficult with recent increases in supply chain complexity. Such complexities
are the result of dramatic changes in manufacturing and distribution, including globalization and
outsourcing. As a result, independent firms manage inventory allocated across different parts of
the global supply chains. Each firm in the supply chain individually and myopically sets strategic
and operational goals to minimize inventory and production related costs. Firms also maximize
profits by using local information such as local cost structures, profit margins and forecasts. As a
result, the supply chain is sub-optimized and not synchronized

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Ethical Issues in Inventory Management

When we speak of ethics violations we immediately think about executive management, or some
sort of Wall Street scandal, and rarely do we realize that it happens more frequently from the
bottom half of the workforce than the glass tower. Ethics violations in inventory management are
committed by:

1. Knowingly giving inaccurate information to clients or prospective clients concerning pricing

of storage space or other services, and the status of their inventory.

2. Favoring one vendor over another when purchasing goods or services because you have a
friend that works for the preferential vendor or because of possible financial gain.

3. Cover-up of damaged products going out on a shipment.

4. Manipulating inventory figures and levels when the client questions his inventory levels or
when management inquires about inventory statuses.

5. Work slowdown to gain overtime.

6. Giving preferential treatment to certain employees for possible gains in the future and
friendship.

These are just a few examples and I'm quite sure that if you observed closely in your
organization you can find many more. Why do these ethics violations occur? One reason is a
lack of a code of ethics. Code of ethics are a specific set of professional behaviors and values
employees must know and must abide by, including confidentiality, accuracy, privacy, integrity.
Large organizations have a code of ethics, but violations occur because the standards are not
enforced or management feels the violation is not worth their time

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Public Procurement Principles

Public procurement principles set the framework for managing public procurement requirements,
and also within which procurement practitioners’ must work. So, as practitioners it is important
not only to have a clear understanding of public procurement principles, but to interiorize them
so that they serve as guiding principles in our decision-making process. By integrating these
principles into our work ethics, the outcome of our decisions will always be in line with public
procurement principles. Being governed by and working in line with public procurement
principles is especially important.

Public procurement practitioners are public servants because we handle public funds. As such,
we are bound by an ethical code of conduct and accountable for what we do or fail to do when
managing those funds. In subsequent posts, the following eleven fundamental public
procurement principles will be addressed:

1. Compliance with Law and Regulations

2. Economy and Efficiency

3. Value for Money

4. Balance of Control and Delay

5. Separation of Authority

6. linkages to other areas of PFM

7. Fairness, non discrimination

8. Ethics and avoidance of corruption

9. Transparency and accountability

10. Safety and Environmental protection

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 11. Comprehensive record keeping

Capacity Planning for Products and Services

Capacity refers to a system's potential for producing goods or delivering services over a
specified time interval. Capacity planning involves long-term and short term considerations.
Long-term considerations relate to the overall level of capacity; short-term considerations
relate to variations in capacity requirements due to seasonal, random, and irregular
fluctuations in demand. Excess capacity arises when actual production is less than what is
achievable or optimal for a firm. This often means that the demand in the market for the
product is below what the firm could potentially supply to the market. Excess capacity is
inefficient and will cause manufacturers to incur extra costs or lose market share. Capacity
can be broken down in two categories: Design Capacity and Effective Capacity: refers to the
maximum designed service capacity or output rate. Effective capacity is design capacity
minus personal and other allowances. Product and service factors effect capacity
tremendously.

Focuses on capacity planning for products and services. Capacity is the ability of a systems
potential for producing goods or delivering services over a specific time interval. The
capacity decisions within a company are very important because they help determine the
limit of output and provide a major insight to determining operating costs. Basic decisions
about capacity often have long term consequences and this chapter explains the ramifications
of those choices. When considering capacity planning within a company, three key inputs
should be considered. The three inputs are the kind of capacity to be determined, how much
of the products will be needed, and when will the product be needed.

The most important concept of capacity planning is to find a medium between long term
supply and capabilities of an organization and the predicted level of long term demand.
Organizations also have to plan for actual changes in capacity, changes in consumer wants
and demand, technology and even the environment. When evaluating alternatives in capacity
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 planning, managers have to consider qualitative and quantitative aspects of the business.
These aspects involve economic factors, public opinions, personal preferences of managers.
The capacity decision is strategic and long-term in nature. Capacity planning is described as
matching the capabilities of an organization with the predicted level of future demand. Many
organizations become involved with capacity planning due to changes in demand,
technology, the environment, etc. Organizations have capacities or limits that their system
can handle.

Three key inputs to capacity planning:

1. The kind of capacity that will be needed
2. How much capacity will be needed
3. When will it be needed
*Accurate forecasts are critical to the planning process

Measuring Capacity
When selecting a measure of capacity, it is best to choose one that doesn't need updating.
When dealing with more than one product, it is best to measure capacity in terms of each
product. For example, the capacity of a firm is to either produce 100 microwaves or 75
refrigerators. This is less confusing than just saying the capacity is 100 or 75. Another
method of measuring capacity is by referring to the availability of inputs. Note that one
specific measure of capacity can't be used in all situations; it needs to tailored to the specific
situation at hand.

Determinants of Effective Capacity

 Facilities: The size and provision for expansion are key in the design of facilities. Other
facility factors include locational factors (transportation costs, distance to market, labor
supply, energy sources). The layout of the work area can determine how smoothly work
can be performed.
 Product and Service Factors: The more uniform the output, the more opportunities
there are for standardization of methods and materials. This leads to greater capacity.
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  Process Factors: Quantity capability is an important determinant of capacity, but so is
output quality. If the quality does not meet standards, then output rate decreases because
of need of inspection and rework activities. Process improvements that increase quality
and productivity can result in increased capacity. Another process factor to consider is the
time it takes to change over equipment settings for different products or services.

 Human Factors: the tasks that are needed in certain jobs, the array of activities involved
and the training, skill, and experience required to perform a job all affect the potential
and actual output. Employee motivation, absenteeism, and labor turnover all affect the
output rate as well.

 Policy Factors: Management policy can affect capacity by allowing or not allowing
capacity options such as overtime or second or third shifts

 Operational Factors: Scheduling problems may occur when an organization has

differences in equipment capabilities among different pieces of equipment or differences
in job requirements. Other areas of impact on effective capacity include inventory
stocking decisions, late deliveries, purchasing requirements, acceptability of purchased
materials and parts, and quality inspection and control procedures.

 Supply Chain Factors: Questions include: What impact will the changes have on
suppliers, warehousing, transportation, and distributors? If capacity will be increased,
will these elements of the supply chain be able to handle the increase? If capacity is to be
decreased, what impact will the loss of business have on these elements of the supply
chain?

 External Factors: Minimum quality and performance standards can restrict

management's options for increasing and using capacity.

 Inadequate planning can be a major limiting determining of effective capacity.

The most important parts of effective capacity are process and human factors. Process factors
must be efficient and must operate smoothly, if not the rate of output will dramatically decrease.
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Human factors must be trained well and have experience, they must be motivated and have a low
absenteeism and labor turnover. In resolving constraint issues, all possible alternative solutions
must be evaluated. This is possible by using CVP analysis and the Break-Even Point formula.

Steps in the Capacity Planning Process

1. Estimate future capacity requirements
2. Evaluate existing capacity and facilities and identify gaps
3. Identify alternatives for meeting requirements
4. Conduct financial analyses of each alternative
5. Assess key qualitative issues for each alternative
6. Select the alternative to pursue that will be best in the long term
7. Implement the selected alternative
8. Monitor results

Common Challenges in Real-Time Inventory Management

Understanding your customers’ needs and making wise decisions on how to manage them
through inventory is a challenge in today’s buying environment. There are many problems faced
in inventory management, but these issues come with solutions. Managing your inventory is

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more complex than it may seem. The following are the most common problems and challenges
in inventory management, and how you can improve your business to overcome them.
1. Lack of Knowing Your Inventory.
2. Inefficient Processes. ...
3. Customer Demand. ...
4. Limited Visibility. ...
5. Managing People and Space. ...
6. Increasing Competition. ...
7. Accurately Track Inventory. ...
8. Centralize Essential Data
9. Challenges in Inventory Management
1) Lack of Knowing Your Inventory
Being unaware of inventory levels has a largely negative impact on supply chains.
Companies should make sure they have full visibility of their inventory at all times, to
know when stock needs to be replenished. It is also important to understand what is in
stock, what is going to be ordered, the size and quantity of the order, and what items need
to be replenished. This can be a cumbersome task, but it is essential to ensuring profitable
business operations.
2) Inefficient Processes
Even with the availability of technology, many companies still have outdated inventory
management systems and manual processes. By upgrading your standard operating
procedures and implementing new technology and software, you will become more
efficient in managing your inventory.
3) Customer Demand
The needs and demands of customers are constantly changing and now they are looking
to distributors to be more flexible with their orders. Additionally, you have to compete
against other businesses who are also trying to keep up to the unique needs of customers.
Your company has the responsibility of learning and understanding customer needs, and
assuring their demands and expectations are met, while simultaneously managing your
inventory to keep up with their needs.

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 4) Limited Visibility
New inventory management software allows companies to see their inventory, expenses,
cash flow, and revenue in one central location. Your ability to make strategic decisions
relies on your visibility of your inventory and working with the right software is
essential.
5) Managing People and Space
You should take full advantage of your warehouse space, and this requires precise
management of your employees and your space. By mismanaging either of these key
areas, you can end up with issues like inadequate storage space, and improperly sorted
and stored materials.
6) Increasing Competition
With emerging economies like China, India, and Latin America building up warehouse
management companies, increasing competition is another challenge of effective
inventory management. These emerging markets provide advantages like lower labor
costs, material costs, and low currency values. With the availability of international
shipping, it’s time you ensure your supply chain is working as efficiently as possible.
9). Ways to Overcome Inventory Challenges
Accurately Track Inventory
It is essential to know where items are at any time in the supply chain. A good third-party
logistics (3PL) company can provide you with the tools you require to manage your
supply chains and inventories more effectively. It is also important for you to be able to
warn customers of any deliveries that may be arriving late. Giving customers a
notification beforehand shows that you are a proactive supplier and that you’re able to
manage the situation ahead of time, instead of waiting for a complaint.
9). Centralize Essential Data
Before your decision-makers can build out a forecast, you should gather and analyze any
historical data you have and make it centralized. This is a huge challenge for many
companies as this information can be found in disparate systems. Getting all your data in
one place is essential to your success, and without proper updates your information can

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 become inaccurate. Integrating and centralizing your systems in real-time will help your
teams access up-to-date information to make the best decisions for your business.
Backup Inventory Data
Losing valuable inventory data can set you and your team back. To prevent this from
happening you should frequently backup your data files in cloud-based storage. These
platforms protect your data from hardware failure.
Transparency
The best businesses will build transparency into their fulfillment to make sure employees
and customers know what is happening to items. Even with the most up-to-date
inventory management strategy, issues with orders can still occur. If your customer is
aware of delays, they can change their expectations and feel confident that their item will
still arrive. Communication and transparency is essential to your success. This includes
notifying the customer the moment an item they are waiting for comes back in stock.
Multi-Location Warehouse
Having warehouses in multiple locations can help you provide more affordable and faster
shipping to customers, and helps you make region-popular items more accessible. If you have
warehouses in other countries, you will have an easier time reaching customers in their time
zone, improving your relationship with them.
Outsource Inventory Management Service
By outsourcing your processes to an inventory management service, you will be better
prepared to take on whatever fulfillment changes lie ahead. Each company may have a different
strategy, depending on their needs and the market focus, so working with the leaders in e-
commerce platforms will help you determine the most effective course of action for your goals.
Inventory Management
Keeping track of inventory in real-time can be challenging, but these inventory management
problems and solutions don’t have to overwhelm you. Getting proactive to avoid these
challenges by implementing helpful tips from the professionals will lead you to more success
than you could ever imagine.
Taking the time to change and improve your warehouse and inventory management
processes will make your supply chain run smoother and will lead to greater efficiency and

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profitability for your business. If you want to learn more about the benefits of our inventory
management system, or want help improving your warehouse operations.
Common Inventory Management Challenges
Managing inventory is a daunting task. The process and results impact every aspect of your
business. There are 20 common inventory management challenges to watch for in your supply
chain.
Inconsistent Tracking:
Using manual inventory tracking procedures across different software and spreadsheets is time-
consuming, redundant and vulnerable to errors. Even small businesses can benefit from a
centralized inventory tracking system that includes accounting features.
Warehouse Efficiency:
Inventory management controls at the warehouse is labor-intensive and involves several steps,
including receiving and put away, picking, packing and shipping. The challenge is to perform all
these tasks in the most efficient way possible.
Inaccurate Data:
You need to know, at any given moment, exactly what inventory you have. Gone are the days
when inventory could be counted once a year with an all-hands-on-deck approach.
Changing Demand:
Customer demand is constantly shifting. Keeping too much could result in obsolete inventory
you’re unable to sell, while keeping too little could leave you unable to fulfill customer orders.
Order strategies for core items, as well as technology to create and execute an inventory plan,
can help compensate for changing demand.
Limited Visibility:
When your inventory is hard to identify or locate in the warehouse, it leads to incomplete,
inaccurate or delayed shipments. Receiving and finding the right stock is vital to efficient
warehouse operations and positive customer experiences.
Manual Documentation:
Managing inventory with paperwork and manual processes is tedious and not secure. And it
doesn’t easily scale across multiple warehouses with lots of stock.
Problem Stock:

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Perishable and fragile stock need specialized plans for care and storage. And high-value
inventory needs specific loss-prevention strategies and inventory controls.
Supply Chain Complexity:
Global supply chains shift daily, placing a burden on your inventory planning and management
operations. The manufacturers and wholesale distributors that dictate when, where and how your
inventory ships require flexibility and offer unpredictable lead times.
Managing Warehouse Space:
Efficiently managing space is an intimidating task. Planning and designing warehouse spaces
with inventory management platforms helps you better control the timing of new stock
deliveries. It can account for important factors, such as available space.
Insufficient Order Management:
One of the most common challenges to sound inventory management is preventing the
overselling of products and running out of inventory. Using historical and seasonal data trends
can help you accurately predict customer orders.
Increasing Competition:
Globalized supply chains are subject to unpredictable economic shifts and market forces that
impact the competition for raw materials. Small businesses are sometimes faced with choosing
between competing for high-demand materials or holding enough inventory to control costs.
Evolving Packaging:
Compostable packaging—or removing packaging all together—to reduce waste presents new
obstacles for warehouse design and storage. It may even mean new equipment or shorter shelf
life for some items.
Expanding Product Portfolios:
Many online retail strategies remove the need for large warehouse distribution centers. These
strategies make it easier to expand inventory and diversify product portfolios, but demand
technology and resources for ordering, shipping and tracking.
Overstocking:
Keeping too much stock on hand can be as problematic as having too little. Overstock impacts
business cash flow and leads to inventory-related problems, such as storage and loss.
Inventory Loss:

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The loss of inventory due to spoilage, damage or theft can be a supply chain problem. It requires
identifying, tracking and measuring problem areas.
Poor Production Planning:
Production planning is vital for avoiding delayed manufacturing and cost overruns. If not done
well, it can impact sales forecasts and project scheduling.
Lack of Expertise:
It can be tough to find skilled inventory managers who are adept at the latest technology and can
improve inventory strategy. Simply upgrading your inventory management platform with a host
of features isn’t enough. You need capable management.
Poor Communication:
Communication and collaboration are key. When departments are apathetic about sharing
information, it makes identifying inventory trends and finding ways to improve much more
difficult.
Inefficient Processes:
Low-tech, manual inventory management procedures don’t seem like a daunting challenge when
inventory is small and there’s only one warehouse location to manage. But as sales volume
increases and inventory expands, inefficient, labor-intensive and low-tech standard operating
procedures are difficult to scale.
Inadequate Software:
To scale inventory management software to support complex logistics, it needs to integrate with
your existing business process platforms. The difficult task is choosing from hundreds of
inventory management solutions and mastering a host of features that require training and
ongoing support.
Solutions to Overcome Inventory Management Challenges
Inventory management is immensely complex. Here are some solutions to the common inventory
management challenges listed above.
Centralized Tracking:
Consider upgrading to tracking software that provides automated features for re-ordering and
procurement. Inventory management platforms provide centralized, cloud-based databases for
accurate, automatic inventory updates and real-time data backup.

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Transparent Performance:
Measure and report warehouse performance metrics like inventory turnover, customer
satisfaction and order processing speed to overcome warehouse inefficiencies. Share this data
with employees and suppliers.
Stock Auditing:
Frequent stock auditing processes, like daily cycle counting, reduce human error and provide
more accurate, up-to-date inventory data for managing cash flow. Organize audits by category
and cycle count smaller inventory samples on a predictable schedule for more accurate financial
data.
Demand Forecasting:
Some inventory management platforms include demand forecasting tools. This feature integrates
with accounting and sales data to help you predict demand and schedule orders based on shifting
customer preferences, material availability or seasonal trends.
Add Imagery:
Add images with product descriptions in your inventory database to improve purchasing and
receiving processes, enhance accuracy and prevent misplaced inventory.
Go Paperless:
Give employees the right inventory tools for the job. They need software to replace manual
inventory documentation, and paperless transactions for invoices and purchase orders.
Preventive Control:
Implement stock control systems to manage problem inventory, such as perishable stock, fragile
equipment or obsolete materials. Perform regular preventive maintenance on machinery and
equipment stock in storage if required by the manufacturer. Catalog data on problem stock
location, cost and quantity to monitor shelf life and prevent waste.
Measure Service Levels:
Monitor and track supplier data, such as shipment errors, damaged or defective products and
missed delivery appointments. Measure your supplier’s performance to find and fix supply chain
disruptions, reduce complexity and streamline logistics.
Optimize Space:

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Use inventory management systems with warehouse management features to optimize storage
space and inventory flow. Categorize inventory storage down to shelf, bin and compartment, and
automate order picking, packing and shipping workflows.
Automate Reorders:
Backordered inventory delays production and creates poor customer experiences. Use inventory
management software to set automatic reorder points based on preset stock levels and current
availability to avoid overselling.
Safety Stock:
Maintain safety stock to offset supply chain disruptions and help manage increased lead times
due to shifting international competition for raw materials. Proper inventory planning helps
operations adapt to dynamic global supply chains.
Classify Inventory:
Create inventory classifications to manage changing trends, such as packaging initiatives to
reduce plastic waste. Categorize stock by packaging type, dimensions and product. Use this
information to control shipping costs and storage location better.
Multi-Location Warehousing:
Use multi-location warehouse management features to track and control expanding inventories.
Take advantage of receiving and put-away schedules with automated inventory tracking alerts
and scheduling features that keep tabs on warehouse location and in-transit inventory.
Leverage Lead Times:
Take lead times into account when placing orders for high-demand stock. Track and manage
your high-demand inventory using cycle counting data to set automatic reorder points and
average lead time to preventing stockouts.
Reduce Human Error:
Use inventory control processes like blind receiving with barcodes and mobile scanners to
prevent human error, inventory manipulation and shrinkage due to theft or negligence.
Plan Demand:
Use an inventory management system with advanced demand forecasting and reporting features
to prioritize your top inventory. Take into account the availability of the top 20% of inventory

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that generates 80% of your customer demand. To learn more about inventory planning and
demand forecasting, read our essential guide to inventory planning.
Subcontract Expertise:
Consider outsourcing to an expert in inventory management. Contract in-person training and
provide online support to help employees follow best practices for working with technical
inventory management software features.
Dashboard Collaboration:
Introduce dashboards with simple interfaces that show real-time inventory data. Having
everything on one screen helps remove communication barriers across accounting, sales and
warehouse operations.
Productivity Tools:
All the information you need about your inventory can be in your pocket. With mobile solutions
and cloud-based software, you can control inventory and improve your warehouse productivity
from anywhere in the world.
Update Platforms:
Upgrading to a cloud-based inventory management platform doesn’t just give all the latest
features. You get to take advantage of the vendor’s expertise and training while it’s being
implemented

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Economic Order Quantity (eoq)
The economic order quantity (EOQ) method of inventory control is a procedure for balancing
ordering costs and carrying costs so as to minimize total inventory costs. Ordering costs are
administrative, clerical, and other expenses incurred in initially obtaining inventory items and
placing them in storage. There also is the carrying, or holding, cost, the expenses associated with
keeping an item on hand (such as storage, insurance, pilferage, breakage). Finally, there are stock
out costs. They include the loss of customer goodwill and possibly sales because an item
requested by customers is not available.
In order to determine the EOQ, calculus is used in the development of the mathematical model.
The method uses an equation that includes annual demand (D), ordering costs (O), and holding
costs (H). The basic equation for EOQ is presented below:
EOQ = square_root[(2 * annual_demand * ordering_costs) / holding_costs]

The EOQ equation helps managers decide how much to order. However, managers also need to
determine the reorder point (RIP), the inventory level at which a new order should be placed. To
determine the reorder point, managers estimate lead time (L), the time between placing an order
and receiving it. In the formula for ROP, lead time is multiplied be average daily demand:
Reorder level = Average daily usage rate * lead-time in days

The model described is one of the simplest to develop. The sophistication level of the model
depends on the actual need of the company and demands of the environment.
Assumptions of economic order quantity

The computation of economic order quantity is possible because of certain

assumptions for instance

1. The total ordering cost in an EOQ remains constant

2. The total units that are to be consumed are certain
3. The ordered inventory is delivered in one attempt
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 4. The inventory costs are assumed constant
5. The maximum quantity for every stock item is computed on a separate
basis
6. No availability of any discount on quantity or cash
7. There is no fluctuation of lead time

Materials resource planning (MRP) and distribution requirements planning (DRP) are two
vital components to the manufacturing industry. Both of these planning methods are beneficial to
manufacturing operations that are trying to optimize production and enhance overall efficiency.
MRP
Materials resource planning (MRP) is a production system that pertains to inventory planning
and control. As MRP is used in the manufacturing industry, it is mainly concerned with the
ordering of raw materials through demand forecasting - meaning that this is more of a push
control of inventory. Demand forecasting is enabled throughout the operation and allows for an
insight into how much inventory is needed, which then enables a direct response to the system
that orders the correct amount of materials that will effectively fulfill the order.
MRP is a about being a step ahead of production and preparing for swift demand changes.
Utilization of accurate data and systematic resources will further enable the production facility to
be able to further optimize production and order materials in a waste minimized, more efficient
manner
DRP
Distribution requirements planning (DRP) is the process in which goods are delivered in a more
efficient manner. These include considering the aspects of establishing a good, quantity of the
good, and the direct location that it is needed to arrive at in a given time. Distribution
requirements planning will benefit the operation as a whole through effective and cost-aware
distribution, which allows for production facilities to be able to focus elsewhere in the
manufacturing operation.
The pull or push method is utilized by DRP distribution, with pull and push differing from each
other. The pull method includes goods shifting upward throughout the system and obtaining

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customer order achievement. Although management controls the amount of goods available,
distribution inventory management is challenging because all orders are considered new to the
supplying location as the demand is flowing upward.
MRP and DRP Correlation
As MRP focuses more on a single location, DRP focuses more on the control of the materials
among the various locations. These two systems operate together and evaluate the supply chain
in a variety of ways:
1) Modification of Orders
2) Receipt Schedules
3) Inventory Balances
4) Transportation Times
These evaluations promote insight within the supply chain and allow for enhanced distribution
and efficient ordering of materials that aid production facilities through coming closer to the
overall efficiency point within the operation.
APS with MRP and DRP
Advanced planning and scheduling (APS) systems enable capabilities that pertain to MRP and
DRP. APS systems are designed to optimize the production scheduling process, which correlates
with the material planning and distribution process. Advanced planning and scheduling offer
various other benefits and capabilities such as
1. Impact analysis
2. Visual Schedule Ordering
3. Flexible Alert System
Utilization of an advanced planning and scheduling system will encourage intuition in the supply
chain and find areas where the manufacturing operation is thriving and areas where the operation
can be improved.
Distinctions between MRP, DRP, and ERP, are: MRP is a set of software programs designed to
schedule material requirements. ... Distribution Resource Planning (DRP) is a time-phased stock-
replenishment plan for all levels of the distribution network. Its focus is on retail and wholesale
distribution network
DISTRIBUTION REQUIREMENTS PLANNING (DRP) IN SUPPLY CHAIN

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Supply chain management is a complex process that involves coordinating the purchasing or
materials, scheduling of operations, logistics, and planning of resource capacities. With the many
aspects involved in supply chain planning, the distribution of materials is considered a vital
component of production. Distribution Requirements Planning (DRP) is the process of
determining the right quality of finished goods to be sent to each distribution center or
warehouse in order to meet customer demand. During DRP, customer and forecasted demand are
translated into purchase orders. This process depends on actual demand signals such as customer
orders as those orders are used to plan the gross requirements of the supply source. One of the
biggest challenges during DRP is caused by the high levels of demand variability. As demand
can vary, how can manufacturing operations properly plan for the quantity of finished goods that
are required on site and positioned to the correct location? In addition, how can these goods
arrive at the correct facility in the time frame required in the most efficient manner?
Distribution Requirements Planning (DRP) in Supply Chain
The Distribution Requirements Planning process ensures that goods are delivered in the most
efficient manner. This includes considering the quantity of the various materials required in
production and the direct location that it is needed to arrive at in a given time. Distribution
requirements planning will benefit operations as a whole by increasing efficiency in the
following areas: Faster Decision Making; Utilization of Demand Forecasting; Planning Initiation
Accuracy; Cost Awareness; Customer Service Enhancement and Push or Pull Method
The DRP process can either use a push or pull method. First, the pull method involves demands
for finished goods shifting upward throughout the system to fulfill customer orders. Although
management controls the amount of goods available, the distribution inventory management is
challenging because all orders are considered new to the supplying location as the demand is
flowing upward, which is otherwise known as the “Bullwhip Effect”. This effect reflects the
increasing demand forecast inaccuracies as orders move up the supply chain
The push method is the opposite of the pull method - instead, goods are sent downward through
the system. The advantage of this method is that it allows lower costs, but can be
disadvantageous when the central planning and demand are not on the same page at all times.

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As distribution requirements planning is gradually being implemented into the production
facilities and manufacturing operations, there is a drastic increase in production efficiency,
accuracy, and order fulfillment.

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