Supply Chain ManagementINVENTORY CONTROLS

Session Objectives To enable the learner to understand:

Types of Inventory Control

The importance of different inventory control techniques in various situations

The pros & cons of various inventory control techniques

Inventory ControlInventory control is a method where all stocks of goods are properly

and promptly issued, accounted, and preserved in the best interest of an entity that handles its inventory.

Inventory control is a method to identify those stocks of goods, which can be used for the production of finished goods.

Inventory Control is defined as the supervision of supply, storage and accessibility of items in order to ensure an adequate supply without excessive oversupply.

Objective of Inventory Control

The objective of inventory management is to have the appropriate amounts of materials in the right place, at the right time, and at low cost.

Strike a balance between ‘too much & too little’.

Why do we have Inventory Control?The variability in the customer demand if not conveyed properly or distorted as it travels upstream in the SCM , is called the “Bull Whip effect”.This phenomenon causes either stock outs or inventory pile ups in the distribution logistics chain. The ripple effect of demand volatility results in inventory problems affecting the profitability & customer service of the firm.

The aftereffects of Bull whip phenomenon can be reduced by the application of latest Inventory Control techniques.

Volatility Amplification in the Supply Chain

Bullwhip Phenomenon

Customer Retailer Distributor Factory Tier I Supplier Equipment

Reasons: Information lags Delivery lags Over &/or under ordering Misperceptions of feedback Lumpiness in ordering Chain accumulations

Solutions: Countercyclical Markets Countercyclical Technologies Collaborative channel mgmt.

What causes bullwhip effect? The more:

–the number of layers

–the delay

–the rate of change, the greater the fluctuations

Each layer:

–updates its forecast in varying patterns

–places order at different times

–price fluctuations (promotions)

–rationing of supply

Dem

and

Supply ChainDownstream Upstream

Key Observations of Bull Whip •Downstream demand gets amplified by the time it reaches upstream.

•All levels go through the effect, albeit in varying magnitudes.

•The farther we are from the end point demand, the greater is the amplitude of this variation.

•There is a phase lag in the effect between the layers.

•Demand is mixed up with noise as it travels upstream in the chain.

Inventory Control Techniques

The degree of control varies with the importance of the items in the supply chain. Following are the various methods used in the industries to control inventory:

ABC Analysis – Annual usage cost of a particular item. VED Analysis – Related to Vital, Essential & Desirable status of inventory items.SAP Analysis – Scarce, Available , & Plenty analysis allows to build into provision forecasts.FSN Analysis – Fast, Slow , or Normal analysis determines the consumption pattern of each items.

Objective of Inventory Control

"Inventory Control" focuses on the process of movement and accountability of inventory. This consists of strict polices and processes in regards to:

1. The physical and systemic movement of materials 2. Physical Inventory and cycle counting 3. Measurement of accuracy and tolerances 4. Good Accounting Practices

The ultimate objective of the Inventory Control is to provide maximum customer service at minimum cost to delight the customers at an optimal level.

Inventory Decision Matrix

Continuous review Procure as needed High safety stocksLow order quantity

Continuous review Procure as per needLow safety stocksLow order quantity

Period review High safety stocks High order quantity

Periodic review Low safety stocksHigh order quantity

High Criticality of Item LowV E D

A

B

C

High

Consumption Value

Low

Illustration of VED analysisLet’s take an example of a hospital scene to understand the concept of VED analysis

Vital (V) medicines that are critically needed for the survival of the patients which must be available in the hospital all the times for e.g., Oxygen supplies. Shortage of Oxygen supplies can adversely affect the functioning of the organization such as hospital.

Essential (E): Medicines with lower critical need, which may be available in the hospital. The shortage or non– availability can only be afforded for a short time for e.g., intravenous sets & IV fluids in a hospital.

Desirable (D): The remaining medicines with lowest critically, the absence of which will not be detrimental to the health of the patients for e.g., Vitamin C or D or sunscreen lotion

Let’s Summarize The degree of control varies with the importance of items. For example, A class , vital or scarce & fast moving items , perpetual reviews are recommended

For B class, essential, medium ,& moving items periodic reviews will be required. For C class , desirable , slow moving items , the periodicity of review will be longer.

Questions, Comments, Suggestions?