Basic inventory principles

First it’s important to remarck that inventory control is an inexact science. This will give us an introduction to  basic inventory principles:

Importance of inventory costs.

What are the typical costs involved? (inventory cost drivers):

• Facility costs
• Human capital: The cost of labor to maintain storage
• Finance costs.
• Management costs.
• Procurement costs: costs of purchasing.
• Inventory turnover.
• Sock accuracy
• Service levels: critical goods, non critical goods, scheduled delivery

Strategies to better manage inventory:

• Vendor managed inventory: lower cost of supply
• Postponement logistics: process of postponing service of goods until demand, offering a faster respond to a designated market

But could we explain what is inventory control in 2 minutes?

By managing inventory we should be able to answer the following questions:

• How much to purchase?
• How much to manufacture?
• When to buy?
• How often to buy?

By controlling inventory we should work on

• Reconcilying: Difference between how many units do we have in our warehouse vs how many units the IT system belives
• Inventory turnover: Annual sales/Stock
• Days of stock your are holding: Stock/Daily sales

Concepts:

• Oder up to level (OUL)
• Economic Order Quantity: Depends on the square root

Important parameters:

• Review period
• Lead time
• Stock level

Reording policies:

• Reorder point (continuous review policy) depends on the product. Usually   if stock<ROP then order (q). It’s the demand during the lead time. ROP=d*L+Z*SigmaSQR(L)
• Periodic review method: if (tiem has arrived) then order (OUL-Stock). It’s quite used, specially when you manage many products. You need a calendar, because each product has a different review time. Here the quantity we order is not constant

Both policies could be considered only one (s,S): When time arrives, if the stock is less than S, then order (S-stock)

Time and stock is almost the same thing

Order up to level means the maximum expected demand during (review period + lead time)

From time to time I look at my stock. Once I check it I order for a different quantity. I have to control the time, the stock and the quantityDepending on my stock level I order

Interesting links:

• Influence of a truck strike over Spanish production system:http://www.guardian.co.uk/world/2008/jun/09/spain

The whole Mercadona stock is only 2 days