Inventory Management in network

8/7/2019 Inventory Management in network

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Inventory Management

In the integrated manufacturing and distribution networkinventory management is the process of developing and

moving raw materials, work-in process and finished

products through the network to satisfy customer

requirements. Customer Service levels-Probability that products

will be available from inventories

Customer delivery quality-To deliver products frominventories at the agreed time

Customer delivery cycle time- Time required to fill

an order from available inventory.


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Suppliers

Possible Inventory Locations

Avoid separate or buffer one locating from another or one

operation from other

This traditional view is fast becoming obsolete as theycontribute to higher avoidable cost

They slow down flow of products to customers.

They mask inefficient order management, unbalancedcapacities in the network.

Manufacturing Distribution

Customer

delivery

Customers

Raw Materialinventory

Work in processinventory Finished

product inventory.

Total company inventory


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Concepts that Guide Inventory

Management

There is just one total inventory in the companyand in the integrated manufacturing and distributionnetwork.

Good information about customer requirements

and product demand and raw materials supply isthe best substitute available for inventory

The inventory management process is themanagement of the flow of materials.in the

network, not the management of the stocks at eachlocation in the network.

Process of adding value at each location forcustomer satisfaction..


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Inventories are to be used as last resort in dealing withuncertainties

RM inventories represent manufacturing uncertainties Distribution inventories represent customer uncertainties

More and better information reduces uncertainty.

Investing in inventories has become a poor substitute for

gaining and communicating better information aboutcustomer requirements and customer demand throughoutthe integrated network.

Companies satisfy customers through timely delivery ofproducts.

Managing inventories means managing the flow ofmaterials throughout the network.

This yields better performance for the network, as theyshare a goal of customer satisfaction.


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One inventory in the Integrated Network

One inventory means sum of all the materials at all locations in the

network Inventories in transit

Raw material inventories for manufacturing

F.G. inventories but not in right place

Companies want to see customer satisfaction impact at each

location Companies need to measure performance of the entire network, to

achieve customer satisfaction goals.

Raw Material Inventories-The size of these inventories depend on;lead times, batch sizes, uncertainty of supply, uncertainty of

production schedules

Inventory planning and replenishment process I,e, order cycletime, manufacturing cycle, vendor supply, capacity, quality,transportation.

Traditional practice of replenishing inventory by EOQ isvanishing.


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New Inventory Replenishment Process

Close working relation with suppliers so that delivery lead timesand order sizes can be as small as possible, tied as closely aspossible to exact daily production requirements for raw materials.

Delivery of raw materials directly to the production floor, bypassing receiving and storage activities

High flexibility in production activities so that schedules, andtherefore raw materials needs, are no longer tied too long, fixedproduction schedules for a mix of products.

Rapid changeover capabilities in every production center so that

batch sixes are small and production rates can be changed rapidly. The impact of this practice is reduced raw materials inventory

needs & increased manufacturing flexibility for the product mix.

Manufacturing lead times becoming shorter, F.G. inventories in

the network are reduced.


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Vendors are given freedom to stock theirmanufacturing customers production line.

Manufactures pay for what they use in the productionrun rather than for what they ordered and received.

Vendors have information about production schedules

and provide raw materials accordingly.

Numerous costs & cycle times are removed from theraw materials supply process for both vendor andmanufactures.

Activities that can be minimized are purchasing,inventory status monitoring, receiving, storage,picking, inspection, and accounts payable.


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Work in Process Inventories

As the manufacturing process become faster and more

flexible, the need for WIP is reduced accordingly Companies are reengineering manufacturing process to

achieve make to customer order

WIP accumulates because of economic production run,

Some WIP can be found at locations other thanmanufacturing

Consigning product is done at distribution locations

center PCs are positioned in distribution locations where they

are assembled according to customer configuration.

PC industry postpones final assembly until customer

orders are in hand.


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Finished Goods Inventories

These are the stocks ready to serve customers

These are maintained for.

The right quantity and product mix

The right timeliness of delivery

The right combination of product delivery time and service

Total Inventory:-Seeing their inventory as just one inventory allows companies

to focus on making just one inventory plan for the ongoing deployment of total

inventory or its working capital equivalent.

Having all network locations and operations agree on, and execute one inventory

plan provides the connection to customer satisfaction that all locations and

operations needs.

Making just one inventory plan results in lower total working capital

requirements and lower total network operating cost to achieve a derived level

of customers satisfaction.


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Separate Versus Collective Inventory Planning

In the past manufacturing focused on efficiency and cost.

These goals lead to raw materials inventory planning & higher investment,higher manufacturing efficiency but reduced flexibility I,e, ability torespond to changing customer order patterns.

Manufacturing flexibility can have positive effect on customer satisfaction.

Manufacturers wanted to minimize RM inventories independent of otherfactors in the business.

With minimum Raw materials inventories, manufacturing could notrespond to rapid changes of market,

They were at the mercy of raw material supply lead times,

They planned for large distribution inventories for customer satisfactionbut at higher cost.

The basis of growth in FG inventories was internal relationship betweenmanufacturing & distribution rather than customer satisfaction or marketgrowth,

Manufacturing & distribution inventories were planned independently.


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Better Approach

All network locations collectively plan & deploy inventories

using customer satisfaction as goal

Planning to take in to account companys marketing strategies,

manufacturing strategies, integrated networks cycle times, cost

structure of business & the patterns of customers demand.

Tactical inventory planning- to optimize customer satisfaction

Strategic inventory planning-customer satisfaction through

changes in network, manufacturing processes, distribution,

rules, polices etc.

Tactical inventory planning measures customer satisfaction on

daily barks.

The fundamental goal of the integrated network is to optimize

customer satisfaction at the lowest possible cost and investment.


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Total workingcapital

Customer Satisfaction

IntegratedNetworkDesign

ProductionProcess

Strategic plans,optimise customersatisfaction

DistributingLocations

Customer deliveryLocations

Capacity plansDelivery LT

Replenishment rules

ManufacturingLocations

Capacity plans

Delivery LTReplenishment rule

Capacity plansDelivery LT

Replenishment rule

Inventory PlanningInformation Sales

Forecasts Network costsCustomer RequirementNetwork performance


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Figure shows inventory planning process with two concentric

circles.

Tactical inventory planning is on inside circle

Strategic inventory planning is on outside circle.

Central to both inventory planning process is a core of

information needed and shared by both.

This information consists of

- Customer requirements

- Sales forecasts

- Network performance

- Network costs.


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Inventory Planning and Information

Needs

Strategic and Tactical inventory planning use some

type of information for planning & evaluation of

results

Each planning interprets information differently

Tactical inventory planning user detailed information

Strategic inventory planning uses aggregated

information

Time horizon for information differs


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Information Needs for Inventory Planning

Tactical Inventory

Planning

Information Source Strategic Inventory

Planning

Assess Customersatisfaction

Monitor networkperformance

Customerrequirements

Change ProductionProcessor

NetworkPerformance

Change networkdesign

Network costs

Assess totalWorking capital

Needs

Change customer

Satisfaction target

Sales forecasts

Assess CustomerDemand

Set customer deliveryLocation inventory

levels

Select inventoryreplenishment rulesto execute network

flow

Monitor customersatisfaction

Monitor networkinventory levels

Change inventory

deployment &

replenishment rules


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Customer Requirements Information

Information should reflect each class of customer,

requirements for each product or group of products whensuch a class share common characteristics

In aggregate form, should indicate total range of

requirements.

Products Requirements Information

Specific individual product needs

Families of products required in concert

Product version or configuration of standards or

exceptions

Product quality or yields standards for as delivered

products.


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Product Cost Information

- Pricing options for individual products & families of products

- Contract or aggregate terms for product priming

- Additional cost inclusions for distribution services, fright,insurance, packaging & labeling.

- Product Order Information

- Product availability Requirements- Customer order volume and product mix specifications

- Order minimums for individual products & families ofproducts.

- Customer order placement modes- Customer order communication channels

- Order completeness specifications

- Order frequency specifications

- Back order options.


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Product Delivery Information

Order delivery lead time or cycle time

Delivery frequency options

Order completeness requirements or split order options.

Customer receiving requirements or customer pick upoptions

Customer returns options

Delivery quality requirements

Customer routing requirements.


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Sales Forecast Information Inventories exist for gaining cost economies, economic lot rise

on production or in multi echelon replenishments

Lower transportation cost for full truck loads

Inventories exist because of significant uncertainties in business.

Uncertainty in raw material needed or available

Uncertainty exist in timing, quantity,& location of customer

demand.

Inventories help in managing uncertainties

Uncertainty enrich in critical business factors like, market size,market share etc over longer period.

Substitute for product, shift in company's business involvingexpansion, diversification or contraction

Where there is uncertainty, companies must make predictionsfor short term or long term.

Sales forecasts are much predictions.


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In integrated network, it is better to have only one forecast;

manufacturing, distribution & customers delivery.

Forecast of capital requirements, personnel needs, cash flow,

costs & prices.

Forecast information includes

Historical sales

Competitors sales

Total market sales

Total market demand

Historical forecast accuracy

Product life cycle stages- new, mature, declining.


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Product development plans or planned changes

Promotion plans

Pricing plans

Competitors strategies for equivalent product, substitute

products, and product replacements.

Economic trends affecting customer demand

Technological trends affecting demand.

Short term product availability

Long term product availability or raw materials availability

Sales force and sales management predictions

New markets or markets that may not be available due to

geographic considerations.


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Network Performance Information

Uncertainty arises from external sources & internal sources

Marketplace- network performance information helpsmanaging uncertainty.

Internal uncertainties arise from-time factors for networkoperations, the accuracy of network operations.

As inventory replenishment lead time gets longer,requirement of inventory becomes larger for the same levelof customer satisfaction.

As LT increases , inventory levels increase.

Accuracy of network operations has a similar impact on

inventory needs at each locations. Network performance in tactical inventory planning

Order filling cycle time, order contents & accuracy, ordercompleteness, inventory records accuracy are theinformation needs of network.


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Net work Cost Information

Cost structure of the integrated network includes

manufacturing, distribution, and customer delivery location,transportation.

In strategic inventory planning, cost of manufacturing isconsidered first.

Shorter manufacturing cycles & LT, need less inventory Strategic inventory issues revolve around number of

distribution & customer delivery locations

These numbers determine the inventory in the network

Operating costs and performance at each location are alsoelements of inventory holding costs.

Network, cost information needed are; product cost,transportation cost, inventory holding cost, inventory

operations cost.


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Strategic Inventory Planning

Process

Change customerSatisfaction

Targets

Monitor network

Performance

Assess customer

satisfaction

Change customerSatisfaction

Targets

Assess Total working

capital need

Change production

processes


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Strategic Inventory Planning (SIP)

SIP process is centered or customer satisfaction It envisages dynamic changes in configuration

SIP focuses on satisfaction of larger customers while TIP onindividual customer satisfaction.

SIP deals with how to get to market over time frames of manyyears

The planning horizons should be consistent with suchcompany factors as product life cycles, market segment,growth patterns & competitive conditions.

Strategic inventory planning seeks to optimize customer

satisfaction through change in any or all components of theintegrated network, including manufacturing processes,distribution and customer delivery locations, product flow,management processes, rules & policies.


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Integrated SIPProcess Steps

Assess customer satisfaction

Monitor network performance

Change production processes

Change network design

Assess total working capital needs Change customer satisfaction targets.


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Strategic Inventory Planning and Customer

Satisfaction

Elements of customer satisfaction are speed of delivery,

quality of customer order performance.

This is applied to entire market segment.

Servicing the order for the entire market segment calls for

strategic deployment of product availability.

Delivery time remains driving force

Each market segment may require its own customer

satisfaction assessment.


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SIP and Network Performance

Companies seek to satisfy needs of different customers

through common manufacturing, distribution.

Network configuration is a design compromise for each of

the segment served.

Every customer segment satisfaction be measured to

monitor performance of network

Network investment & operating cost be monitored

For this divide the total customer demand for a product

among different segments.


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SIP and Production Processes

When will the product be made again ?

In what quantities will the product be made ?

In what sequence will each product be made when manyproducts share the same production lines or productionequipment

How much flexibility will be allowed in these productionprocess characteristics or rules?

What planning horizon be used for fixed, unalterable productionschedules?

What is the ordering LT required to obtain production out putwhen the distribution & customer service locations want moreproduct?

The answers should satisfy customers or change the process


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SIP and Network Design

No: of locations & customer service facilities are not cost

effective in achieving satisfaction

Products are not getting into market in time.

Working capital for inventory no longer provides

satisfaction

Changes in network becomes only option

Increasing the number of inventory locations improvescustomer satisfaction but cost goes up.


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Assess Total Working Capital Needs

Changes in working capital needs make changes in production

processes, network design, customer satisfaction targets.

Areas of strategic change are customer satisfaction targets,

network design? Production processes

All these areas contribute to total inventory requirements

Trade off between customer satisfaction targets & inventory

requirements

If customer satisfaction is not adequate, loss of market share

may take place.


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What affects Strategic Inventory

Requirements

Inventories are higher

with

Inventories are lower with

Customer

satisfactio

n Targets

Uncertain demand. Higherforecast errors. Poor ordermanagement.

Improved fore casting.Excellent order managementBetter customer requirementsinformation.

Network

Design

More stocking locations,Longer transit times,Uncertain delivery times,Order quality problems.

Fewer stocking locationsshorter transit times,Reliable deliveryschedules, Excellent orderquality, Rapidcommunication, Highervisibility status information.

Production

processes

Larger production runs,Lower quality, Longersupplier LT.

Shorter production runs,excellent quality, shortersupplier LTs, shorterproduction cycle times.


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Tactical Inventory Planning

Process

Monitor network

Inventory level

Change inventorydeployment andreplenishment

rule

Set customerDelivery location

Inventorylevels

Assess customerdemand

MonitorCustomer

satisfaction

Select inventory

Replenishment


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Tactical Inventory Planning.

While doing TIP, companies work with existing network with

constraints With these constraints, they determine, performance.

For TIP ,assess customer demand, set customer delivery

location inventory levels, select inventory replenishment rules

to execute network flow, monitor customer satisfaction,monitor network inventory levels, change inventory

deployment and replenishment rules,

Assess customer demand.

Set customer delivery location inventory levels Select inventory replenishment rules to execute network flow.

Monitor customer satisfaction.

Monitor network inventory levels.

Change Inventory Deployment & Replenishment rules.

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Inventory Management in network