Inventory Management and Supply Chain Optimization

Summary- Inventory management and Supply chain optimization

• Inventory management is a financial trade-off between inventory costs (Holding Costs) and stock-out costs (missed sales opportunities).
• Components of Inventory:

• Cycle Stock [cs] determined by production during lead time
• Safety Stock [ss] determined by supply/demand variability
• Target stock [ts]= cs + ss total required inventory holding quantity

• An option to reduce the overall inventory is to use Alternate supply rather than Simultaneous supply in case of more than one item in the inventory.  
• Overall inventory can also be reduced by increasing replenishment frequency.  
• Hybrid inventory management :

[“Pseudo” discreet replenishment+ “near-to” continuous depletion]

In case of two products (Grade A and Grade B): the hybrid inventory management is used and the following production Wheel is obtained: Grade A, Grade B i.e. when the two grades of these products are replenished alternatively.[pic 1]

[cs] = Qrepl * LT/2

(Here CS assumes that replenishment and depletion are 100% reliable and constant in time.)This inventory model can be used in case of more than two grades like for example; In case of product with 4 different grades these grades have their own replenishment needs. But the overall combined cycle stock is independent of the number of grades and its individual Quantity of replenishment amounts.

Two methods: 1 production wheel method

    2 production wheel method

• Safety stock [ss] is held when there is uncertainty in the depletion or replenishment of the product

Factors affecting safety stock:

• Supply chain variability (σ %) - standard deviation of historic depletion/ replenishment.
• Service factor (k) - the degree of reliability desired to support the supply chain process (avoid interruptions, delays and/or slow-downs).

• Lead Time (LT)-

[ss] = k * (σ% * Qrepl) LT (0.5)

• Supply Chain Execution:

• Inventory level at warehouse level:

Maintain the overall inventory within a range of +/- 20% around the Target Stock

+20% leads to risk of production slowdown/ inventory overflow

-20% leads to risk in stock break

• Inventory level at product level:

Maintain the overall product inventory between 120% (+20%) of Safety Stock and 80%(-20%) of Target Stock

• Re-order point = Replenishment point – Lead Time

I.e. ROP = where stock reaches “depletion during lead time”+ [ss]

Where, Replenishment point is decided from future demand forecast

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