Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
30
CHAPTER 6
Inventory management
Objectives of this chapter
• To consider provisioning systems for stock and production purposes
• To examine positive and negative reasons for holding stock and approaches to reducing
inventories
• To identify methods of stock control and their application
• To explain the economic order quantity (EOQ) concept
• To discuss the usefulness and limitations of forecasting in the supply context
• To develop an appreciation of MRP, MRP2, DRP and ERP systems
• To discuss ‘just-in-time’ and related philosophies such as Lean and Agile supply
List of Cases, Research Boxes and Figures in this chapter
Mini Case Studies
• Reckitt & Coleman
• Benetton
Best Practice Boxes
Nil
Figures
• Figure 6.1 Requirement profiles:
(a) constant rate;
(b) increasing rate;
(c) seasonal rate;
(d) periodic rate
• Figure 6.2 Developing the master production schedule
• Figure 6.3 Flows of information (--->) and materials (—>) in a material requirements
planning system
Baily et al., Procurement, Principles and Management, 11e © Pearson Education Limited 2015,
Instructor’s Manual
• Figure 6.4 A simple kanban system (Source: Hahn et al., 1983)
• Figure 6.5 The ‘milk round’ routing of collection transport
• Figure 6.6 The power of late customisation
Teaching Notes
Holding inventory costs money, and therefore reduces profitability. That inventory is designed
to support production and service operations. Some level of inventory is essential in order to
provide continuity of service and to avoid costly downtime and service disruption and non-
availability. Inventory reduction and, therefore, the release of cash and reduced operating costs
remain essential concerns of inventory management. Although inventory ties up money which
could be used elsewhere, there are, however, reasons for companies holding some inventory:
The reasons include:
• the convenience of having things available as and when required without making
special arrangements;
• cost reduction through purchase or production of optimum quantities; protection against
the effects of forecast error, inaccurate records; or
• mistakes in planning;
• provision for fluctuations in sales or production.
Accordingly, there are many concepts which have been developed to manage inventory
effectively and this chapter attempts to provide an overview of some of the key concepts with
which students of procurement and supply chain should be made familiar.
Key inventory management concepts included are as follows:
• Inventory as waste
• Economic order quantity (EOQ)
EOQ formulae
The basis EOQ formula is:
2 annual usage quantity ordering cost
EOQ = unit cost stockholding
××
×
Writing u for annual demand or usage quantity;
p for the paperwork and administrative cost associated with an order;
c for unit cost or price each;
s for the cost of holding stock as a decimal fraction of average stock value, the formula
becomes:
EOQ = 2 /u
p
cs
Stock-turn rate
Instructor’s Manual
DRP is a ‘pull’ approach to replenishment in that it depends on awareness of customers’ (end
users’) requirements, which pulls the rest of the system through the echelons of the distribution
system.
Enterprise resource planning (ERP)
It is, as its name suggests, an approach whereby the resource requirements of the entire
organisation, with reference to those of its neighbours in the supply chain, can be taken into
account in planning. ERP is a multi-mode suite of software, operating on a company-wide basis,
which might be concerned with all aspects of the business including, for example, procurement,
inventories, production, sales, human resource management, marketing, engineering and cash
flows. All departments operate with the same data.
Just-in-time (JIT)
The basic idea is simple. If made-in parts are produced in just the quantity required for the next
stage in the process, just in time for the next operation to be carried out, then work-in-progress
stocks are almost eliminated. If bought-out parts are delivered direct to the production line
without delays in stores or inspection, just in time for the needs of production and in just the
quantity needed, then material stocks are largely eliminated too. Stock-turn rates of better than
30 have been achieved (although after years of effort and not overnight), compared with the
rates of 5 to 8 which comparable businesses were getting with traditional methods.
Vendor managed inventory (VMI)
Researchers at Cardiff Business School have defined VMI as follows:
VMI is a collaborative strategy between a customer and supplier to optimise the availability of
products at a minimal cost to the two companies. The supplier takes the responsibility for the
operational management of the inventory within a mutually agreed framework of performance
targets which are constantly monitored and updated to create an environment of continuous
improvement.
The key concepts underpinning the VMI approach are:
• Collaboration. Readers will be aware of the implications of this word, and the associated
concepts of trust and transparency. VMI, if adopted, is a decision taken jointly with a full
appreciation of the relevant factors.
• Minimal cost to the two companies. VMI is not about cost allocation, in other words the
‘Who pays?’ question, it is about cost removal.
• Framework. The parties involved understand their responsibilities, and have agreed targets
in view. Questions such as ‘Where will the inventory be located? When does payment take
place? Is there a management charge, and if so how much?’ will be answered and those
answers embodied in the framework agreement.
• Continuous improvement. This pervasive concept is very important here. Supplier and
customer can share in the pursuit and avoidance of waste.
