Chapter 9: Inventory Management

Methods to Reduce Inventory

• ABC Analysis
• Accuracy of Inventory Information
• Bar Code & Cycle counting
• Real-time tracking (RFID)
• Continuous Improvement
• House Keeping : 5 S
• Inventory Pooling
• Collaboration with suppliers and customers
• Vendor-managed Inventory (Supplier-managed Inventory)
• Collaborative Planning, Forecasting, and Replenishment (CPFR)

• Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

ABC Analysis

• ABC Analysis
• Dividing SKUs into three classes in terms of their dollar usage (Dollar value = volume * Unit value)
• Managers can focus on items that have the highest dollar value.
• Basis: Pareto’s 80/20 rule
• - Top 20% of items accounts for 80% of total dollar value

• Question: When we have too many items, how can we manage inventory effectively?

• A
• 20%

• B
• 30%

• C
• 50%

ABC Analysis

Item	Value/unit	Usage/yr	Dollar value
1	$20	10	$200
2	$100	50	$5000
3	$500	2	$1000
4	$10	200	$2000
5	$5	20	$100
total			$8300

Item	% of item	Dollar value	% of dollar value to total	Cumulative % of dollar value
2	20%	5000	60.24%	60.24%
4	20%	2000	24.10%	84.34%
3	20%	1000	12.04%	96.38%
1	20%	200	2.41%	98.79%
5	20%	100	1.21%	100.00%
total	100%	8300	100%	100%

• Dollar value= value/unit *Usage/yr
• Sort the Dollar Value in a descending order

• % of dollar value to total value
• =(item’s dollar value / total dollar value)*100%
• i.e., 60.24% = (5000/8300)*100%

• 84.34%=60.24%+24.10%

Example of ABC Analysis (1 of 4)

• Booker’s Book Bindery divides SKUs into three classes, according to their dollar usage. Calculate the usage values of the following SKUs and determine which is most likely to be classified as class A.

SKU Number	Description	Quantity Used per Year		Unit Value ($)
1	Boxes	500		3.00
2	Cardboard (square feet)	18,000		0.02
3	Cover stock	10,000		0.75
4	Glue (gallons)	75		40.00
5	Inside covers	20,000		0.05
6	Reinforcing tape (meters)	3,000		0.15
7	Signatures	150,000		0.45

Example of ABC Analysis (2 of 4)

SKU Number	Description	Quantity Used per Year			Unit Value ($)			Annual Dollar Value ($)
1	Boxes	500			3.00		=	1,500
2	Cardboard (square feet)	18,000			0.02		=	360
3	Cover stock	10,000			0.75		=	7,500
4	Glue (gallons)	75			40.00		=	3,000
5	Inside covers	20,000			0.05		=	1,000
6	Reinforcing tape (meters)	3,000			0.15		=	450
7	Signatures	150,000			0.45		=		67,500
					Total			81,310

Example of ABC Analysis (3 of 4)

• Dollar Value

Example of ABC Analysis (4 of 4)

Accuracy of Inventory Information

• 7–

• Universal Product Code(UPC)

• RFID Chip

Inventory Tracking Using RFID

• RFID Tag attached on item

• 1. Reader sends electric signals to RFID tag

• 2. RFID tag sends information in the tag back to the reader

• 3. The information the reader received goes to the host.

• 4. Transformed information at the host moves to a computer server

• 5. Retrieve the information from the server to a personal computer

• Tracking system using RFID

Continuous Improvement

• Continuous improvement is used to reduce inventory.
• Inventory reduction reveals the problems hidden.

• 8–

• The water level indicates inventory

House Keeping: 5 S

5S Term	Definition
1. Sort (Seiri)	Separate needed items from unneeded items (including tools, parts, materials, and paperwork), and discard the unneeded.
2. Straighten (Seiton)	Neatly arrange what is left, with a place for everything and everything in its place. Organize the work area so that it is easy to find what is needed.
3. Shine (Seiso)	Clean and wash the work area and make it shine.
4. Standardize (Seiketsu)	Establish schedules and methods of performing the cleaning and sorting. Formalize the cleanliness that results from regularly doing the first three S practices so that perpetual cleanliness and a state of readiness are maintained.
5. Sustain (Shitsuke)	Create discipline to perform the first four S practices, whereby everyone understands, obeys, and practices the rules when in the plant. Implement mechanisms to sustain the gains by involving people and recognizing them through a performance measurement system.

• Note: Some companies add safety to 5 S.

Inventory Pooling

• WH
• 1

• WH
• 2

• WH3

• WH4

• 100

• 100

• 100

• 100

• WH
• 200

• Total Inventory at a big warehouse
• = 100*4 / ( / 1 ) = 200

• 4

• We consolidate 4 warehouse into a big one, we can reduce inventory from 400 to 200.

• Pooling inventories in 4 warehouses into one big warehouse

• Inventory

• An advanced transportation system is required for successful inventory pooling.

Managing Inventory Across the Supply Chain

• Collaborative planning, forecasting and replenishment (CPFR):
• The idea behind CPFR is that by coordinating activities throughout the supply chain inventories can be moved more efficiently
• CPFR establishes a common language, common processes and metrics to assist the trading partners to achieve these goals.

• Vendor-managed Inventory (VMI): the vendor is responsible for managing inventory for the customer
• Vendor monitors and replenishes inventory balances
• Customer saves holding costs
• Vendor has higher visibility of inventory usage

• Strategy/planning – Demand/supply mgmt.
• – Execution - Analysis