Welcome to the Inventory Management Video.
Good inventory management represents a careful balance
between risk and opportunity.
It is essential to maximizing customer satisfaction
and optimizing operational costs.
Inventory management has three major goals: Supporting customer service performance objectives
Optimizing inventory investment
and aligning with sustainability goals.
To achieve these goals, inventory management must start with a top-down approach that efficiently
targets the most important inventory areas.
Aggregate inventory can be considered in a number of ways, including categories of raw
material, work in progress, and finished goods.
One such approach is ABC classification.
For this video we will focus on ABC inventory in our examples.
A foundational part of the inventory management process is the aggregate inventory policy,
which focuses on the overall level of inventory desired.
Finding the optimal level requires negotiating the competing interests of three areas.
The first is customer service.
The marketing team often represents the voice of the customer.
Customers often want something of everything, in any quantity, at any time regardless of
if the item has been forecasted or not.
The second area is operational efficiency.
Operations wants high efficiency and utilization.
They want to be able to build what they want, when they want, and in whatever quantity they want.
The third area is financial return on investments.
This policy is often guided by earlier strategic decisions.
Finance often wants low cost operations, satisfied customers, and an effective supply chain with
associated costs.
To effectively manage aggregate inventory, it's important to have clearly defined goals
and objectives which support the strategic plan.
Having balanced metrics is also important, as it changes the way you look at utilization
and efficiency or forecast accuracy, among other metrics.
It is also important to have an effective S&OP process.
You should stratify your inventory into an ABC classification whereas A items ship the
same day, or in X days from receipt of order.
B items ship Y to Z days within receipt of order, and C items are MTO.
There should be a strong emphasis on continuous improvement, not simply supporting customer
service with inventory.
There should also be an emphasis on collaboration within clearly defined supply chain networks.
Without moving into the area of detailed items, aggregate inventory should also consider the
following:
Volume; overall space, transportation, and distribution; control systems, procedures, and policies
total cost of ownership; and of course, the ongoing balance between
marketing, operations, and finance all while supporting strategic goals and objectives.
Aggregate inventory also needs to be concerned with total inventory cost, including inventory
carrying cost which is often a forgotten element, or possibly an element that is ignored, when
developing overall inventory strategy.
Carrying or holding costs reflect all of the expenses associated with owning inventory.
Carrying costs are directly related to inventory volume.
They include capital costs, storage costs, and risk costs.
Capital costs are the cost of money invested in inventory and these can vary by industry.
Storage costs include things like warehousing and equipment.
These costs can increase as inventory volume increases.
Risk costs occur when inventory’s value is reduced, either by reduction of quantity
or through scrap, theft, or damage.
Together, these costs are calculated as a percentage of inventory and summed to arrive
at the carrying costs ratio.
For example, if we have a 5 percent capital cost, a 13 percent storage cost, and a 2 percent
risk cost, the total carrying cost is 20 percent.
As with carrying cost, often companies fail to consider the total landed cost of a product.
Note the purchase cost is often the smallest element of total landed cost.
Overall, when a product arrives at a customer’s door—the costs associated are considered
“landed costs”.
Landed costs combine item and some carrying costs such as the cost of warehousing, transportation,
and handling fees.
Developing the right aggregate inventory policies is crucial to the success of any organization.
This strategic process will greatly influence one’s ability to support the goals and objectives
of the organization.
Meeting the customer’s needs, operational cost objectives, and the financial health
of the organization are key to this process.
This all starts with a well designed supply chain strategy that supports each of the functional
groups while supporting the strategic plan.
By following these principles and utilizing these inventory methods and techniques, you
can help to better manage your company’s aggregate inventory.
Thank you for watching this video, and best of luck with your studies!