Dr. Muhammad Hammad A. K.

 Inventory Fundamentals

 Inventory Forecasting

 Shipping Port Types


 Inventory Management Goal
 All activities associated with the valuation,
acquisition, shipment, location, storage, sale,
distribution, disposition, recovery and disposal of
merchandise related to the operation of a firm’s
business

Goal is to meet the

customer service
requirements of the
company
•Product availability
  Freight Transportation $352, $455 Billion

 Inventory Expense $221, $311 Billion

 Administrative Expense $27, $31 Billion

 Logistics Related Activity 11%, 10.5% of GNP

Source: Cass Logistics

 Profit 4% Profit

Logistics &
 Logistics & Inventory Cost 21% Inventory Cost

Marketing
 Marketing Cost 27% Cost

 Manufacturing Cost 48% Manufacturing

Cost
 Transportation Transportation Customers
Warehousing

Information
flows
Factory

Transportation

Vendors/plants/ports
Warehousing Transportation

CR (2004) Prentice Hall, Inc.

 Finished product held for sale
Goods in warehouses
Work in process
Goods in transit
 Staff hired to meet service needs
 Any owned or financially controlled raw
material, work in process, and/or finished
good or service held in anticipation of a
sale but not yet sold
Types of Inventory Operating Model
 Raw materials  Build to stock
 Components/sub-assemblies  Build to order
 Work In Process  Assemble to Order
 Engineer to Order
 Finished goods
 Just In Time
 Distribution inventory (Goods in  Vendor Managed Inventories
Transit)
 Accessories
 Spare parts
 MRO

8
 What are Inventories?
Material Inbound Production Outbound Finished goods Customers
sources transportation transportation warehousing

Receiving
Production
materials

Inventories
in-process

Shipping
Finished goods

Inventory
locations
 To achieve satisfactory levels of customer
service while keeping inventory costs
within reasonable bounds.
◦ Level of customer service.
◦ Costs of ordering and carrying inventory.
1. To meet anticipated demand.
2. To smooth production
requirements.
3. To decouple operations.
4. To protect against stock-outs.
5. To take advantage of quantity
discounts.
6. To permit operations.
7. To help hedge against price increases.
8. To take advantage of order cycles.
 Management has two basic functions
concerning Inventory.
◦ To make decisions about how much and when
to order.
◦ To establish a system of keeping track of items
in an inventory.
1. A system to keep track of inventory.
2. A reliable forecast of demand.
3. Knowledge of lead times.
4. Reasonable estimates of:
1. Holding costs
2. Ordering costs
3. Shortage costs
5. A classification system.
◦ ABC analysis is an inventory categorization method
which consists in dividing items into three
categories, A, B and C: A being the most valuable
items, C being the least valuable ones.
 Maximum Stock Level:
This is the optimum stock level for the particular
SKU.
 Reorder Point:
At this stock level, a new purchase order is
generated. This number is arrived after
considering the time taken by the supplier to
deliver the goods in the warehouse.
 Low Stock Warning Level:
This level is the warning level for the SKU going
out of stock.
 Restocking Level:
This is the level after the reordered quantity is
delivered in the warehouse.
17
 Inventory estimation (forecasting) may be defined
as a process of predicting inventory in future time
periods. More specifically inventory forecasting is
a scientific approach of predicting sales during a
specified future period based on the proposed
marketing plan and a set of uncontrollable and
competitive forces.
 There are several internal and external factors
affecting sales of an organization:

◦ Seasonality of inventory
◦ Competition
◦ Technological failures
◦ Reputation
◦ Labor issues
◦ Supply chain related factors
◦ Inflation
◦ Recession
◦ Change in government laws
 Happy Customers:
When a customer gets the product without a delay, they tend to trust
you more for their needs. This helps in repeat purchases and loyal
customer base. Consider a scenario where the customer would
require a product on a regular basis which, if not procured on time
may affect his business. If he is able to purchase the product and
get this delivered on time, he will be a loyal customer for life.
 Reduced Stock outs:
This is one of the most talked about yet common issues among
retailers for sales loss reasons. Factors need to continuously
optimized to get a better estimate trend. An accurate forecasting
method not only ensures lower inventory idle time in the warehouse
but also the less operational cost is required.
 Efficient Production Cycle:
Forecasting involves closely monitoring present inventory to
understand the future. Responding to and adapting to the changes
or pattern of consumption by the consumers gives a better idea of
how the future is going to be.
 Lowering Safety Stock:
When your inventory forecasting process is accurate, it increases
your reorder capacity and thereby reducing the safety stock level
to free up capital. If a business is using proper forecasting to
plan then you don’t need to carry high safety stocks to manage
your inventory.
 Reduced Idle Stock:
Obsolete inventory is a big burden on the margin of any
business. To reduce the burden, it’s very essential to identify,
repurpose or removal of obsolete inventory. It decreases the
volume of inventory on hand and subsequently both direct and
indirect costs of keeping the obsolete inventory will be reduced.
Having a reliable forecasting inventory method will reduce
ordering any excess stock and increases net profitability.
 Managing Manpower Better:
When a business suddenly starts to grow, manpower
requirement is also increased to handle the operations. So an
inventory forecasting report helps the organization be better
prepared for a sudden growth in future inventory with a proper
manpower planning in place. For example in the case of a
subscription business, if the inventory is going to shoot up in
few weeks’ time, the recruitment effort has to start immediately
in order to be able to fulfill the inventory.
 Better Pricing and Promotion Strategy:
With a better coordinated and planned promotion strategy
always yields better results. With integrated distributor-
level promotions and related forecasts helps to improve the
flow of goods. It also achieves better results in terms of
availability and stock fill rates.
 Better Supplier Negotiation:
When you know exactly when and how much you are
required to order; the negotiation becomes easier for you.
The supplier is also aware of the kind of business he can
expect from you and hence gives you a better price. By
having a negotiation based on logic and research you are
positioning yourself as a credible customer who wants to
have a long-term relationship rather than one-off spot
buy.
 Plan Sales Strategies:
Forecasting is very helpful with Product Management,
Marketing and Product Design planning. Decisions on
promotions, pricing and purchasing are made with data
derived from inventory forecasting. This has a positive
impact on the sales and profit margin.
 While forecasting inventory, there will be two sets
of products. First is for the products that has
stable inventory and has past data available. It
can be forecasted more accurately. The second
type of products are items that are new, low
volume and innovative products. It is very hard to
predict an accurate forecast with considerable
uncertainty involved. And to make the problem
more complex, there are zero historical data and
some assumptions have to be made to calculate
inventory.
 The techniques used can be broadly divided into 4
different categories.

 Trend forecasting:
These are forecasting methods. When a particular type of
upward or downward trend for a particular product is
involved, this method is used for forecasting. The double
exponential smoothing, regression, triple smoothing etc.
are few techniques popular in this category.
 Graphical forecasting:
When you have data and you convert them into a
graphical representation, it conveys the pattern visually.
Visual representation of data is easier to comprehend.
This technique can give you a general trend without
getting too much into understanding the data. Previous
inventory exploration, trends and patterns help you
forecast easily.
 Qualitative forecasting
When historical data is unavailable or irrelevant or
are scarce, the forecasting is done based on an
intuitive or judgmental evaluation. When a new
product or a new innovation is launched, this
scenario arises. Some typical qualitative techniques
are based on personal insight, sales force feedback,
panel consensus, market research, visionary
forecasting, and the Delphi method.
 Quantitative forecasting
When a historical inventory data is used to project
future inventory, it becomes more accurate and
relevant. The available data and the other relevant
factors are taken into account while forecasting the
future inventory in these methods. The popular
methods adopted by organizations are the Extrinsic
and intrinsic techniques, time series forecasting
methods (relying on past data) supplemented by
qualitative judgments.
Keeping a few very crucial points in mind while calculating
inventory forecasting gives maximum output.

 Get input from various stakeholders. Take input from Sales, Marketing, and
Finance.
 Competitors sales data
 POS data
 Amount of obsolete stock
 Frequency of stock outs
 Shipments
 Orders
 Measure Forecast Accuracy at the SKU, Location, and Customer Planning
Level
 Adjustments Based on Feedback of Current Cycle & Focus on exceptions
 Talk with customers
 Review the data for trends
 It is always very beneficial to have a great inventory
forecasting team who work on a regular interval to
understand the trend and derive accurate inventory
forecasting method.
 It is important to understand what kind of data is more
important with respect to forecast accuracy. Is it the
external data like competitor sales, POS data, sales team
forecast or the internal data like stock-outs, shipments,
orders, etc.?
 Apart from this, it is also important to determine which
time buckets are most suitable for forecasting. For
example, whether to use monthly time buckets or weekly
time buckets for planning. All these factors changes from
organization to organization.
 Nobody can predict 100% accurate inventory forecasting
every time. It is very essential to understand this and
review the past forecast, learn from the trends and
improve the accuracy.
Thank You