CC3 InventoryManagement

Crash Course on:
Inventory Management
Inventories today: a curse, a blessing, a must..?
Stanisaw Krzyaniak
Course programme:
1.
Why do we keep inventories?
2.
Typical demand classifications and analyses helpful in inventory

management.
3.
Why high quality forecasting is so important for inventory

management?
4.
Cost aspects of inventory management.
5.
Material Decoupling Point - dependent and independent demands,

deterministic and stochastic approaches to inventory management.
Stanisaw Krzyaniak
Course programme:
6.
Calculation of safety and cycle stock.
7.
Classical stock replenishment systems (Reorder Point and Cycle

Review) and their typical combinations.
8.
Safety stock in case of dispersed inventories (square-root law).
9.
Information Decoupling Point concept and its role in reduction of

stock levels.
10. Review of selected logistics concepts and solutions oriented on stock

reduction/rationalisation .
Stanisaw Krzyaniak
Course programme:
1.
2.

management.
3.

management?
4.
5.
Material Decoupling Point - dependent and independent demands,

Stanisaw Krzyaniak
Crash Course on Inventories
Why do we keep
inventories?
Stanisaw Krzyaniak
Inventory (stock) - materials in a supply chain or in

a segment of a supply chain, expressed in
quantities, locations and/or values, not used at
present, but kept for the future use (consumption/
/sale).
Based on ELA Terminology
Stanisaw Krzyaniak
THROUGHPUT TIME IN A SUPPLY CHAIN
5%
Utility value
95%
Stanisaw Krzyaniak
Among
others,
keeping
inventories
is also here.
Income
Costs
Customer
service
Profit
Working
capital
Return on
Investment
Inventories
Stanisaw Krzyaniak
Income
Costs
Customer
service
Profit
Working
Assets
capital
Return on
Investment
Assests
Inventories
Stanisaw Krzyaniak

Stock classification
By type and position in a pipeline
Materials stock (raw materials, components)

Work-in-progress stock
Finished products stock
Spare parts and auxiliary materials stock
Stanisaw Krzyaniak
10
Deliveries
Raw materials
and components
Production
Raw materials
and components
Work-in-progress
Distribution
Finished
products
Consumer
goods
Work-in-progress
Auxillary materials, spare parts
Stanisaw Krzyaniak
11

Do you keep a stock of bread in your household?
Stanisaw Krzyaniak
12

Do you keep a stock of bread in your household?
Stanisaw Krzyaniak
13

By the reasons for keeping
Cycle stock
Safety stock
Seasonal stock
Speculation stock
Strategic stock
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14
By rotation
Fast moving (rotating) stock

Slow moving (rotating) stock
Not moving (rotating) stock
Obsolete stock
Emergency stock
Stanisaw Krzyaniak
15
Stock structure
Cycle stock
SC
SS
Safety stock
Surplus stock
Ssp
Stanisaw Krzyaniak
16

Stock maintaining, replenishment and its quantity result from:
uncertainty of real demand,

uncertainty of real quantity, quality and timing of deliveries,
seasonal access to some materials and goods,
service level required by a customer,
expected difficulties with an access to some goods (expected rise of
prices),
discounts offered for purchases of larger quantities,
some technical and/or organisational conditions of deliveries.
Stanisaw Krzyaniak
17

Cycle stock:
Lack
of possibilities to fully synchronise supplies with consumption,

Technical and/or organisational conditions (limitations),
Economic incentives (discounts).
Safety stock:
Random
fluctuations of demand,
Forecast errors,
Long replenishment lead times,
Unpredictable delays,
Required service level.
Surplus stock:
Miscalculation
of factors influencing safety stock,

Wrong estimation of the required service level,
Excessive safety measures taken to avoid stock-outs.
Stanisaw Krzyaniak
18

So, is this good or bad to have inventories?
Good, because they:
Bad, because they:
Guarantee
Take
a continuous access to all

kinds of goods when supplies are
discontinues,
Guarantee access to goods in periods
when they are not available,
Ensure required service level
compensating random variations of
demand,
Ensure required service level
compensating delays of deliveries
random variations of replenishment
lead time.
Stanisaw Krzyaniak
space (warehouses),
Cost money (space, losses, capital);
carrying stock may cost annually up to
30% of its value.
19
Course programme:
1.
2.

management.
3.

management?
4.
5.
Material Decoupling Point - dependant and independent demands,

Stanisaw Krzyaniak
20
Demand analyses
Stanisaw Krzyaniak
21
Demand analyses
ABC analysis,
XYZ analysis,
Customer and supplier related analyses,
Trends & Seasonality,
Random deviations - demand profile,
Life-cycle analysis,
Identification of wild demand .
Stanisaw Krzyaniak
22
Demand analyses - ABC classification

No
Item code
10-01
2
3
No of used/sold
items
Unit price
Value of used/sold
items
Cummulated value
of used/sold items
15344
3,5
53 704,00
53 704,00
7,0%
10-02
23
76,1
1 750,30
55 454,30
7,2%
10-03
557
11
6 127,00
61 581,30
8,0%
10-04
1270
5,43
6 896,10
68 477,40
8,9%
10-05
7088
2,05
14 530,40
83 007,80
10,8%
10-06
278
20,66
5 743,48
88 751,28
11,6%
10-07
1513
2,53
3 827,89
92 579,17
12,1%
10-08
13
1178
15 314,00
107 893,17
14,1%
10-09
997
6,53
6 510,41
114 403,58
14,9%
10
10-10
8724
0,4
3 489,60
117 893,18
15,4%
11
20-01
1245
2,46
3 062,70
120 955,88
15,8%
12
20-02
7688
20,9
160 679,20
281 635,08
36,8%
13
20-03
679
6,2
4 209,80
285 844,88
37,3%
14
20-04
1190
5,14
6 116,60
291 961,48
38,1%
15
20-05
25799
0,89
22 961,11
314 922,59
41,1%
16
20-06
1409
32,6
45 933,40
360 855,99
47,1%
17
20-07
133
74,86
9 956,38
370 812,37
48,4%
18
20-08
799
15,34
12 256,66
383 069,03
50,0%
19
20-09
9887
9,3
91 949,10
475 018,13
62,0%
20
20-10
2234
2,40
5 361,60
480 379,73
62,7%
21
30-01
22
208,9
4 595,80
484 975,53
63,3%
22
30-02
12778
20,4
260 671,20
745 646,73
97,3%
23
30-03
79
63
4 977,00
750 623,73
98,0%
24
30-04
1313
9,92
13 024,96
763 648,69
99,7%
25
30-05
557
4,81
2 679,17
766 327,86
100,0%
Stanisaw Krzyaniak
23
Rules of the ABC analysis:

o establish a criterion,
o rank and sort assortment according to the established
criterion,
o calculate a total sum,
o calculate cumulative sums,
o calculate percentage share of cumulative sums in the

total sum,
o assign to group A items responsible for 80% of the
criterion value, to group B items responsible for further
15%, and the remaining items to group C.
Stanisaw Krzyaniak
24
80:20
20%
30-50%
B
Stanisaw Krzyaniak
C
25
Stanisaw Krzyaniak
26
Demand analyses ABC/XYZ classification

5
20-06
1409
32,6
45 933,40
612 936,90
20-05
25799
0,89
22 961,11
635 898,01
10-08
13
1178
15 314,00
651 212,01
10-05
7088
2,05
14 530,40
665 742,41
30-04
1313
9,92
13 024,96
678 767,37
10
20-08
799
15,34
12 256,66
691 024,03
Price
80,0%
83,0%
85,0%
86,9%
88,6%
90,2%
Z
Y
10-08
30-04
20-05
Quantity
Stanisaw Krzyaniak
C
27
Demand analyses - XYZ classification

Price
Quantity
Stanisaw Krzyaniak
28

Price
Quantity
Stanisaw Krzyaniak
29

No
Item code
10-01
2
3
No of used/sold
items
Unit price
Value of used/sold
items
Cummulated value Cumm.

of used/sold items
[%]
15344
3,5
53 704,00
53 704,00
7,0%
10-02
23
76,1
1 750,30
55 454,30
7,2%
10-03
557
11
6 127,00
61 581,30
8,0%
10-04
1270
5,43
6 896,10
68 477,40
8,9%
10-05
7088
2,05
14 530,40
83 007,80
10,8%
10-06
278
20,66
5 743,48
88 751,28
11,6%
10-07
1513
2,53
3 827,89
92 579,17
12,1%
10-08
13
1178
15 314,00
107 893,17
14,1%
10-09
997
6,53
6 510,41
114 403,58
14,9%
10
10-10
8724
0,4
3 489,60
117 893,18
15,4%
11
20-01
1245
2,46
3 062,70
120 955,88
15,8%
12
20-02
7688
20,9
160 679,20
281 635,08
36,8%
13
20-03
679
6,2
4 209,80
285 844,88
37,3%
14
20-04
1190
5,14
6 116,60
291 961,48
38,1%
15
20-05
25799
0,89
22 961,11
314 922,59
41,1%
16
20-06
1409
32,6
45 933,40
360 855,99
47,1%
17
20-07
133
74,86
9 956,38
370 812,37
48,4%
18
20-08
799
15,34
12 256,66
383 069,03
50,0%
19
20-09
9887
9,3
91 949,10
475 018,13
62,0%
20
20-10
2234
2,40
5 361,60
480 379,73
62,7%
21
30-01
22
208,9
4 595,80
484 975,53
63,3%
22
30-02
12778
20,4
260 671,20
745 646,73
97,3%
23
30-03
79
63
4 977,00
750 623,73
98,0%
24
30-04
1313
9,92
13 024,96
763 648,69
99,7%
25
30-05
557
4,81
2 679,17
766 327,86
100,0%
Stanisaw Krzyaniak
30

No
Item code
20-05
10-01
10-01
10-02
30-02
10-03
20-09
10-04
10-10
10-05
20-02
10-06
10-05
10-07
20-10
10-08
10-07
10-09
20-06
10-10
30-04
20-01
10-04
20-02
20-01
20-03
20-04
20-04
10-09
20-05
20-08
20-06
20-03
20-07
10-03
20-08
30-05
20-09
10-06
20-10
20-07
30-01
30-03
30-02
10-02
30-03
30-01
30-04
10-08
30-05
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
No of used/sold
items
25799
15344
15344
23
12778
557
9887
1270
8724
7088
7688
278
7088
1513
2234
13
1513
997
1409
8724
1313
1245
1270
7688
1245
679
1190
1190
997
25799
799
1409
679
133
557
799
557
9887
278
1554
133
22
79
12778
23
79
22
1313
13
557
Stanisaw Krzyaniak
Unit price
0,89
3,5
3,5
76,1
20,4
11
9,3
5,43
0,4
2,05
20,9
20,66
2,05
2,53
2,40
1178
2,53
6,53
32,6
0,4
9,92
2,46
5,43
20,9
2,46
6,2
5,14
5,14
6,53
0,89
15,34
32,6
6,2
74,86
11
15,34
4,81
9,3
20,66
3,45
74,86
208,9
63
20,4
76,1
63
208,9
9,92
1178
4,81
Value of used/sold
items
22
53961,11
704,00
531704,00
750,30
2606671,20
127,00
916949,10
896,10
3 489,60
14
530,40
1605679,20
743,48
143530,40
827,89
5 361,60
15
314,00
36827,89
510,41
453933,40
489,60
133024,96
062,70
6 896,10
160
679,20
34062,70
209,80
66116,60
116,60
6 510,41
22
961,11
12
45256,66
933,40
49209,80
956,38
6 127,00
12
256,66
2 679,17
91
949,10
55743,48
361,30
94956,38
595,80
4 977,00
260
671,20
14750,30
977,00
4 595,80
13
024,96
152314,00
679,17
Cummulated value Cumm.

of used/sold items
[%]
53 704,00
7,0%
55 454,30
7,2%
61 581,30
8,0%
68 477,40
8,9%
83 007,80
10,8%
88 751,28
11,6%
92 579,17
12,1%
107 893,17
14,1%
114 403,58
14,9%
117 893,18
15,4%
120 955,88
15,8%
281 635,08
36,8%
285 844,88
37,3%
291 961,48
38,1%
314 922,59
41,1%
360 855,99
47,1%
370 812,37
48,4%
383 069,03
50,0%
475 018,13
62,0%
480 379,43
62,7%
484 975,23
63,3%
745 646,43
97,3%
750 623,43
98,0%
763 648,39
99,7%
766 327,56 100,0%
31
Basic parameters describing demand variability

Mean (average) demand
D1 D2 ......... Dn
n
Standard deviation
(D D1 )2
D
(D D2 )2 ...... (D Dn )2
n 1
Coefficient of variation
Stanisaw Krzyaniak
D
D
D
32
D = 82,7
D = 4,5
D=0,055
Stanisaw Krzyaniak
33
D = 40,9
D = 9,4
D=0,23
Stanisaw Krzyaniak
34
D = 4,21
D = 2,07
D=0,49
Stanisaw Krzyaniak
35

D = 0,0417
D = 0,201
D=4,82
Stanisaw Krzyaniak
36

Coefficient of variation as a criterion for the XYZ classification
Z
D
0,2
0,2
Stanisaw Krzyaniak
D
D
0,6
0,6
37
AX Group
High turnover in terms of value,
high and even periodical
consumption (daily, weekly
demand). Highly reliable
forecasts.
BX Group
Medium turnover in terms of
value, high and even periodical
forecasts.
CX Group
Low turnover in terms of value,
forecasts.
AY Group
demand). Less reliable forecasts
(significant forecast errors).
BY Group
CY Group
AZ Group
demand). Very poor reliability
of forecasts.
BZ Group
of forecasts.
CZ Group
of forecasts.
Stanisaw Krzyaniak
38
AX
BX
CX
AY
BY
CY
AZ
BZ
CZ
Stanisaw Krzyaniak
39
Demand analyses trends and seasonality
Demand
General pattern of a time series seasonality with a trend

Seasonality
Trend
Year I
Year II
Stanisaw Krzyaniak
Year III
Year IV
Time
40
Demand analyses
Analysis of a demand variability and profiles
Stanisaw Krzyaniak
41
Demand analyses variability and profiles
D = 82,1
D = 4,5
D=0,055
Stanisaw Krzyaniak
42

50
40
30
20
10
Stanisaw Krzyaniak
43

50
40
30
20
10
Stanisaw Krzyaniak
44

Frequency
0,40
0,30
0,20
0,10
10
20
Stanisaw Krzyaniak
30
40
50 Demand
45
D = 82,1
D = 4,5
D=0,055
Stanisaw Krzyaniak
46
D = 40,9
D = 9,4
D=0,23
Stanisaw Krzyaniak
47
D = 40,9
D = 9,4
D=0,23
Normal distribution can be applied in the case of fast moving goods (groups X and Y)
Stanisaw Krzyaniak
48

D = 0,0385
D = 0,197
D=5,03
Stanisaw Krzyaniak
49
D = 0,0385
D = 0,197
D=5,03
Poisson distribution can be applied in the

case of slow moving goods, where
calculated average demand (for a chosen
time unit) D is equal to the square of the
2
standard deviation D
D .
Stanisaw Krzyaniak
50

Poisson distribution
D = 0,0385
D = 0,5
D = 2,0
D = 3,0
Stanisaw Krzyaniak
D = 1,0
D = 4,21
51
Inventory management v. life cycle

DEMAND
Phases:
Introduction
Saturation
Development
Withdrawal
Decline
TIME
Stanisaw Krzyaniak
52
D = 38,4;
= 5,84
Stanisaw Krzyaniak
D = 42,5;
= 15,0
53
Course programme:
1.
2.

management.
3.

management?
4.
5.

Stanisaw Krzyaniak
54
Why high quality forecasting

is so important
for inventory management?
Stanisaw Krzyaniak
55
Basic forecasting models and techniques

Inventory planning requires foreseeing future events,
influencing processes which determine stock level:
demand and its variability (trends, seasonality, random
nature),
changes of replenishment lead time and its variability,
cost relationships.
Foreseeing future events means:
forecasting (based on formal procedures, formulas
and algorithms),
prediction (expert analysis).
Stanisaw Krzyaniak
56
Forecasting can be based on:

internal data (e.g. historical data about
sales of nutrients for infants),
external data (e.g. demographical data
regarding increase or decrease of births).
Stanisaw Krzyaniak
57

Demand D
Random factor
Seasonality
Trend
Year I
Year II
Stanisaw Krzyaniak
Year III
Year IV
time t
58

Selected forecasting metods
Exponential smoothing Winters model

Seasonal coefficients model
Analytical models
Exponential smoothing Holts model
Exponential smoothing Brown model
Econometric models
Heuristic models
Analog models
Scenarios
Simulations
Weighted moving average

Moving average
Arithmetical average
Shortterm forecasts
Longterm forcests
Stanisaw Krzyaniak
59

Exponential smoothing
all data considered in a forecast

selection of the smoothing constant
calculation of a forecast:
Dk
Dk
Dk
Dk
(0 <
Dk
Dk
Dk (1
< 1)
= 0 constant forecast model

= 1 naive forecast
Stanisaw Krzyaniak
60
0,0
12
10
7,00
8
6
4
2
0
64
65
66
67
68
69
70
Dk
71
Stanisaw Krzyaniak
72
Dk
73
74
75
76
Dk
77
78
79
Dk
61
0,1
12
10
7,11
8
6
4
2
0
64
65
66
67
68
69
70
Dk
71
Stanisaw Krzyaniak
72
Dk
73
74
75
76
Dk
77
78
79
Dk
62
0,3
12
10
6,83
8
6
4
2
0
64
65
66
67
68
69
70
Dk
71
Stanisaw Krzyaniak
72
Dk
73
74
75
76
Dk
77
78
79
Dk
63
0,5
12
10
6,68
8
6
4
2
0
64
65
66
67
68
69
70
Dk
71
Stanisaw Krzyaniak
72
Dk
73
74
75
76
Dk
77
78
79
Dk
64
0,7
12
10
6,68
8
6
4
2
0
64
65
66
67
68
69
70
Dk
71
Stanisaw Krzyaniak
72
Dk
73
74
75
76
Dk
77
78
79
Dk
65
0,9
12
10
6,84
8
6
4
2
0
64
65
66
67
68
69
70
Dk
71
Stanisaw Krzyaniak
72
Dk
73
74
75
76
Dk
77
78
79
Dk
66
1,0
12
10
7,00
8
6
4
2
0
64
65
66
67
68
69
70
Dk
71
Stanisaw Krzyaniak
72
Dk
73
74
75
76
Dk
77
78
79
Dk
67
How to assess forecast quality?

Three areas of assessment:
Quality of a forecast model
Forecast accuracy
Forecast acceptance
Stanisaw
68Krzyaniak
68

Forecast accuracy
Forecast acceptance
Stanisaw
69Krzyaniak
69

t
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20
Demand 120 132 141 150 159 166 173 181 184 190 195 199 206 210 215 220 223 230 233 236
Stanisaw Krzyaniak
70
Determination coefficient
n
R2
y t
t 1
n
yt
0,1
t 1
y t - real, historical value of the considered variable for the period t,

t - theoretical (model) value of the considered variable for the period t,
y
y - mean value of the considered variable for n periods.
Stanisaw Krzyaniak
71

t
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20
Demand 120 132 141 150 159 166 173 181 184 190 195 199 206 210 215 220 223 230 233 236
Stanisaw Krzyaniak
72

Forecast accuracy
Forecast acceptance
Stanisaw
73Krzyaniak
73

Forecast accuracy
t
Forecast
Demand
1
50
51
2
49
51
3
48
56
Today
4
50
52
5
52
53
6
53
48
7
52
63
8
54
56
9
54
49
10
54
52
11
54
49
12
54
45
13
50
36
14
46
57
15
48
48
16
47
36
17
44
38
18
43
49
19
46
62
20
47
57
Forecast
Real demand
Stanisaw Krzyaniak
74

Forecast accuracy ex post measures
1
Absolute forecast error ex post
Formula
q t y t y*t
n
Mean absloute forecast error ex post
(y t
e 0
t 1
y *t
yt
3
Relative forecast error ex post
Mean relative forecast error ex post
1
n
y *t )
yt
n
t 1
100
y t y*t
100
yt

y t - forcast value of the considered variable for the period t,
Stanisaw Krzyaniak
75

Forecast accuracy ex post measures
5
Mean square error
Formula
s
1
n
n
t 1
Mean absolute error (deviation)
y *t ) 2
(y t
d
i 1
y *t
yt
n

y t - forecast value of the considered variable for the period t,
s*, d
Stanisaw Krzyaniak
min
76

Quality of the forecast model
Forecast accuracy
Forecast acceptance
Stanisaw Krzyaniak
77

Today
Forecast acceptance
t
Forecast/model
Demand
1
37
37
2
3
4
5
38,8 40,6 42,4 44,2
38
42
39
46
Absolute forecast error ex ante
s*
(T t ) 2
n
(t
t)
1
1
n
6
46
49
7
8
9
10
47,8 49,6 51,4 53,2
49
44
55
52
11
55
?
12
13
56,8 58,6
?
?
Relative forecast error ex ante
t
*
t
100
t 1
Stanisaw Krzyaniak
78

Today
Forecast acceptance
t
Forecast/model
Demand
1
37
37
2
3
4
5
38,8 40,6 42,4 44,2
38
42
39
46
Absolute forecast error ex ante
s*
(T t ) 2
n
(t
t)
1
1
n
6
46
49
7
8
9
10
47,8 49,6 51,4 53,2
49
44
55
52
11
55
?
12
13
56,8 58,6
?
?
Relative forecast error ex ante
t
*
t
100
t 1
Stanisaw Krzyaniak
79
It has to be distinguished between

a wrong forecast and a forecast error.
What are the consequences of wrong
forecasts (wrong forecast models)?
Wrong safety stock levels: too high or too low,
What are the consequences of high forecast

errors?
High safety stock levels.
Stanisaw Krzyaniak
80
Course programme:
1.
Why do we keep inventory?
2.

management.
3.

management?
4.
5.

Stanisaw Krzyaniak
81
Cost aspects
of inventory management
Stanisaw Krzyaniak
82
Cost aspects
Replenishment costs (Cr)

Carrying costs (Cc)
Stock-out costs (Co)
We can distinguish
Fixed (independent) costs (Crf, Ccf, Cof)
Variable (dependant) costs (Crv, Ccv, Cov)
Stanisaw Krzyaniak
83
Cost aspects

fixed (independent) costs (Crf)
fixed costs of a purchasing department
and other departments responsible for
receipts (rooms, media, salaries,
overheads)
fixed transport costs (fleet depreciation,
salaries, overheads)
Stanisaw Krzyaniak
84
Cost aspects

variable costs (dependent on a number
of orders) (Crv)
Order preparation costs,
Quality control costs,
Transport costs (fuel, maintenance),
Custom clearance fees.
Stanisaw Krzyaniak
85
Cost aspects

variable costs (dependent on a number of
orders) over a given period (Crv) can be
calculated by multiplying a unit cost related
to a single order/delivery (cr) and a number
of deliveries (nd) realised in the period.
Crv
Stanisaw Krzyaniak
c r nd
86
Cost aspects
Carrying costs (Cc)

fixed (independent) costs (Ccf)
Depreciation and exploitation costs of a
warehouse (building)
Depreciation costs of a warehouse
equipment
Salaries plus overheads
Stanisaw Krzyaniak
87
Cost aspects
Carrying costs (Cc)

variable costs (dependent on stock
quantity) Ccv
Cost of maintaining special storing conditions,

Stock insurance costs,
Cost of losses and stock depreciation,
Cost of a tied-up capital (cost of credit or lost
incomes from a deposit).
Stanisaw Krzyaniak
88
Cost aspects
Carrying costs (Cc)

variable costs (dependent on stock quantity)
(Ccv ) over a given period depends on a
storing period (time) and stock value (eg.
purchase price).
A unit inventory carrying cost can be calculated as:
Cc v
c c pu
cc coefficient of periodical inventory carrying cost (cc = 0.050.20 per year)

pu unit price
Stanisaw Krzyaniak
89
Cost aspects

fixed (independent costs (Cof):
Additional transport cost for emergency purchase,
Fixed penalty fee paid to the customer,

Permanent loss of a customer (loss of future incomes),
Loss of the market reputation (temporary or permanent
loss of a group of customers),
Cost of stopping a production line.
Stanisaw Krzyaniak
90
Cost aspects

Variable costs (dependant on the shortage
quantity) Cov
Higher price for emergency purchase,

Penalty fee based on number of missing items,
Lost margin income due to particular transaction,
Less margin income due to selling a substitute product,
Cost of the postponement (transaction and payment
postponed),
Cost of lost production.
Stanisaw Krzyaniak
91
Course programme:
1.
2.

management.
3.
Why high quality forecasting is so important for inventory management?
4.
Cost aspects of inventory management..
5.

Stanisaw Krzyaniak
92
Material Decoupling Point

dependent and independent demand
Stanisaw Krzyaniak
93

Delivery
Production
Distribution
Reaction time
Lead time gap
Lead time gap
Customer order lead time
Lead time gap
Source: M. Christopher. Logistics and Supply Chain Management. Startegies for

Reducing Costs and Improving Services. 1st edition. Financial Times. Prentice Hall
Stanisaw Krzyaniak
94
Information (orders)
Delivery
Inventory
Stanisaw Krzyaniak
95
Delivery
Inventory
Stanisaw Krzyaniak
96
Delivery
Production
Stanisaw Krzyaniak
Distribution
97
Delivery
Production
Dependent
demand
4
5
Distribution
Independent
demand
Stanisaw Krzyaniak
98
Delivery
Production
Residual stock
Cycle and safety stock

of finished goods
Dependent
demand
Calculations
Material Requirements Planning
Stanisaw Krzyaniak
Distribution
Independent
demand
Forecasts
99
Course programme:
6.
Service level and safety stock.
7.
Classical optimisation of the cycle stock.
8.

9.
Safety stock in case of dispersed inventories (square-root law),
10. Information Decoupling Point concept and its role in reduction of

stock levels.
reduction/rationalisation.
Stanisaw Krzyaniak
100
Service level
and safety stock
Stanisaw Krzyaniak
101
Service level and safety stock
D = 40,9
D = 9,4
D=0,23
Stanisaw Krzyaniak
102
Stanisaw Krzyaniak
103
Knowledge of a demand distribution over a selected

time unit (e.g. a day, a week) is very important. But this
is not enough to manage inventories in a proper way.
Stock replenishment is realised over a defined time

period, called a replenishment lead time.
It is very important to know this time.
The key issue is the demand distribution over the
replenishment lead time
Stanisaw Krzyaniak
104
Demand distribution within

replenishment cycle
Stanisaw Krzyaniak
105
Replenishment lead time

Replenishment lead time the period of time between
the moment the decision is made that a product is to
be replenished and the moment the product is
available for use.
Delivery lead time is the time between the receipt of the
customer order and the delivery of the product to the customer
and is always shorter then the replenishment lead time.
Stanisaw Krzyaniak
106

Replenishment
cycle
Delivery
cycle
Decision on replenishment
Placing an order
Receipt of the order
Starting production or picking the order
Preparation for loading
Loading
Arrival to the customer (receiver)

Approval of the delivery (quality control)
Unloading
Availability for use
Stanisaw Krzyaniak
107

The need for replenishment occurs

The need is recognized
Decision on replenishment
Placing an order
Receipt of the order
Starting production or picking the order
Preparation for loading
Loading
LT
Arrival to the customer (receiver)

Approval of the delivery (quality control)
Unloading
Availability for use
Stanisaw Krzyaniak
108
D = 40,9
D = 9,4
D=0,23
LT=4
D = 163,6
D = 18,8
D=0,121
Stanisaw Krzyaniak
109
D;
Probability density functions
DLT
20
40
60
80
100
120
Stanisaw Krzyaniak
140
D LT;
160
180
200
DLT
220
LT
240
260
280
110
Distribution function
Probability that demand over the replenishment cycle
will not exceed the given level
Probability density function
20
40
60
80
100
Stanisaw Krzyaniak
120
140
160
180
200
220
240
111
p(DLT195) 0,953
185
20
190
40
195
60
80
200
100
Stanisaw Krzyaniak
205
120
140
160
180
200
220
240
112
f(D)
f(LT)
f(T)
5050
150
100
100
150
LT
f(DLT)
Normal distribution
340
Stanisaw Krzyaniak
500
660
DLT
113
Service level
Stanisaw Krzyaniak
114
Suppliers Sevice Level

indicators
Time to inform about
emergency situation,
Relaibilty of deliveris
(quality, quanitity,
time),
Customer oriented
Sevice Level
indicators
Row materials
and
components
Finished goods
Flexiblity of deliveries
(time, quantity)
Avalibility of ordered
raw materials and
components
Avalibility of goods
Responsiveness to
customer needs
(flexibility).
Stanisaw Krzyaniak
115
Customer service level

SL1
Probability of not getting out of stock
(Probability that a stock-out situation will not
occur over a replenishment lead time)
Stanisaw Krzyaniak
116
220
How often?
200
180
160
DLT
140
120
100
80
60
40
20
0
Stanisaw Krzyaniak
117

0,045
0,04
0,035
Service level
Probability of serving demand
within replenishment cycle
0,03
Stock-out probability
within a replenishment cycle
0,025
0,02
0,015
0,01
0,005
0
1
10 13
16 19 22 25 28
31 34 37 40 43
46 49 52 55
DLT
58 61 64 67 70
73 76 79 82 85
88 91 94 97 100
Stock level at the beginning of a replenishment cycle
Stanisaw Krzyaniak
118

0,045
0,04
0,035
Service level
0,03

0,025
0,02
0,015
0,01
50%
0,005
0
1
10 13
16 19 22 25 28
31 34 37 40 43
Stock level at the

beginning of a
replenishment cycle
Stanisaw Krzyaniak
46 49 52 55
58 61 64 67 70
73 76 79 82 85
88 91 94 97 100
DLT
119

0,045
0,04
0,035
Service level
0,03

0,025
0,02
nd ndstock
SL1
nd
0,015
0,01
out
0,005
0
1
10 13
16 19 22 25 28
31 34 37 40 43
Stock level at the

beginning of the
replenishment cycle
Stanisaw Krzyaniak
46 49 52 55
58 61 64 67 70
SS
DLT
73 76 79 82 85
88 91 94 97 100
Safety stock
Ss
DLT
120
f (SL)
SL
Stanisaw Krzyaniak
121
Variable demand
Stock level
[t]
SS
LT
LT
LT
Constant
replenishment cycle lead time
DLT
Stanisaw Krzyaniak
LT
122

Stock level
Constant demand
LT
LT
SS
[t]
Variable
LT1
DLT
Stanisaw Krzyaniak
LT
D
123

Stock level
LT
Variable demand
LT
LT
SS
[t]
Variable
LT1
Stanisaw Krzyaniak
DLT
2
D
LT
2
LT
D2
124
Customer service level

SL2
Fill rate for customer orders
(Probability of meeting the expected demand
in terms of quantity)
Stanisaw Krzyaniak
125

0,045
0,04
FR
0,035
nsh
Q
How many units can be

missing? What is the
expected number of shorteges
nsh?
0,03
0,025
0,02
0,015
0,01
0,005
0
1
10 13
16 19 22 25 28
31 34 37 40 43
46 49 52 55
58 61 64 67 70
73 76 79 82 85
88 91 94 97 100
DLT
Stock level at the beginning of the replenishment cycle
Stanisaw Krzyaniak
126
f(D)
f(LT)
f(T)
50
100
150
LT
Real service level resulting

from the assumtion that the
demand distribution is
compatible with the normal
distribution.
Expected
service
level
Normalndistribution
340
Stanisaw Krzyaniak
500
660
DLT
127
Safety stock (SS)

Average demand D
Demand variability
(forecast std. deviation)
Replenishment lead time T

Lead time variability
LT
Cost based optimisation:

safety stock carrying cost
stock-out cost
Stanisaw Krzyaniak
Service level:
probability of a no stock-out situation
over a replenishment cycle (probability
measure),
demand (order) fulfilment (quantity
measure).
Strategic (tactical) decisions

Intuitive,
Casual.
128
Ss
Cso
Cc(Ss)v
SL opt
Crv
Sr
Cc(Sr)v
Q opt
Ss opt
Sr opt
TC = Crf + Ccf + Crv + Cc(Sr)v + Cc(Ss)v + Cso

Cost relationships in optimisation of safety stock
Stanisaw Krzyaniak
129
1400,0
Cost
A sum of stock carrying and stock-out costs
1200,0
1000,0
800,0
Stock carrying cost
600,0
400,0
Stock-out cost
200,0
0,0
90
91
92
93
94
95
96
97
98
99
SL [%]
Optimal serice level

Opitmal safety stock
Stanisaw Krzyaniak
130
Course programme:
6.
7.
8.

9.
Safety stock in case of dispersed inventories (square-root law),

stock levels.
Stanisaw Krzyaniak
131
Cycle stock optimisation
Stanisaw Krzyaniak
132
Q
Q
CS
CS
SS
Stanisaw Krzyaniak
SS
133
Ss
Cso
Cc(Ss)v
SL opt
Crv
Sr
Cc(Sr)v
Q opt
Ss opt
Sr opt
TC = Crf + Ccf + Crv + Cc(Sr)v + Cc(Ss)v + Cso

Cost relationships in optimisation of cycle stock
Stanisaw Krzyaniak
134
A principle of calculating the Economic Order Quantity

Variable cost of replenishment and carrying the cycle stock:
Crv
Cc v
Dp
Q
cr
0,5 Q pu c c p
Dp forecast (planned) demand over a period p (eg. a year annual demand,

Q order quantity
cr - replenishment cost related to a single order/delivery
pu unit price (or production cost per unit),
ccp inventory cost carrying coefficient for a period p.
Stanisaw Krzyaniak
135

C
O
S
T
Ccv
Crv
EOQ
Economic Order Quantity
Stanisaw Krzyaniak
136
Economic Order Quantity
EOQ
Stanisaw Krzyaniak
2 Dp c r
pu c c p
137
Course programme:
6.
7.
8.
Classical stock replenishment systems (Reorder Point and

Cycle Review) and their typical combinations.
9.

stock levels.
Stanisaw Krzyaniak
138
Basic replenishment
systems
Stanisaw Krzyaniak
139
Basic replenishment systems

Orders
S
U
P
P
L
I
E
R
Demand fluctuations
Decisions
Stock
Lead time distribution
Stanisaw Krzyaniak
C
U
S
T
O
M
E
R
Demand distribution
140
There are two basic replenishment (ordering)

systems:
Replenishment system based on a reorder level (BQ)

variable replenishment periods
safety stock: when to order?
fixed order quantity
Replenishment system based on a periodic review (ST)

variable order quantity
safety stock: how many (how much) to order?
fixed replenishment periods
Stanisaw Krzyaniak
141
Replenishment system
based on a reorder level
(when to order?)
Stanisaw Krzyaniak
142
Replenishment system based on a reorder level
Basic principles and rules:

fixed quantity of orders and deliveries (Q = const)
variable replenishment period (t)
current knowledge of the economic stock (Se)
calculated reorder level (order point B)
B = D LT + SS (SS =
D(LT))
an order is placed whenever the economic stock falls below

the reorder level: SeB
Stanisaw Krzyaniak
143
Economic stock =
= Physical stock
+ quantity of that product ordered but
not yet received
quantity of that product already
reserved
Stanisaw Krzyaniak
144
Ss
Safety stock:
I. If
II. If
LT
III. If
0 and
0 and
0 and
(SL)
DLT
LT
0 then :
DLT
LT
0 then :
DLT
LT
LT
0 then :
LT
2
LT
DLT
Stanisaw Krzyaniak
2
D
145

Variable demand
S
T
O
C
K
LT
Ss
LT
Variable replenishment
lead time
Stanisaw Krzyaniak
LT
[t]
LT1
146
Replenishment system
based on periodic review
(how much to order?)
Stanisaw Krzyaniak
147
Replenishment system based on a periodic review
Basic principles and rules:

fixed review and replenishment period (To=const)
variable quantity of orders and deliveries (Q)
current knowledge of the economic stock (Se)
calculated maximum level S
S = D LT+To) + SS (SS =
an order quantity is calculated as: Q=
Stanisaw Krzyaniak
D(LT))
S-Se
148
Ss
Safety stock:
I. If
0 and
(SL)
0 then :
LT
DLT
II. If
LT
0 and
0 then :
III. If
0 and
LT
0 then :
DLT
Stanisaw Krzyaniak
2
D
DLT
D
DLT
(LT T0 )
LT T0
LT
2
LT
149

S
T
O
C
K
Variable demand
[t]
LT
T0
LT
T0
LT
T0
Ss
Stanisaw Krzyaniak
150
Alternative (hybrid)
replenishment systems
Stanisaw Krzyaniak
151

Review
period
(Tr)
Order
period (T0)
(A) BQ
(B) ST
fixed
Order
quantity
(Q)
Reorder
level
(B/s)
fixed
fixed
fixed
fixed
(C) BS
fixed
(D) sQ
fixed
(E) sS
fixed
Stanisaw Krzyaniak
Maximum
level
(S)
fixed
fixed
fixed
fixed
fixed
152
BQ
Q
LT
Q
LT
Q
LT
Reorder level based system (a lot of small orders)

Stanisaw Krzyaniak
153
ST
LT
T0
LT
T0
LT
T0
LT
T0
LT
T0
Periodic review
Stanisaw Krzyaniak
154
BS
LT
LT
LT
Recommended in the case of relatively small number of big orders (MIN-MAX)

Stanisaw Krzyaniak
155
sQ
s
LT
LT
T0
T0
LT
T0
T0
T0
Fixed cycle of possible orders of fixed quantity

Stanisaw Krzyaniak
156
sS
LT
LT
T0
T0
LT
T0
T0
T0
Small number of big orders fixed review cycle

Stanisaw Krzyaniak
157
Course programme:
6.
7.
8.

9.

stock levels.
Stanisaw Krzyaniak
158
Safety stock in case of dispersed

inventories (square-root law)
Stanisaw Krzyaniak
159
D1
D2
D3
D4
100 Dispersed
units; D1
20 units
Dinventories
1
D1
D1
1,40
1,60
1,20
1,40
1,20
1,00
1,00
0,80
0,80
0,60
0,60
0,40
0,40
1,60
1,40
0,20
1,40
1,20
1,20
1,00
1,00
0,80
0,80
0,60
0,60
0,40
0,40
0,20
0,20
0,00
0,00
Regional Warehouse 1
0,20
1,40
1,20
1,00
0,00
0,80
0,60
0,00
0,40
1,60
1,40
0,20
1,20
1,00
0,00
0,80
0,60
0,40
0,20
0,00
1,60
1,40
1,20
1,00
0,80
0,60
0,40
1,60
1,60
1,40
1,40
1,20
1,20
1,00
1,00
0,80
0,80
0,60
0,60
0,40
0,40
0,20
0,00
0,20
0,00
0,20
0,00
Stanisaw Krzyaniak
160
Dispersed inventories
1,40
1,20
1,00
0,80
1,60
1,40
1,40
1,20
1,20
1,00
1,00
0,80
0,80
0,60
0,60
0,40
0,40
0,20
0,20
0,60
0,00
0,00
1,40
Central warehouse
1,20
1,00
0,80
0,60
0,40
1,60
1,40
0,40
0,20
1,20
1,00
0,00
0,80
0,60
0,40
0,20
0,00
1,60
1,40
1,20
1,00
0,80
0,60
0,40
0,20
0,00
0,20
0,00
Stanisaw Krzyaniak
161
1,60
1,40
1,40
1,20
1,20
1,00
1,00
0,80
0,80
0,60
0,60
0,40
0,40
0,20
0,20
0,00
0,00
1,40
1,20
1,00
0,80
0,60
0,40
1,60
1,40
0,20
1,20
1,00
0,00
0,80
0,60
0,40
0,20
0,00
1,60
1,40
1,20
1,00
0,80
0,60
0,40
0,20
0,00
DMC DRW1 DRW2

2
DMC
2
DRW1
2
DRW2
Stanisaw Krzyaniak
DRW3
2
DRW3
......... DRWN
.....
2
DRWN
162
If:
DRW1
2
DMC
DRW2
2
DRW1
then:
DRW3
2
DRW2
DCW
2
DCW
......... DRWN
2
DRW3
.....
DRW
2
DRWN
2
DRW
N DRW
N
2
DRW
DMC
Stanisaw Krzyaniak
DRW
163
DCW
2
DRW1
2
DRW1
?
SS CW
2
SRW 1
2
SRW 2
Stanisaw Krzyaniak
2
DRW1
Ss
....
2
DRW1
DLT
2
SRW 3
...... S
LT
2
SRWN
164
Course programme:
6.
7.
8.

9.
10. Information Decoupling Point concept and its role in reduction

of stock levels.
reduction/rationalisation .
Stanisaw Krzyaniak
165
Information Decoupling Point
Stanisaw Krzyaniak
166
Delivery
Inventory
Stanisaw Krzyaniak
167
D = 38,4;
= 5,84
Stanisaw Krzyaniak
D = 42,5;
= 15,0
168
Delivery
Inventory
Stanisaw Krzyaniak
169
Delivery
Inventory
Stanisaw Krzyaniak
170
Solutions oriented on stock reduction

6.
7.
8.

9.

stock levels.
11. Review of selected logistics concepts and solutions oriented on
stock reduction/rationalisation.
Stanisaw Krzyaniak
171
Stock structure
Cycle stock
SC
SS
Safety stock
Surplus stock
Ssp
Stanisaw Krzyaniak
172
Safety stock
Shorter replenishment
cycles
Revision of service levels

ABC/XYZ/CAV analysis
SS
2
D
LT
2
LT
Fewer delays
Forecats
Centralised stock
Stanisaw Krzyaniak
173

Forecats
CS
1
EOQ
2
Reduction of
replenishment costs.
Improvements of
ordering process.
1
2
2 Do c r
pu c c o
Reduction of inventory
carrying costs.
Cycle stock
Stanisaw Krzyaniak
174

EOQ
SC
SS
Stanisaw Krzyaniak
CS
SS
EOQ
2
1
2
2
D
LT
2 Do c r
pu c c o
2
LT
175
Just-in Time JiT

Quick Response QR
Efficient Consumer Response ECR
Vendor Managed Inventory VMI
Co-managed Inventory CMI
Collaborative Planning, Forecasting and Replenishment CPFR
Stanisaw Krzyaniak
176
Just-in-Time
CS
SS
Stanisaw Krzyaniak
EOQ
2
1
2
2
D
LT
2 Do c r
pu c c o
2
LT
177
Qiuck Response
CS
SS
Stanisaw Krzyaniak
EOQ
2
1
2
2
D
LT
2 Do c r
pu c c o
2
LT
178

Collaborative
Planning,
Forecasting and
Replenishment
CS
SS
Stanisaw Krzyaniak
EOQ
2
1
2
2
D
LT
2 Do c r
pu c c o
2
LT
179

Continous
replenishemnt
CS
SS
Stanisaw Krzyaniak
EOQ
2
1
2
2
D
LT
2 Do c r
pu c c o
2
LT
180

Vendor Managed
Inventory
Co-Managed
Inventory
CS
SS
Stanisaw Krzyaniak
EOQ
2
1
2
2
D
LT
2 Do c r
pu c c o
2
LT
181
Performance measures stock controll

Stock cover:
SCO
Stock turnover:
D
S
Stanisaw Krzyaniak
STO
S
D
182
Sales (demand) - D
Average stock level - S
475
52
9,13
560
52
10,77
SCO
SCO
S
D
S
D
Stanisaw Krzyaniak
Last year
This year
475
31
560
35
31
9,13
35
10,77
3,39
3,25
STO
STO
D
S
D
S
475
31
560
35
15,3
16
183
Crash Course on inventorises.
Thank
you for yourToday
attention!
Inventories
Inventories today: a curse, a blessing, a must..?
In a way INEVITIBILITY, but ..
. dont let them get out of control!
Stanisaw Krzyaniak
184
Summary of the questionnarie

1.
Do you keep in your household a stock of:
Stanisaw Krzyaniak
185

1.
In case of permanent stock is it high or low level stock?
Stanisaw Krzyaniak
186

2. Please indicate three most important reasons for keeping inventories
in your company:
Stanisaw Krzyaniak
187

3. Which, in your opinion, would be the most effective ways to reduce
stock levels in your company?
Stanisaw Krzyaniak
188

4. What are the most critical barriers for implementation of solutions
leading to stock reduction in your company?
Stanisaw Krzyaniak
189
Contact:
stanislaw.krzyzaniak@ilim.poznan.pl
mateusz.boruta@ilim.poznan.pl
Instytut Logistyki i Magazynowania
(Institute of Logistics and Warehouisng)
Pozna - POLAND
www.ilim.poznan.pl
Tel. +48-61-852-98-98
Stanisaw Krzyaniak
190

CC3 InventoryManagement

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Crash Course on:

Why do we keep inventories?

Typical demand classifications and analyses helpful in inventory

Why high quality forecasting is so important for inventory

Cost aspects of inventory management.

Material Decoupling Point - dependent and independent demands,

Calculation of safety and cycle stock.

Classical stock replenishment systems (Reorder Point and Cycle

Safety stock in case of dispersed inventories (square-root law).

Information Decoupling Point concept and its role in reduction of

10. Review of selected logistics concepts and solutions oriented on stock

Why do we keep inventories?

Typical demand classifications and analyses helpful in inventory

Why high quality forecasting is so important for inventory

Cost aspects of inventory management.

Material Decoupling Point - dependent and independent demands,

Crash Course on Inventories

Why do we keep inventories?

Inventory (stock) - materials in a supply chain or in

Based on ELA Terminology

THROUGHPUT TIME IN A SUPPLY CHAIN

Why do we keep inventories?

Why do we keep inventories?

Why do we keep inventories?

Why do we keep inventories?

Materials stock (raw materials, components)

Why do we keep inventories?

Auxillary materials, spare parts

Why do we keep inventories?

Why do we keep inventories?

Why do we keep inventories?

Why do we keep inventories?

Fast moving (rotating) stock

Why do we keep inventories?

Why do we keep inventories?

uncertainty of real demand,

Why do we keep inventories?

of possibilities to fully synchronise supplies with consumption,

of factors influencing safety stock,

Why do we keep inventories?

Good, because they:

Bad, because they:

a continuous access to all

Why do we keep inventories?

Typical demand classifications and analyses helpful in inventory

Why high quality forecasting is so important for inventory

Cost aspects of inventory management.

Material Decoupling Point - dependant and independent demands,

Crash Course on Inventories

Demand analyses - ABC classification

Demand analyses - ABC classification

Rules of the ABC analysis:

o calculate percentage share of cumulative sums in the

Demand analyses - ABC classification

Demand analyses - ABC classification

Demand analyses ABC/XYZ classification

Demand analyses - XYZ classification

Demand analyses - XYZ classification

Demand analyses - XYZ classification

Cummulated value Cumm.

Demand analyses - XYZ classification

Cummulated value Cumm.

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