IMPLIMENTATION ASPECT OF INVENTORY SYSTEM

On the basis of the information collected, we have formulated a process for tracking and managing 10,000 SKUs. The following steps describe the standard path to be followed while implementing SKU specific inventory models. They have been categorised as Category Management, Policy Formulation, Postpolicy Formulation and Model implementation. SKU classification chart is created to guide what model should be used for a given SKU. A brief report of how this system can be implemented is given below.

1.Category Management (Classification of the item):

This includes the categorization of items, which is highly essential so as to apply apt inventory model. a. Identify the incoming item b. Identify the unit of measurement (UOM) to be used for item c. Identify the class under which the incoming item is to be classified. A. Perishable items The items that are classified in this category are:

items having less shelf life- eg: Food materials items which become obsolete- eg: Electronic goods

In this case, the inventory levels are kept at a minimum. In order to manage such SKUs it is recommended that the lead time be minimized. A model that could be used for such items is Lot for Lot order quantity.

B. Cost In this category, cost minimization or profit maximization is the primary objective. Models have been suggested for the same. C. Security Items like say computer chips, innovations, valuable items fall in this category. Hazardous materials could also fall in this category. No particular model is suggested for this classification. D. Critical Medicinal goods, defense items etc call fall in this category. By critical items it is meant that these items are of utmost importance and the supplier cannot afford to have stockouts. For these items it is suggested that the lead time be minimized and maximum safety stock be kept. Periodic ordering model is suggested for these items.

2.PolicyFormulation:
This includes the policy decisions, which should be made during the model formulation. a. When to differentiate product treatment versus when to standardize: Different supply characteristics, different product characteristics (volume, size, flow rate, shelf life storage requirements, security constraints factors related to costs, loss rates), order quantity requirements and customer service level requirements in terms of demand suggest that multiple strategies should be provided. Single strategy is used as far as economies of scale are to be considered, but this is disadvantageous when product characteristics vary greatly. b. Centralize versus Decentralized Inventory Storage: Inventory planning over multiple stocking points is a complex procedure and hence it should be considered very carefully. The trade-off between quantities to be stocked at main distribution center and its sub-distribution center is beyond the scope of this project and hence it is not dealt herein. c. Demand/Inventory Estimation method to be used: The best way is to create a perfect method of forecasting for a given SKU and then finding out the stock control model that nullifies the demand forecast error

to best possible extent. Inventory models can be classified as deterministic, probabilistic and heuristics (specially developed for a particular class of SKU). In this procedure, only stock control models are considered and also it is assumed that demand for each SKU is constant over the length time (only deterministic models). The stock control method should be able to detect and respond quickly to definite short-term changes in the customer demand, which are representative of the market condition, and also at the same time the model should ignore spurious changes in demand. Demand matching should be done with due consideration to stock-out costs and inventory carrying costs for particular class of SKU. d. Defining the Benchmarks: After successfully defining which model is to be used to manage a particular class of SKU, it is necessary to define the levels at which the model will operate. In other words, it is imperative to define the expectations from the model in terms of measurable quantities, known as Performance Metrics. They should be defined such that every operational aspect of the organization, which contributes towards the managing SKU, is accounted for. (Performance metrics are defined precisely in ‘Metrics and Benchmarking’ section).

3.

Post-policy Formulation:

a. Shipment scheduling: This is solely to be done in accordance with customer demand and incoming shipment. Both of them should be matched in order to avoid any possible chance of stock outs and back order filling. b. Reorder levels: Reorder levels are determined by inventory model and must be always met unless and until there is an opportunity to achieve positive trade-off between stocking out and carrying particular item. c. Measuring against operational performance metrics: The effectiveness and efficiency of inventory control model (mathematical algorithm used to manage stock levels of SKU) is monitored by pre-defined performance measures called as Performance Metrics. If the performance is not according to pre-defined specifications (benchmarks) then it is necessary to review each aspect of the model, in order to determine where positive changes can be made. Some of the performance metrics are listed below: * Inventory turns per fiscal year

* Order forecast accuracy * % Space utilization * Stock to sales ratio * Item fill rate etc. Objective should be to monitor all the metrics simultaneously and continually. These performance levels are to be monitored at various levels of organization, such as corporate level (interested in total inventory turnover) as well as operational level (interested in order quantities etc.)

4.

Model Implementation and Feedback:

This is the final step in inventory model formulation and implementation as the name suggests. Formulated model is implemented in daily practice and close track is kept so as to report any deficiencies in the model as far as inventory levels are concerned. Customer feedback is also solicited and entered in the historical records data store for further use. The model to be used for the same SKUs is updated and revised (if necessary) depending upon the feedback.

Reference for the above section: 1.Maja Greeff, Retail Inventory Model Utilization, University of the Witwatersrand, Johannesburg, 1998