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ck In-transit stock Safety or buffer stock Speculative stock Seasonal stock Dead stock If demand and lead time is constant, only cycle stock is necessary. In transit inventory is usually accounted for on the place of shipment as it is not available at the destination. In-transit stock can be reduced through faster modes of transportation. Safety or buffer stock is a result of uncertainty of demand and lead time. Speculative stock is inventory held for reasons other than satisfying current demand, often acquired to reach economies of scale or to generate seasonal stock. Dead stock includes items for which no demand has been registered and may become obsolete. Inventory Management Conditions Certainty Uncertainty In a perfect world as described in business school text books and case studies one manages in a world of certainty. And the best ordering policy can be determined by minimizing the total of inventory carrying costs and ordering costs using the Economic Order Quantity (EOQ) model. EOQ = 2PD √ CV P = ordering cost ($/order) D = annual demand (number of units) C = annual inventory carrying cost (% of product cost) V = average cost of one unit of inventory ($/unit) This formula can be adjusted for volume discounts and incremental replenishment, as well as other conditions. Most of us don’t work in a place called perfect, and are facing uncertainties. Life ends up throwing monkey wrenches into the production of widgets. For those of you who love math look at the operations management literature and you will find ways to calculate fill rates, safety stock, and standard deviation of replenishment cycles. Symptoms of Poor Inventory Management Increasing number of backorders Increasing cancelled orders Increasing numbers of returns High customer turnover rate Large number of obsolete items Periodic lack of storage space You know you have a problem if your backorders continue to increase and at the same time you are faced with increasing cancelled orders. Reverse logistics may be tasking as well as your number of returns increase, and you end up loosing customers, while accumulating obsolete items which among other things may lead to lack of storage space. You may face these inventory symptoms, but the causes may be part of the bigger picture. Ways to Reduce Inventory Levels Lead-time analysis Delivery-time analysis Eliminate low turnover items Eliminate obsolete items Analysis of package size Analysis of discount structure Examine returned goods procedures Measurement of fill rate by stock-keeping unit (SKU) Analysis of customer demand Improve forecasting Improve Electronic data interchange with vendors/suppliers The above mentioned ways to reduce inventory levels should be part of a system approach to improving Inventory Management Inventory Management Systems/Analysis ABC Analysis Forecasting Advanced Order Processing Systems Enterprise Resource Planning (ERP Electronic Data Interchange (EDI) Knowledge Management (KM) Systems Vendor-Managed inventory (VMI) ABC analysis is a tool to classify items according to their relative importance/profitability (Category A items are more important than category B items, and so on). A distribution by value report usually forms the basis of an ABC analysis. Better sales forecasting and advanced order processing systems as part of a larger marketing plan will reduce invent