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 inventory. And Enterprise Resource Planning (ERP) system such as SAP will eliminate stove pipes and information silos and contribute to information sharing along with a company knowledge management (KM) system. Top management may see Vendor-Managed Inventory (VMI) as a way to out-source the inventory problem. But one has to be careful as it requires a high degree of transparency and integration between the partners. Such a marriage may bring a lot of benefits during the honeymoon period but also may have a costly divorce lurking in the background.

Inventory is a poor investment alternative for cash, but imperative to achieve required service levels. Maintaining the appropriate levels and types of inventory is essential to providing quality, timely service and products to your customers. Preventing stock-outs without overstocking products requires a disciplined process and information system that can dynamically manage this balance. Two of the keys to optimizing inventories are to improve reliability and reduce variability in the supply chain to meet your customer's demand while being cost effective. To order just in time and just enough.

References

Arnold, T. and Chapman, S. (2004). Introduction to M

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