Inventory Planning Control
A Brief Overview of Inventory Planning and Control
In any business, inventory is a key area of concern as inventoryis what is sold. Though, on the surface this may seem to be merely aphysical construct, inventory and inventory management principle easilyextend to service or other intangible product offerings. Perhaps the firstprinciple of inventory is that, inventory is money, or rather arepresentation of invested capital that is listed on the balance as aliability. While inventory is properly represented as a liability, a moreaccurate way to think of it is that is an asset in the waiting.
Atypical retail store may have millions of dollars in inventory on the floor.If it is the right product, priced right, in the right place at the right time,it will likely sell. Though the 3-P’s just mentioned are the crux of themarketeer’s problem, they are also the problem of the inventory orreplenishment analyst on the store side and the problem of the manufacturingand shipping division of the supplier.
Boththe vendor and the supplier seek inventory optimization, that is,managing from their perspective the same issues with which the marketeerwrestles. The daily issues of this perspective are focused on the same fourvariables with typical examples listed below:
- Product – Is a certain SKU present in the regular modular only or checkout lane modular also? Are there multiple SKU’s for a certain product (i.e., single or multi-packs)? A new SKU is being phased in to the modular set, is the are corresponding reduction in another product? Is replenishment on the old item ‘turned off’? If I have a certain product, is there a complimentary product that should also be sold, ideally with modular adjacencies?
- Placement – Is a particular product in all stores (i.e., riding lawnmowers in NY City, snow shovels, even in January, in Mexico)? Does this product go into all stores simultaneously or should it be staged (i.e., lawn care product in southern stores first)? Are there any new stores that should be added to the shipped to list? Is a particular product a ‘regular’ item or does it go on a ‘special’ display/store location (i.e., holiday)?
- Price – Are all the prices indicated on the shelf or on the product? Are the prices correct? Are prices updated annually or monthly? Is the item on ‘deal’ (i.e., advertised special for which we might anticipate the ‘standard’ 20% lift in velocity)?
From theperspective of the vendor, a store or even a whole chain of store only has a[short-term] fixed floor area, ‘backroom’ area and so many storage areas andtrucks that can be in transit to manage not simply one product at one locationbut the full range of products at all locations. This, in essence, is theproblem of inventory: managing and ideally optimizing the coming and going of allproducts at all locations. For the manufacturers, the problem is essentiallythe same, only with a different perspective: all of their products atall of the locations at which they are sold. The daily issues of this simply detail.Consider the perspectives of WalMart and 3M: one US retail operation and theone US division of one multinational manufacturer:
- WalMart has approximately 3,000 US stores, if there is one case of one product from 3M going to each store in the chain, this alone represents shipping 36,000 items (12 per case) just one time. Consider the number of products shipped, received and sold for all products at each store.
- 3M Stationary Products Division, Tape & Adhesives section, has over 50 SKUs. Each peg on the display holds from 6 to 15 units of product. Each product comes in varying numbers per box, from 4 to 24, with from 1 to 6 boxes per case (the minimum order quantity).
- WalMart has the largest trucking fleet of any US corporation and has number distribution centers and warehouses. 3M has 1-2 factories per product and 3-4 key distribution points. Some items are ‘warehouse items and therefore have a lead time of 3-4 days while other items have lead times of up to 21 days.
The myriad issues that result from this collaborative efforts issignificantly enhanced but the good management of ‘the inventory problem’.From the number of units to build and subsequently ship (and to where) untilthe items are sold, the units exist as inventory.
A Brief Discussionof EOQ and other Methods for Inventory Control
To manage the issues discussed just prior is but one matter, tomanage them optimally is another and that is really the goal of anyinventory planning and control system. Realizing that any businessdecision is one in which the principle of the trade-off is employed, one canthen begin to methodically examine the variables. For example, in the simplestexample in which the costs of placing an order and the costs of carryinginventory are minimized. This optimal point is deemed the Economic OrderQuantity.
While, in theory, the method works perfectly, its simplicity is alsowhat limits it in the real world in which additional variables and varyingassumptions run rampant. For example, EOQ does not, or, has trouble takinginto account the following variables/assumptions:
- Product cost assumptions such as fixed batch costs
- Product prices which may be variable and thus would change velocity and subsequent sales/demand forecasts
- Failure to adequately consider or cost out of stocks or backorders
- Failure to adequately consider lead times, special deals or seasonal items (Eason, 2003).
Regardless, EOQ isthe starting place for the consideration or both additional variables as wellas the consideration of other models such as JIT, or the ‘just-in-time’ methodin which the goal is -0- inventory. This is more applicable to a manufactureside though its principles do have applicability in retail. In this method,the basic assumption that has generally been borne out through research is thatinventory carrying costs are generally far higher than one might initiallythink (Schniederjans & Cao, 2001). JIT is achieved by precisely the rightquantity of material/product to its destination just-in-time. Anothersomewhat similar method is ERP or enterprise resource programs. ERPleverages technology to provide firm-wide view of the materials at variousstages in the work process. This data is merged with other firm informationsuch as sales/demand forecast to create a optimized forecast for all rawmaterials, parts and finished products at any point in time.
Insummary, whether using EOQ, JIT, ERP or any other combination of letters forinventory optimization, the key is to understand and purposefully manipulatethe variables of business to prioritize and manage the inherent trade-offs ofany business function.
Bean, J. (2005), former 3M BusinessAnalyst, Interview on May 21, 2005. [Mr. Bean had significant work inmaintaining in stock levels to between 98.5-99.5% on Stationary and Tapeproducts]
Eason, J. (2003, May). Setting TargetInventory Levels for New Products [Masters Degree Thesis, University ofArkansas, Fayetteville, Arkansas, US].
Piasecki, D. (2001, January). OptimizingEconomic Order Quantity. IIE Solutions. pp. 30-39.
Schniederjans, M. & Q. Cao. (2001). Analternative analysis of inventory costs of JIT and EOQ purchasing. InternationalJournal of Physical Distribution & Logistics, (31), 2, pp. 190-117.