Inventory Management efficiency Framework

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Most of executives and staffs who have the activities in the supply chain and logistics management have to involved in inventory management.

In management term, inventories are the asset that need to manage closely and effectively due to we spend more money to invest in the acquisition and hope to create value added for us. If we unfocused, the result are :

• Inventories over demand -If we purchase/make to stock, the inventories costs will high and have risk to be outdated, expired, stolen, or lost,the money invested in inventories can not be exploited in other expense.

• Inventories less than demand- If we kept too little inventories, risk to stock out or shortage. We will lose the opportunity to sell our products and got the money from customers. Moreover, our customer/our market may be replace by the competitors and finally we lost customer.

The necessary to kept inventory because we have to support the uncertainties case such as

1. Market change
2. Urgently required from customer
3. Irregular / Error from Production
4. Abnormal or wear of Machine
5. Uncertainty of Supplier

The 5 uncertainties are difficult to control but we able to manage the inventories to be efficiency. How to do? These are the conceptual framework and the relation of  each activities about inventory management, see the picture for more details.

Inventory Management Efficiency Framework

From the picture above, the way to manage inventory effectively should do the following.

1. Classification to use/not use.  The process of classification the existing inventories are still use or not use. This process like the step 1st S (S-Sort) of 5S concept.
2. Re-Classification for use items. Once we know what inventories are still use.The next process is re-classify the group of inventories. Normally the inventory  classification techniques is "ABC Classification" but the actually we able classify by other segmentation such as VED (Vital-Essential-Desirable) or SED (Scarce-Difficult-Easy). See more details at "Because Inventory Classification is not only ABC"  
3. Demand Forecast for each item After re-classify inventories, the next process is demand forecasting. The forecasting accuracy is the important criteria to be consider. Each organization, each time, it is not necessary to use the same forecasting technique. Select the right fit for the your organization.   
4. Calculate Order Quantity / ROP/ SS. This process are the calculation of order quantity, Safety Stock (SS), ROP (Reorder point) . The technique is often use to calculate are EOQ, MRP, Fixed interval etc. And every time of your calculation, please consider the service level. The result will be efficiency.
5. Define Parameters in ERP System  The current purchasing system usually works through ERP, so need to be check are update the parameters correctly. 
6. Source/Purchase Execution  When everything is set, carry out the procurement according to the conditions that we set up. The next process is purchase execution. This process able to use people or e-procurement. depending on the business process of the organization. It should control the operation of the supplier to meet the conditions.
7. Monitoring/Control/Continuous Improvement  In general, according to the principle of supply chain, key measurement requires that 5 aspects are Reliability, Fast response, Agility, Cost, and Asset management efficiency  See more details about key metric of supply chain performance at the Blog "Performance Pyramid : The key metric to manage and control whole Supply Chain"  The results of monitoring and control are the guidances for the continoues improvement. Many tools and practices able to used for the improvement. Finally, go back to review the inventory is always appropriate.

How do you feel about the conceptual and framework of this inventory management? Is able to make your process to be effective? Hope it's useful for you and someone who read this blog. If your have any question or advice, don't hesitate to contact me.

Mongkol  Patcharadamrongkul
Instructor/Consultant/Expert in Logistics and Supply Chain Management, Thailand 

Tel 081-8476479, E-mail : naitakeab@gmail.com 

10 February 2018