Inventory Management and

Warehousing Master class

Navdeep Yadav
Product Manager
MBA IBS Hyderabad
Inventory Management and Warehousing Master class overview
1. Inventory basics and Optimization 3. Introduction to statistics
• What is Inventory Management • Mean, Mode and Median
• Types of Inventory Management • Standard deviation and variance
• Inventory Optimization • Standard Normal distribution
• Cost in Inventory Management • King's or normal distribution of Safety stock
• Normal distribution with lead time and demand
variation
• Problems with ABC Analysis
• Introduction to ABC - XYZ Inventory Optimization
2. Safety Stock, Economic order
quantity, and Lead time
4. Inventory finance and accounting
• Types of Safety Stock Techniques
• Introduction to retail finance
• Safety stock and Reorder point
• Income statement and cash flow statement
• Service level on safety stock
• Introduction to asset and margin management
• How to Reduce Safety stock
• The strategic profit model in retail
• Economic Order Quantity
• Walmart and Tiffany's financial statement
• EOQ backorder, reorder point
 Inventory Management and
Warehousing Master class

1. Basics of Inventory management

Navdeep Yadav
Product Manager
MBA IBS Hyderabad
What is Inventory management?
 Inventory management

Inventory management is the process of ordering, handling,

and storing raw material components or finished stock items
ready for sale.

So having the right amount of stock, in the right place, at the

right time

Bottom line:

You want to keep inventory levels balanced at all times

without ever having too much or too little of each product in
stock.
 The importance of inventory management

Good inventory management helps with:

Customer experience - Enough stock to fulfil orders

Improving cash flow - Too much cash into inventory cause

issues at payroll or marketing.

Avoiding shrinkage - Purchasing the wrong inventory will lead

to the dead, spoiling, or stealing.

Optimising fulfilment – Place and space good enough to pick,

packed and ship quickly and easily.
 Inventory management vs. inventory control

Inventory management to ensures Inventory control - addresses inventory

businesses always have the right already in a business's possession.
amount of inventory at the right time
and in the right place. • receive inventory
• process interbranch transfers
• calculate safety stock • process receipts
• calculate reorder points • pack and ship stock
• accomplish demand planning and • process customer invoices
forecasting • process supplier purchase orders.
• identify obsolete items
• optimize warehouse layout
• identify fill rate percentage.
 What are the methods of inventory management?

• Choose an appropriate fulfilment option.

• Take forecasting seriously.
• Set reorder points for each product (Safety stock)
• Use EOQ for optimal order quantities.
• Give each variant a dedicated warehouse bin.
• Sell older inventory first.(LIFO & FIFO)
• Prioritise with ABC analysis.
• Always track your metrics.
• Verify accuracy with regular counts.
• Automate as much as possible.
Type of Inventory
 Type of Inventory

Raw
materials.

WIP
Direct/
Cycle Finished
goods.

MRO
Inventory goods

Ready for
sale

Indirect In-transit

Buffer
 Cycle/ Direct inventory
Inventory needed to meet a customer demand example

1. Raw material, components, and subassemblies

(items used to manufacture finished products)

2. Work in process (currently in production, but not yet

ready for sale)

3. Finished goods (complete and ready for sale)

4. Maintenance, repair, and operating supplies

5. Packing materials (Bubble wrap. Padding)

 Inventory Management KPIs

Storage cost is the amount spent over the storage or

holding of inventory
An inventory is a stock or store of goods maintained by
the firm. For example, it might be near the retail store or
the production site.

There are four types of inventory are

1. Raw materials
2. Work-in-process(WIP)
3. Finished items
4. Overhaul(MRO – maintenance, repair, operating
supplies).

The reasons to keep inventory in the company are

1. To have safety stock
2. To fulfil seasonal demands
3. To avoid lack of raw materials because of mid-way inventory
4. rotational inventory
5. Sleepy inventory.
 Cycle/ Direct inventory
The basic function of stock (inventory) is to insulate the production process from changes in the
environment as shown below.
 Finished good types of inventory
1. Ready for sale Also known as available inventory and
could be picked, packed and shipped.

2. Allocated Bought by a customer and allocated to a

sales order.

3. In-transit This is unsold inventory that is currently on

the move.

4. Seasonal or anticipation stock is manufactured to

cover a forecasted upturn in demand.

5. Safety This acts as a buffer cushion of stock for any

unforeseen upturns.
How much stock we should have?
 How much stock should we have?
There are two extreme answers to this question:
a lot
• this ensures that we never run out
• is an easy way of managing stock
• is expensive in stock costs, cheap in management costs

none/very little
• this is known (effectively) as Just-in-Time (JIT)
• is a difficult way of managing stock
• is cheap in stock costs, expensive in management costs
 Why inventory management?

Lost Sale Due

to Stockout

Cost of Carrying
Inventory
A Framework for Inventory Optimization
 A Framework for Inventory Optimization

1 objective: 📈 profits
2 questions: 📦 how much to order and 📆 when to order
3 inventory drivers: 🏭 supply, 💰 costs, and 🛍️ demand
5 costs: 💳 purchasing, 🚚 transaction, 📦 holding, 🗑️ expiration, and 💶 shortage
 A Framework for Inventory Optimization
The objective here is to optimize the supply chain environment
(supply, costs, and demand) while being restrained by logistic
constraints (warehouse size, number of trucks) and achieve
business objective.

Setting the right objective will allow us to

choose the right trade-off between too
much and too little inventory.

✅ Right Business objective 🎯

Capital Efficient- Maximize your profits with
fewer investments.

❌ Wrong Business objective 🎯

We need to achieve 95% service level but ❔How do you know the optimal level

Cost Minimization = Profit Maximization 💰

 A Framework for Inventory Optimization
2. Inventory Policies
Inventory policies will control your stock levels by answering
three simple, straightforward questions:

📦 How much to order (EOQ)

📆 When to order (Cycle, Lead time, Buffer)
🏭 Where to order (Distance, Lead time)
 A Framework for Inventory Optimization
Supply Chain Environment
So now the objective is profit maximization and we will be using
the supply chain environment and inventory policies as a tool to
achieve it.

🏭 Supply - The expected supply lead time, and its variability (is your supplier/production reliable?).

🛍️ Demand - We need to understand two aspects:

📊 The expected demand distribution or expectation (on average) with variability.

📅 How much time your clients are willing to wait for your products (Backorder)

💰 Costs - 💳 purchasing, 🚚 transaction, 📦 holding, 🗑️ expiration, and 💶 shortage costs.

 A Framework for Inventory Optimization

💰 Costs

💳 Purchasing – Optimizing Production cost or COGS, Volume discount,

Economies of Scale.

🚚 Transaction - Divide this cost into supplier and client sides.

Supplier: transport, packaging, picking

Client: Order inspection & reception, warehouse interims

📦 Holding- Costs related to storing or possessing products

🗑️ Expiration

💶 Shortage costs.
 A Framework for Inventory Optimization

1 objective: 📈 profits
2 questions: 📦 how much to order and 📆 when to order
3 inventory drivers: 🏭 supply, 💰 costs, and 🛍️ demand
5 costs: 💳 purchasing, 🚚 transaction, 📦 holding, 🗑️ expiration, and 💶 shortage
 Inventory management technique

Good inventory management all comes down to understanding:

• Lean Inventory practice e(JIT, 5s framework, Kanban)

• Types of inventory (Cyclic, buffer, transit etc)
• Inventory forecasting (For purchase orders)
• Inventory storage (Where to and how much)
• Handling techniques (Pick, pack and ship inventory) Drop shipping and
Cross Docking
• Multichannel tracking - Visibility for additions (purchases) and subtractions
(sales & shrinkage).
• Inventory accounting - Inventory on financial documents.
• Inventory management systems (Backordering
• Safety Stock, EOQ, ABC etc)
• First-In, First-out Vs Last-in, Last-Out (FIFO vs LILO) Approach
 Inventory accounts – Balance Sheet

Upcoming Topic
keywords in inventory management
 keywords in inventory management

Order management- From receiving orders and processing payment

to picking, packing, shipping, and handling returns.

Inventory management (Periodically and Perpetual inventory

management)

Purchase order (PO) A commercial document created by a business to

its supplier

Sales order (SO) A document created when a customer makes a

purchase

Stock-keeping unit (SKU) a unique alphanumeric code applied to

each variant in a company’s inventory.

Third-party logistics (3PL) an external third party to handle

warehousing, inventory, fulfilment and/or customer service
 keywords in inventory management
Average inventory - (EI + BI)/2
Backorder (BO) out of stock order that can’t be fulfilled now.
Carrying costs - The total costs associated with holding and storing
inventory in a warehouse or facility until it is sold on to the customer.
Cost of goods sold (COGS) - Direct costs of purchasing any goods sold like
materials, labour, tools used, etc but exclude things like distribution,
advertising, sales force costs, etc.
Deadstock - Inventory that remains unsold for a long enough period.
First-in-first-out (FIFO) - assumes stock that was purchased first, is also the
first to be sold.
Last-in-first-out (LIFO) Most recent products are the ones to be sold first.
Inventory shrinkage inventory items that have been stolen, repaired or lost
between POP and POS
Lead time-Time it takes for a supplier to deliver new stock to the desired
location
Multichannel and omnichannel distribution
 What are the methods of inventory management?

• Choose an appropriate fulfilment option.

• Take forecasting seriously.
• Set reorder points for each product.
• Use EOQ for optimal order quantities.
• Give each variant a dedicated warehouse bin.
• Sell older inventory first.
• Prioritise with ABC analysis.
• Always track your metrics.
• Verify accuracy with regular counts.
• Automate as much as possible.
Cost of inventory management
 Inventory management mistake
Sama business owner need to match the supply for the materials and production to customer
demand.

If she makes more chairs than she can sell, she’ll need to find somewhere to
store the excess: which could end up cutting into her margin.

On the other hand, if she runs out of any one of her raw materials,
production will cease entirely until she restocks.
 Cost of Inventory

Why we need Inventory ?

• Protection against Uncertainty
• Work in progress buffer
• The exploitation of price fluctuations
• Smoothing or levelling of production
• Economies of scale and economies of Scope

Cost of Inventory
• Financial cost (Working capital, opportunity cost, cost of capital,
financing, cash flow)
• Ordering cost (Preparation, ordering cost)
• Holding cost (Storage and warehousing cost, risk of obsolescence,
deterioration/decay, handling storage damage, labour and movement
costs)
• Operational cost (complexity, Managerial Control, Lead time,
responsiveness
 Storage cost
Storage cost includes the cost of warehouse utilities, material handling cost, personnel cost,
and climate control cost.

Storage cost = warehouse utilities cost + material handling cost + personnel cost + climate
control cost + (locality cost x area in square feet).
 Cost of Inventory

💰 Costs

💳 Purchasing – Optimizing Production cost or COGS, Volume discount,

Economies of Scale.

🚚 Transaction - Divide this cost into supplier and client sides.

Supplier: transport, packaging, picking

Client: Order inspection & reception, warehouse interims

📦 Holding- Costs related to storing or possessing products

🗑️ Expiration

💶 Shortage costs.
 Inventory holding Cost

1. Cost of capital
• Amount paid to make your product
• Interest associated with the purchase
• Opportunity cost

2. Storage of inventory
• Space
• Labor
• insurance

3. Transportation cost
• Material
• Assemblies
• Final products

4. Holding time for inventory

• Damaged
• Spoiled
• Become obsolete
Inventory holding Cost
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