INVENTORY OPERATIONS

INTRODUCTION TO INVENTORY OPERATIONS

MONITORING MOVEMENTS

When it comes to monitoring inventory, organisations are advanced to develop tracking

systems for their inventory items.

Inventory tracking refers to the process of a business continuously monitoring all of

the inventory that it owns. Inventory has several definitions, but it most commonly means
raw materials, unfinished goods, and ready-to-sell items. With inventory tracking, you have
access to data such as your exact inventory levels, the location of each item or SKU, updated
delivery statuses, and other inventory related information. Inventory tracking happens in
every place of business that deals with inventory: manufacturing and production companies,
warehouses, retail stores, etc.

What is being tracked?

Typically, inventory tracking systems can monitor the following information:

Updated stock levels

This value tells you how much of each item you currently possess. It’s important to keep this
data consistently updated so that you know whether you have enough stock for your business
processes, whether they’re manufacturing new items or fulfilling customer orders.
Additionally, your stock levels provide a base for the other data that is tracked.

Stock locations

In a best-case scenario, your stock should not remain in one location for too long. (If it does,
that means it has become either slow-moving or dead stock.) Once the stock enters your
warehouse, it moves around as its first sorted and categorized, then stored, and then
eventually retrieved and sent to the next stage of your supply chain. Since your stock doesn’t
remain in a fixed place, it’s important to keep track of its location so that you know where to
find it if needed.

Inventory accuracy

This is a KPI (Key Performance Indicator) that refers to the ratio between the quantity of
inventory that has been tracked and the quantity of inventory that is physically present in
your possession. Ideally, both numbers should be the same, but because of reasons like theft,
damage, miscalculations, and shortages from suppliers, there could be discrepancies.
Inventory accuracy will show you how big those discrepancies are. Like your stock levels,
inventory accuracy is essential for your business processes to smoothly function.

Carrying costs
This refers to the total amount of money that is spent on storing, holding, and owning your
inventory. This includes how much you spend on rent, labor, storage and relevant bills, and
security. Carrying costs can tell you how long your business can continue to store this
inventory before you begin to lose money because of it. Slow-moving inventory and dead
stock are two main contributors to high carrying costs, so if you’re trying to reduce those
costs, you’ll have to figure out a way to remove or sell the items.

Inventory valuation

This is a practice that is used to calculate the value of unsold inventory when a business
prepares their financial statements. Inventory valuation gives your leftover stock a financial
value, which needs to be added to your balance sheet. This can also help calculate your
inventory turnover.

Inventory turnover

Inventory turnover is the rate at which your inventory is sold. A higher value represents
stronger sales, and a lower value represents weaker sales. Inventory turnover can tell you how
your business is doing and whether you need to improve your sales strategy. Check out
our free inventory turnover tool to calculate yours.

Reorder levels

A reorder point or level is the specific amount of stock remaining for a certain item at which
it needs to be replenished or refilled. Reorder points are essential for preventing stock outs
(situations where a seller runs out of stock).

Why do you need inventory tracking?

Better stock visibility

With inventory tracking, you can view every single one of your products throughout
its life cycle—from the moment they enter your warehouse or storage space, to the time they
leave. This means that you will have access to each product’s current location, available
stock, relevant purchase and sales orders, etc.

Avoiding shortages

With an exact count of what you have, you can also figure out what you don’t have and
replenish your stock in time. This will help you avoid running out of items and missing out
on valuable sales. According to a survey conducted by People ox, 34% of businesses claimed
to have delivered

o\ders late because they didn’t have the products in stock, but weren’t aware of that when the
order was placed.

Better inventory forecasting

Having an accurate count of your inventory at different times in a year can allow you to
predict or forecast how much inventory you’ll need in order to fulfil your future demand.
This can help you make informed purchasing decisions and avoid over- or under-stocking.
A report by McKinsey & Company stated that businesses can reduce their inventory costs by
10%, just by avoiding over- and under- stocking.

Multiple location tracking

Businesses that store items in multiple storage spaces or warehouses may have a harder time
tracking their entire inventory together. With more warehouses, you’ll have longer strings of
location info, more places to lose stuff, more places to have to shelf counts, more places to
coordinate shipping from, and so on. That’s why certain inventory tracking systems offer
tracking for multiple locations in a single platform. Being able to access your data in a single
place can definitely help reduce the complexity of this data.

Faster error detection

Consistently tracking your inventory levels can also help you identify anomalies early on,
whether they indicate errors, drops or increases in sales, or unexpected expenses. If you can
see these issues early, you can rectify them before they cause too much damage.

Although inventory tracking sounds like a relatively simple task, it can be quite a handful
when more products are involved, which is the case for larger businesses. After a certain
point, tracking your products manually stops being an option. This is where an inventory
tracking system could come in handy. An inventory tracking system is software that helps
you monitor the movement and location of your inventory. While there are standalone
systems that are specifically used for inventory tracking, most inventory tracking systems are
actually part of inventory management software. , like Zoho Inventory. Using Zoho
Inventory’s inventory tracking system ensures that your data is accurate, updated in real-time,
and efficiently tracked.

INVENTORY ACCURACY

This is a KPI (Key Performance Indicator) that refers to the ratio between the quantity of
inventory that has been tracked and the quantity of inventory that is physically present in
your possession. Ideally, both numbers should be the same, but because of reasons like theft,
damage, miscalculations, and shortages from suppliers, there could be discrepancies.
Inventory accuracy will show you how big those discrepancies are. Like your stock levels,
inventory accuracy is essential for your business processes to smoothly function.

MEASURING AND VALUATION OF INVENTORY (REFER TON PREVIOUS

TOPIC 4)

STOCK VALUATION

This is concerned with determining the value of closing stock/inventory or any quantity of
inventory held at a particular point in time.
STOCK VALUATION TECHNIQUES/METHODS

These include the following:

a) First In First Out (FIFO).

b) Last In First Out (LIFO).

c) Weighted average cost (WACO).

d) Replacement Cost

e) Actual Cost (AC).

f) Standard cost/price

The FIFO method

This is based on the assumption that the oldest stock/inventory should be issued out first and
therefore the issues are priced using the earlier prices, implying that closing stock or
inventory is comprised of the latter items.

Advantages

- It is logical.

- It minimizes obsolescence and deterioration of stock

- Stock values (in the Balance sheet) are a reflection of the Market prices hence fair
values therein.

Disadvantages

- During inflation, the closing stock will be low hence high profit and high tax
burden resulting there from.

- High profits may raise the expectations of the shareholders for dividends yet these
are book profits.

- Historic costs are matched with current revenues, which is misleading.

The LIFO method

This is based on the assumption that the latter stocks are issued first, in which case closing
stock is comprised of the oldest items. Note: Although historically known, this method is now
prohibited (according to the revised IAS 2 inventories issued) as a method of determining the
cost of inventory.
Advantages

- From the accountant’s view it allows for the prudence concept

- It matches costs and revenues at comparable prices.

Disadvantages

- It is not logical; it purports issuing/ selling what has not been purchased

- It can lead to obsolete items

- It may lead to understatement of closing stock: - Financial statements will not

show a true and fair view.

Weighted average cost (WACO).

It uses the average cost of all items (materials) in stock on the day of issue as the value for
issuing materials and valuing closing stock/inventory.

Advantages

- It is a simple method to implement

- It is acceptable for external reporting and tax purposes.

Disadvantages

- It uses non-market values

- It uses approximation and rounding-offs that don’t paint a true and fair view of the
stock value.

- It can lead to book gains and losses that can be misleading to shareholders and
other stake holders.

Illustration

Using the following information obtained from the material records of ABBACUS (U)
Ltd, for the month of February, 2014; determine the value of closing stock, using the
various Valuation methods.

Feb, 1st Opening Balance 100 units at 1,000@

3rd purchased 50 units at 1,200@

5th purchased 30 units at 1,300@

10th issued to job X 40 units

 15th issued to job Y 70 units

20th purchased 30 units at 1,500 @

25th purchased 10 units at 1, 600 @

27th issued to job X 25 units

28th issued to job Y 70 units

Note: assume perpetual inventory / stock taking

Inventory (Stock) Control Ledger (Record): FIFO

Date Receipts Issue Balance

Qty Unit Value Qty Unit Value Qty Value

(units) price (Units price (units)
)

1 100 100,000

3 50 1,200 60,000 - - - 150 160,000

5 30 1,300 39,000 - - - 180 199,000

10 - - - 40 1,000 40,000 140 159,000

15 - - - 70 60 1,000 70 87,000
60,000
10 1,200
12,000 72,000

20 30 1,500 45,000 - - - 100 132,000

25 10 1,600 16,000 - - - 110 148,000

27 - - - 25 1,200 30,000 85 118,000

28 - - - 70 15 1,200 18,000 15 23,500

30 1,300 39,000

25 1,500 37,500 94,500

Inventory (Stock) Control Ledger (Record): LIFO

Date Receipts Issue Balance

Qty Unit Value Qty Unit Value Qty Value

(units) price (Units) price (unit
 s)

1 100 100,000

3 50 1,200 60,000 - - - 150 160,000

5 30 1,300 39,000 - - - 180 199,000

10 - - - 40 30 1,300 39,000 140 148,000

10 1,200 12,000
51,000

15 - - - 70 40 1,200 70 70,000
48,000
30 1,000
30,000 78,000

20 30 1,500 45,000 - - - 100 115,000

25 10 1,600 16,000 - - - 110 131,000

27 - - - 25 1,600 16,000 85 92,500

10
1,500 22,500

15 38,500

28 - - - 70 15 1,500 22,500 15 15,000

55 1,000 55,000 77,500

Note:

From the above illustration, students,

 Could try the same question using other valuation methods, especially the WACO
method.

 Note the differences in the Closing Stock Value arrived at for the different valuation
methods.

 Analyze the implications of such differences on management decisions relating to the

control procedures to be designed and implemented for inventory management and
control.
Actual Cost (AC)

According to this method, inventory/ issues are valued at their historical costs of acquisition.
It does not matter which items are issued first or last. However, it requires that (purchase)
invoices be referred to during the valuation exercise, to make sure that the items are actually
valued at their costs of acquisition.

Standard cost/price

A standard price is a predetermined price fixed on the basis of up-to-date knowledge of

market prices and conditions. It is set for a given period of time, e.g. six months or so. It is
kept fixed irrespective of the actual prices paid for the receipts of items (materials). This
standard could be reviewed after (at the end of) the fixed period. Where this method is used
both receipts and issues are valued as standard (therefore, there is no real need to show the
total values of each transaction on stock records. The value of stock on hand at any time is
calculated by multiplying the quantity by the (standard) price.

Replacement Cost

Here inventory/issues is/are valued based on what it would cost to replace them at present.
This method takes advantage of the current market prices.

Sample Question

a) Using the following information obtained from the material records of

ABBACUS (U) Ltd, for the month of February, 2014; determine the value of
closing stock, using the various Valuation methods, (LIFO, FIFO & WACO).

Feb, 1st Opening Balance 100 units at 1,000@

3rd purchased 50 units at 1,200@

5th purchased 30 units at 1,300@

10th issued to job X 40 units

15th issued to job Y 70 units

20th purchased 30 units at 1,500 @

25th purchased 10 units at 1, 600 @

27th issued to job X 25 units

28th issued to job Y 70 units

 b) Identify the differences in the stock values arrived at during the course of the
month and explain their implications on management decision making in a
manufacturing firm of your choice.

RECEIPT AND ISSUANCE OF INVENTORY (MATERIALS AND INVENTORY

MANAGEMENT)

Materials constitute a significant proportion of the cost of production in most organizations.

Planning for and control of materials is therefore an important function of the production and
operations department. The major aim here is maintaining an adequate supply of the correct
materials at the right time and at the most economic cost.

Types of Materials in organizations

There are various types of materials, which are managed and controlled by any organization.

1. Raw materials - these are components used in the manufacture of products.

2. Work-in-progress (WIP) - these are partly finished goods held between manufacturing
stages.

3. Finished goods - these are completed products ready for sale or distribution.

4. Service materials - these are materials used in service and maintenance operation for
example detergents or cleaning fluids, computer stationary etc.

Material Control Department

This is an arm of the organization that directly manages its materials. Most organizations
have this role integrated within the stores department. Whatever is a case with any given
organization, the bottom-line is, there should be some deliberate efforts for managing
materials in anyone organization.

Major functions of the Material Control Department

These include: -

1. Assessing material requirements in agreement with marketing forecasts and

production needs.

2. Coordinating the purchase of materials.

3. Receiving and storing materials safely and in good condition.

4. Issuing of materials upon receipt of appropriate authorization.

5. Identifying surplus stock of materials and taking action to reduce it.

6. Protection of materials from any dangers and losses.

 7. Keeping up to date record of materials in store.

8. Coordinating the disposal of unnecessary materials.

Purchasing and Store Keeping Procedures for materials

Purchasing Procedure

Purchasing is a major function of the organization's system. When purchasing materials,

several considerations must be noted.

1. The need to ensure that supplies are maintained so as to avoid the incidence of idle
time or loss of future business.

2. The need to minimize investment in materials so as to achieve maximum returns.

3. Ensuring that purchases must be obtained at the most economic price. However, the
most economic price may not necessarily be the lowest price and the lowest price
should not compromise quality.

4. The quality of materials produced should be maximally maintained, implying that the
purchases of materials should be in line with the philosophy of TQM.

5. Adequate records must be kept in order to ensure that the purchasing routine is
implemented in an efficient manner.

The purchasing procedure goes through a number of steps and for accounting and
control purposes, relevant documents must be prepared and kept in each stage. These
stages include: -

1. Purchase Requisition

This is a written/printed request for materials that are needed but are out of the [Link] is
raised in response to a need that may have been expressed by any department in an
organization. The purchase requisition may also be in response to the effect or regular
production orders for various products or services by customers.

The purchase requisition must specify the following: -

Quantity of materials required.

Quality of materials required.

Required delivery date.

Endorsement by (Name & Signature) the responsible officer who has raised the
requisition.

2. Selection Of Supplier
When the purchasing department receives a duly authorized purchase requisition, a source of
supply has to be selected. The purchase department maintains a list of suppliers for each type
of material and selects a particular supplier after inviting tenders. The rule here is to buy the
best quality at the lowest possible price after considering delivery dates and other terms of
purchase.

3. Local Purchase Order (LPO)

This is a document, which authorizes the supplier to go ahead and supply the specified
quantities and qualities at the specified date and terms. When a successful bidder has been
selected, the purchasing officer prepares a purchase order. 5 copies are usually made, the
original is sent to the supplier, one copy to the purchase department, then the receiving
department, accounting department and the department requisitioning for the material.

NOTE

The supplier may prepare an advice note and forward it to the company as an
acknowledgement indicating the date when goods are likely to be delivered and this is
normally passed on to the receiving department which has to match with the purchase order.
This note is checked to ensure that the quantity and quality of materials corresponds to the
details in the purchase order.

4. Receiving and inspection of materials

When receiving the goods, the delivery note, which is sent along with the goods, should be
checked properly to ensure that the quantity specification tally with the physical goods
received. The goods are then sent for inspection. If on inspection, the goods are acceptable, a
Goods Received Note is raised. The Goods Received Note and Delivery Note are signed by
an official responsible and then the goods are sent to the store.

5. Return of rejected materials

In case materials received are damaged or are not in accordance with the specification they
are returned to the supplier along with the Debit note. This informs the supplier that his
account has been debited with the value of rejected materials when the supplier accepts such
a claim, he signifies acceptance by the issue of a Credit note.

6. Payment of the supplier

At this point, the company receives an invoice from the suppliers. An invoice received is a
demand order requesting the company to make payments of goods earlier supplied. The
invoices should be approved by the accounting officer and sent to the person in charge of
payments.

The invoice should be checked to ensure that the following are specified.

Purchase order reference number

 Suppliers name

Amount of payable tax (VAT component)

The date of the invoice

Description of goods delivered and to be paid for.

Price per unit and the total value including the details of the discounts to be
given.

All supporting document should be attached and prices cross checked to make
sure that all calculations are fine. A voucher is then prepared and sent for pre-
auditing. A cheque in favor of the supplier is then prepared.

After payment, all documents must be stamped 'PAID'.

Duties of the Purchasing Officer/Department

1. Finding and approving suppliers

Suppliers are taken to include those who supply goods and those who supply services. The
purchasing manager is sometimes required to visit suppliers' premises before he can approve
various supplies. The purchasing manager should also try to assign quantitative values of the
factors which are desirable is a supply.

2. Buying at a least cost to the company

While the quality and quantity of goods and services should be specified elsewhere, the buyer
must purchase these items at the most advantageous terms. The purchasing manager should
obtain a list of suppliers and should also send as many inquiries as possible requesting for
more information especially on quality and quotations. More information should be got about
delivery charges, discount structures (discounts for prompt payments) and any other
supplementary charge.

3. Ensuring delivery of goods and services at the right time.

This will involve contacting suppliers before the due date and seeking assurance that these
dates of deliverance will be maintained.

The purchasing manager must also try to avoid contacting the supplier for the order which
has already been supplied. This can only be prevented by maintaining a close liaison with
receiving department.

4. Verifying invoices presented by suppliers

This task is carried out by the purchasing department but sometimes the receiving department
would be the one responsible. It is necessary to check that the prices quoted on an invoice
agree with what was negotiated for by the purchasing manager.
 5. Organizing all discussions with actual and potential suppliers

The operations department needs to meet suppliers and discuss various issues. These
discussions should be arranged by the purchasing department because this is the only
department with the knowledge of buying and where to buy. This will also ensure that
deliveries and prices are in accord with the company's purchasing policy.

6. Speculative buying

This is a duty of the purchasing manager and it implies to the purchase goods not for reasons
of immediate use but because it appears that market conditions are particularly favorable thus
it may seem to the buyer from his knowledge of marketing forecasts that the particular
product is likely to become difficult to obtain or that its price is likely to rise sharply.

7. Advising on prices for materials

This activity is of substantial value since it may help to decide major policy issues especially
concerning the costing of the final products produced.

8. Acting as window in the world

The purchasing job brings continual contacts with outside organizations and this is a valuable
channel for organizational communication.

9. Checking legal conditions of contracts

10. Maintenance of purchase records.

11. Coordinating efforts with other functional departments.

Duties of a Goods Receiving Department

i. Recording all goods received in a ledger (goods received book- It is also a simple
list of goods recorded) as they arrive.

ii. Unpacking and checking all goods received against the purchase order especially
for quantity and quality specifications.

iii. Returning all defective goods to the suppliers responsible. Such goods are covered
by the rejection note, giving reasons as to why these goods are rejected. This note
is raised after inspection.

iv. Informing the purchasing department of the receipt of all goods and this normally
done by preparation of a Goods Received Note.

v. Returning all chargeable packaging materials to suppliers.

NOTE
After the goods receiving department has concluded its entire necessary recording,
goods are passed on to the store and the storekeeper takes the charge of controlling and
monitoring all material movements.

Store Keeping

It is also an important aspect of materials management. The storekeeper is assumed to be

responsible for handling both incoming materials and outbound materials.

However in most cases the goods receiving department handle materials received.

Duties of a Store Keeper

These normally vary from one company to another. In some companies, the storekeeper is
virtually a materials controller, keeping comprehensive records and raising all the necessary
purchase requisitions, while in other organizations, a storekeeper can even be given a
responsibility of receiving these items.

Whatever the organizational situation, care must be taken to give the position of a storekeeper
its due importance and he is therefore expected to perform some of the following duties.

1. Receiving and storing goods in good order and condition

These may include: -

Raw materials purchased

WIP items

Finished goods and service materials (indirect materials)

2. Issuing materials against authorized requisitions only.

The storekeeper should never issue materials without a requisitions sent by a dully authorized
person. (Except for items, which have been declared, free issue).

3. Organizing materials in the store against certain relevant sets of documents.

This is normally a frequent exercise for the storekeeper to conveniently assemble together all
the materials in the required order using correct documents. Materials can then either be
issued against a summarized materials requisition or against a well-prepared document.

4. Carrying out physical stocktaking as necessary so as to verify whether the

materials physically in the stores tally with the records.

5. Protection of materials against theft, fire and damage and any other kind of
deterioration.

Stock Taking
When goods are continually being moved in and out of the stores, some inaccuracies creep in
and therefore to minimize the effect of these inaccuracies, stocktaking is carried out.

Stocktaking is a physical counting of stock at certain periods of time to determine if the

counting results correspond with records on stock record cards.

Errors found are investigated and if necessary, changes are made to the records to bring them
in line with actual/stock.

Ways of Stock Taking

1. Annual stock taking

This involves physical counting of stock at the end of each accounting period. The purpose is
to establish the closing stock valuation. This is normally a major exercise and it is likely to
occupy a substantial number of man-hours and therefore it can disrupt production.

2. Perpetual or continuous stock taking

This is a continuous method of recording store balances after each receipt and issue to
facilitate regular checking for proper stock taking. The total balances represent the stock at
hand. And this makes it easy to determine the inventory value at any time without physical
counting.

Advantages of Perpetual Stock Taking

i. The system helps in avoiding the long and costly work of physical checking of all
items’ stocks at the end of the year.

ii. The P & L account, and the balance sheet can be easily prepared at interim periods as
stock figures are readily available at all times.

iii. The system helps in keeping up to-date records.

iv. Discrepancies can easily be discovered and rectified.

Materials Handling and Control Systems

Control of materials is very important especially when managing materials in the stores. This
is because it helps in minimizing losses and escalations in cost of materials.

For any material control system to be effective various support documents are prepared
which must be used in the various stages of procurement, storage and utilization of those
materials.

The Documents required are:

1. Materials / stores requisition

This is a well-prepared document that is required by the storekeeper to issue materials. It
should bear the following information.

The date when it was raised.

Identification of its originators.

Indicate the materials and the relevant code

Quantities of material required and the relevant facts.

Material issuing officer

2. Purchases requisition

This is a request to the purchasing department to purchase materials and it may be originated
from the production department or any other department. There is often restriction on the
signing of the purchase requisition for purposes of internal control.

3. Stores record card

These constitute the central records for the materials received and kept with the store e.g. the
Bin cards

Stores ledger control account

The details in the stores ledger control account should include:-

Receipts

When materials were received.

How much was received

Cost attached

Value of materials received

Issues

Description of the materials issued.

Pricing of materials issued.

Value of materials issued.

Quantity of materials issued.

Note

It's important for management to determine an appropriate level of investment in the

inventory so as to optimize the use of inventory in an organization. However, determination
of investment in the inventory or determination of how much inventory should be held in an
organization should be done after analyzing the following factors.

The levels of operations and volume of work.

Technical nature of operations (production cycle)

Perishability of the inventory

SYSTEMS TO REPLENISH INVENTORY

With customers expecting lightning-fast order fulfillment times, there is a growing need to
streamline and optimize warehouse operations. Inventory replenishment is an indispensable
part of warehouse operation management that controls the efficient flow of goods throughout
an entire supply chain (and thus, greatly affects fulfillment times).

Definition of inventory replenishment

Is a combination of models, practices, and technologies that help manage the movement of
stock from a central location to another location downstream to ensure that stock continues to
flow efficiently along the supply chain. Also known as stock replenishment, inventory
replenishment aims to use the most efficient methods to move inventory from reserve to
primary storage and from the latter to picking locations.

Goals of inventory replenishment

 Avoid excessive /overstock which results in increased carrying/storage costs.

 Ensure on-time deliveries.

 Minimize labour costs.

 Cut back on dead stock and slow-moving items.

 Reduce the risk of logistical problems.

 Improve replenishment planning.

 Meet demand without shortages.

 Maintain adequate safety/buffer stock levels.

INVENTORY REPLENISHMENT MODELS

Min/max inventory replenishment

Also known as the “routine” method, the min/max replenishment model triggers restocking
activity when a certain product reaches a predetermined minimum threshold. This is best used
for SKUs with predictable throughput and seasonal demand that can be predicted using
historical data.
In this model, inventory levels are continuously reviewed and when they reach a preset level
(reorder point), replenishment orders are placed. While the ordering costs associated with this
replenishment model are negligible compared to other expenses, carrying costs are usually
high, and more space may be needed for both upstream storage and downstream picking
areas.

Demand inventory replenishment

The demand inventory replenishment model makes sense for warehouses with limited space
and picking locations. It is best used in situations where it’s inefficient to dedicate significant
space to any single item. In demand replenishment, the replenishment quantity should be just
enough to fulfil a pending order or group of orders without leaving excess stock behind.

Top-off inventory replenishment

The top-off replenishment model uses similar min/max thresholds as the min/max
replenishment model and usually runs on set schedule or batch released (by area, line or
product). The inventory for a specific product is “topped-off” to acceptable levels in picking
areas or forward picks locations based on projected demand or shift in the number of
available staff.

This model works well when large waves of picking work or picking volume is expected. It’s
best used when picking operations are less active or when there are work shortages. Having a
system that triggers top-off replenishment when variations in picking work or volume is
expected promotes interleaving opportunities in active areas.

Periodic inventory replenishment

In warehouses where periodic replenishment models are used, the amount of inventory needed
for certain intervals (based on demand forecast) is moved to picking locations. The end of
these intervals are typically used as review points and the amount of inventory in stock is
checked at these points. If stock levels fall below the minimum threshold, replenishment
orders are placed. Otherwise, they are skipped until the next review point.

As such, this model is associated with longer lead times and should be used when there is a
large storage area for products (because inventory is moved in large volumes to picking
locations). On the flip side, carrying costs are typically negligible compared to ordering costs
while ordering costs are typically independent of order volume.

Identifying the right mix of replenishment models

Choosing the right replenishment model is essential for efficient operations. Although each
replenishment model has its pros and cons, using the wrong model can turn replenishment
operations into a nightmare for warehouse managers and finance executives. In some cases,
using a mix of replenishment models is the best way to achieve optimal balance between
inventory levels and consumer demands.
Achieving this balance may require warehouses managers to use a combination of
replenishment models for different product lines, during periods of seasonal demands or even
for the same product at the same time.

Lot-sizing methods

Lot-sizing methods are usually determined by the trade-off between the ordering costs from
the supplier and the carrying costs of the SKU. It’s used to establish optimal order quantities
for both reorder point strategy and periodic replenishment models. The following are various
lot-sizing methods that can be used for inventory replenishment activities.

Fixed order quantity

This is the simplest lot-sizing technique. A specific amount of a product is ordered at one
time. Surplus inventory in a particular period must be consumed in future periods before a
new order is placed.

Economic order quantity (EOQ)

Economic order quantity (EOQ) is used to describe the order quantity that minimizes both
total ordering and holding costs. It is the quantity of a SKU that should be added to inventory
with each order placement to minimize holding, shortage and order costs. The EOQ is a
valuable tool and provides a model for accurately determining the optimal reorder quantity
and appropriate reorder point to prevent stocks from running out.

Lot-for-lot (LFL)

Also referred to as discrete order quantity, lot-for-lot provides a model for determining the
quantity of a product that should be ordered to meet demand requirements for a specific
period. It’s best used in situations where demand for an item fluctuates widely.

Periods of supply (POS)

This establishes the quantity of a product that should be ordered to meet demand
requirements for a defined number of periods. Periods of supply is very similar to the lot-for-
lot model — the only difference is that the latter concerns itself with just one period while the
former deals with multiple periods.

Period order quantity

The period order quantity uses EOQ to calculate the specific number of periods that should
be covered in an order

Essentially, EOQ/Avg = POQ.

Least unit cost

The least unit cost lot-sizing technique determines the best ordering quantities based on the
effect of cumulative needs over time. In this method, the inventory carrying and ordering
costs for each possible lot size is added and divided by the total number of product units in
that lot size. Choose the lot size whose unit cost is the lowest.

Least total cost

The least total cost technique helps calculates order quantities by comparing the ordering and
carrying costs for several lot sizes. The lot size where these costs are nearly equal is what is
purchased.

Part period balancing

This technique computes order quantities by determining the total demand sum up to the
period when carrying costs and ordering costs for the item are most balanced. Part period
balancing is a dynamic lot-sizing technique that works by first calculating order quantities
(using the least total cost method) and then looking ahead/back to see if grouping periods
together reduces the overall ordering and carrying cost.

TYPES OF INVENTORY REPLENISHMENT SYSTEMS IN WAREHOUSES

Most large businesses that sell or manufacture tangible goods have to manage and track
hundreds, if not thousands of products. It’s easy for human operators to miss key indicators
that point to seasonal changes in demand, change in consumer preferences and out-of-date
products, leading them to order inventory at the wrong time or in sub-optimal quantities.

As such, a lot of operations managers resort to legacy applications in an attempt to optimize

replenishment activities. Most of these systems do not have functionalities like demand
forecasting, custom alert notifications, inventory management and demand planning. Some
managers may even use spread sheets to attempt a manual calculation of demand forecasts —
an arduous, time-consuming replenishment process that greatly increases error margins.

To maintain optimum inventory levels, there is a need for accurate demand forecasting and
planning systems to predict future sales and ensure sufficient inventory levels without
increasing ordering/carrying costs and running the risk of stock-outs or obsolescent stock.
This requires the use of inventory replenishment systems, such as those outlined below.

Enterprise resource planning

Enterprise resource planning solutions (ERPs) typically come with inventory management
capabilities, making it easy to organize stock, track the movement of SKUs through the
supply chain, intelligently improve picking and packing processes and manage inventory
replenishment.

The latter functionality allows businesses to create replenishment rules that trigger the
creation of economic order quantity (EOQ) orders when inventory levels reach the reorder
point. If the warehouse uses the min/max replenishment model for a SKU, restocking activity
is triggered when the minimum level is reached. Order quantities are determined by
subtracting the max quantity from the min quantity.
While ERPs are essential tools for effective warehouse management, they should be paired
with other systems to optimize replenishment operations. Without accurate demand
projections, companies end up with stockouts, back orders or excess inventory — a major
problem for seasonal inventory with high carrying costs. As such, ERP systems should be
integrated with demand forecasting and planning solutions to gain insight into incoming
inventory and define accurate/effective reorder points.

Warehouse management systems

Replenishment modules in warehouse management systems allow operations managers to set

individual reorder amounts per product item. Once the number of products drops below the
minimum threshold, the system automatically initiates the protocol to replenish that item.
This keeps inventory levels stable (even during periods of high sales volumes). However, this
process works best when the WMS is paired with real-time data capture and scan validation.

The availability of real-time, accurate data supports better demand forecasting, leading to
optimized replenishment activities. As orders are picked from forward-pick locations,
replenishing from overstock helps avoid delays and maintain inventory accessibility for
pickers (based on established replenishment model). One of the cons of using such systems is
excess labor utilization, particularly in cases where overstock is moved too early or
frequently.

Warehouse execution systems

Warehouse execution systems (WES) offer heightened visibility, dynamic order releases, and
better replenishment execution/management than most traditional warehouse management
systems. WES solutions can either be paired with a WMS or used on their own to gain better
visibility of product movement as they travel through the supply chain. Better still, dedicated
execution and management of inventory replenishment is a core function of a WES.

This functionality is ideal for warehouse/distribution center operations that move a wide
range of SKUs and have limited warehousing space. The WES sends real-time notifications
to operations managers when pallets flow forward and pallet space becomes available.

Also, the aggregated data in WES solutions can be used to create algorithms that send custom
alerts on the status of replenishment space for slow-moving SKUs. Lastly, warehouse
execution systems can also manage picking systems (especially collaborative robots or
machine-controlled systems) thus removing the need for a WMS solution.

HOW MUCH TO ORDER (Economic Order Quantity (EOQ) Model )

Economic Order Quantity Analysis

EOQ is a model that is used to decide optimum order size of stock, which will minimize the
costs of ordering and holding stock. It is a deterministic type of model, which assumes that all
parameters (factors) are known with certainty.
For example.

Calculate the EOQ given that the annual demand is 20,000 units and that the ordering
cost per order and holding cost per unit are 1,000/= and 4,000/= respectively

From QEOQ = √2CoD

Hc

Q = √2x1,000x20000

4000

= √40,000,000

4000

= √10000 = 100 units

Given that for a typical mfg co, the following info is available relating to a particular
financial year.

Cost of raw materials US $10 per unit

Usage per day 100 units

Minimum lead time 20 days

Maximum lead time 30 days

Cost of ordering materials US $400 per order

Carrying costs 10% per annum

Note; assuming that each year consists of 48 working weeks of 5 days per week

Required: Calculate;

i. The re-order level

ii. The re-order quantity (E.O.Q)

iii. Maximum inventory level

v. Minimum inventory level

WHEN TO PLACE AN ORDER (ROP AND JIT)

Just In Time Technique

This is the purchase of goods or materials such that a delivery immediately precedes demand
or use.
It makes sense to attempting to keep low or possibly no inventory of items by relying on very
frequent deliveries possibly on daily basis. The objective is to avoid tying lots of money in
stock (working capital). The organization will need to find extremely reliable suppliers of
defect free products who are JIT oriented. JIT is based on "PULL" concept, whereby
suppliers wait for a signal from their customers before they deliver or replenish.
Advantages/Benefits
Reduced or zero inventory holding costs
Lower working capital costs
Fresher products/material received.
Improved quality due to fresher products
More productive usage of space
Disadvantages/Drawbacks
Suppliers may not be capable
Suppliers will require greater contractual security
Higher transport and delivery costs
The Organization is highly dependent upon its suppliers
If demand suddenly increases, the organization may not be capable of responding to
the change in demand.
It requires more deliveries thus potentially more traffic, pollution and congestion
Other Models include;
VED (Vital, Essential, Desirable)
FSN (Fast, Slow and Non Moving)

WHEN TO PLACE AN ORDER (When There is No Demand Uncertainty)

Reorder Point Formula

R=DXT

R = Reorder Point in Units (of product)

D = Average Daily Demand in Units (of product)

T =Average Performance Cycle in Days (i.e., order cycle time, or the number of days
between placing an order and receiving the order)

Reorder Point Formula

e.g. given that D = 20 products/day

T = 10 days

R= DXT

R = 20 X 10

Reorder Point = 200 products

Note: an order is initiated whenever there are 200 products left in inventory
WHEN TO ORDER (When Demand is Uncertain_)

R = D X T + SS

D = 20 products/day

T = 10 days

SS = 100 products

R = 20 X 10 + 100

Reorder Point = 300 products

Note: an order is initiated whenever there are 300 products left in inventory