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Inventory Planning

Inventory Planning

  • Inventory planning is the process of determining the optimal quantity and timing of inventory for the purpose of aligning it with sales and production capacity. 
  • Inventory planning involves forecasting demand and deciding exactly how much inventory and when to order.

Demand Classification

  • Dependent demand: is the demand of constituent parts of a finished product. 
    • Dependent demand can either be ‘vertical’ e.g. for a chip actually required in the production of the computer, or ‘horizontal’, e.g. for user manuals that go with the finished product.
  • Independent demand: the opposite of dependent demand in that as a planner, one does not have a view of the customer requirements and as such one is forced to estimate a forecast. 

Forecasting Principles

  • Forecasting has been defined as a technique for using past experiences to project expectations for the future. 
  • Alternatively, a forecast is an estimate of the future level of some variable and the common variables that are forecasted are given as demand levels, supply levels and prices 
  • Every organisation engages in some form of forecasting process, especially when determining long-term needs, business plans and supply chain activities.

ABC Analysis of Inventories

  • The ABC inventory control technique is based on the principle that a small portion of the items may typically represent the bulk of money value of the total inventory used in the production process, while a relatively large number of items may from a small part of the money value of stores. 
  • The money value is ascertained by multiplying the quantity of material of each item by its unit price.
  • Each item of inventory is given A, B or C denomination depending upon the amount spent for that particular item. “A” or the highest value items should be under the tight control and under responsibility of the most experienced personnel, while “C” or the lowest value may be under simple physical control.
  • “A” Category – 5% to 10% of the items represent 70% to 75%of the money value.
  • “B” Category – 15% to 20% of the items represent 15% to 20% of the money. 
  • “C” Category – The remaining number of the items represent 5% to 10% of the money value.
  • The relative position of these items show that items of category A should be under the maximum control, items of category B may not be given that much attention and item C may be under a loose control.

Advantages of ABC Analysis 

  • It ensures a closer and a stricter control over such items, which are having a sizable investment in there. 
  • It releases working capital, which would otherwise have been locked up for a more profitable channel of investment. 
  • It reduces inventory-carrying cost. 
  • It enables the relaxation of control for the ‘C’ items and thus makes it possible for a sufficient buffer stock to be created. 
  • It enables the maintenance of high inventory turnover rate.

Material Requirements Planning

  • MRP is a product-oriented computerised technique aimed at minimising inventory and maintaining delivery schedules. 
  • It relates to the dependent requirements for the materials and components comprising an end product to time periods known as buckets over a planned horizon (typically one year) on the basis of forecasts provided by marketing or sales and other input information. 

The Aims of MRP

  • To synchronise ordering and delivery of materials and components with production requirements.
  • To achieve planned and controlled inventories and ensure that required items are available at the time of usage or not much earlier.
  • To promote planning between the purchaser and the supplier to the advantage of each. 
  • To enable rapid action to be taken to overcome material or component shortages due to emergencies, late delivery, etc.

Applications of MRP

While having elements common to all inventory situations, MRP is most applicable where:

  • the demand for items is dependent
  • continuous, i.e. lumpy and non-uniform
  • there is job, batch and assembly or flow production

Distribution Requirements Planning

  • Distribution Requirements Planning (DRP) is a method designed to consider requirements for multiple distribution centres. 
  • In principle DRP is an application of MRP, by breaking down the flow of goods from source through the network of depots and transportation systems. 
  • The difference is that MRP operates in a dependent demand scenario whilst DRP is an independent demand environment. 
  • DRP allows for warehouses/depots and sales facilities to request products from production facilities.

Just-in-Time (JIT) Purchasing

  • JIT is as an inventory control philosophy whose goal is to maintain just enough material in just the right time to make just the right amount of product. 
  • JIT is a demand pull system where the demand for a product dictates the production requirements. 
  • It looks at inventory as a waste that should be eliminated as much as possible.