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This paper is the second in a series of three papers that look at alternative options available to optimise inventory at both an aggregate and parts level. Together, the papers aim to provide a valuable guide to managers, in order to advance their organisation to the next level.
It is assumed that inventory is under control and the basics discussed in the previous paper First Steps to Inventory Management have been established using the ABC system.
The main part of this paper focuses on the development of options available for managers to improve inventory performance, for example, the introduction ofoverage, extending inventory analysis to six or more classes and considering the use of the calculation of safety stock.
The article comprises seven main areas of discussion:
1) Good and Bad Inventory
The three elements of inventory are discussed; batch, safety and overage. A detailed explanation of each of the elements is given and how these are related to research findings. The discussion is backed with simple diagrams to help understanding.
2) Extending Stock Classification for Greater Control
An extension of the ABC principle is explained here. Greater control over inventory can be achieved by looking into factors like seasonality and demand. Effective reduction of the overall inventory within an organisation can be reached by simply increasing the number of classes based on AUV. 3 class, 6 class and 8 class systems are discussed.
3) A worked example showing the impact of moving from 3 to 6 classes
This section shows a detailed analysis of making the transition between using a 3 class system, as discussed in the first paper, to a 6 class system. The results are shown in a set of tables. The advantages are displayed and a further transition to an 8 class system is mentioned.
4) Buffer Stock Methodology
The function of buffer stock is explained in this section; how it is used to mitigate uncertainties in supply and demand and how much buffer stock should be carried. Approaches for managing the balance between carrying inventory and running out of stock are addressed all with a common aim, to be able to compensate for the fluctuations in demand and supply.
5) Simple buffer stock
Here, the common and simplest methods of calculating buffer stock are evaluated and defined. An explanation of safety days and lead time demand are given. A comparison of a scenario based on safety days for buffer stock and the results of using stochastic safety stock is shown in table form.
6) Stochastic buffer stock
This is discussed in detail here and the most important aspect of using scholastics is explained. Buffer stock levels can be set to gain desired service levels. In depth formulae are displayed to explain customer ser vice level and safety stock in different scenarios. It is suggested that experimentation has to be done to determine the best model of reality.
7) A worked example showing the impact of simple safety stock and stochastic safety stock
Calculations are shown here to reflect the stochastic safety stock and the steps taken to achieve these calculations. The calculation of safety stock relies heavily on factors with a number of varying probabilities, which is why a lot of companies prefer to use more simple methods available. It is discussed that, although it is a little more complex, calculating safety stock and finding out its significant impact on your business is worth the effort as you are able to find the right model and move forwards.
Summary of steps in Paper 1, First steps to Inventory Management:
Step 1: Inventory Control
Step 2: Basic Inventory Management
Summary of Steps in Paper 2, Professional Inventory Management:
Step 3: Focused Inventory Analysis
The third and final paper in this series introduces the concept of the K-curve analysis to manage batch stock, discuss the impact and control of overage and to look further at alternative inventory management strategies.
This paper was authored by Dr Geoff Relph, Witek Brzeski and Gail Bradbear in IOM Control Journal, Vol. 29 - No. 05, July/August 2003.
This paper is the first in a set of three that all look at different options available to optimise inventory. This article looks at the basics of ABC control. IOM Control Journal, Vol. 28 - No. 10, December 2002/January 2003.
Professional Inventory Management
The main part of this paper focuses on the development of options available for managers to improve inventory performance and discusses inventory optimisation at aggregate and item level. IOM Control Journal, Vol. 29 - No. 05, July/August 2003.
Extending the Pareto Principle to MRP Controlled Parts and Regaining MRP Control
This article discusses the outcome of an extensive research project. The completion of the project has led to the development of a decision-aid that allows the prediction of eventual MRP System Performance by using the Pareto Principle and setting the MRP Parameters to suit this.