Inventory Management

Question 1

The Logistics Cycle

Answer 1

Aim: to give quality customer service

Steps

1: Selecting the right product mix
2: Determine how much through quantification then procure them
3: After procurement, IM comes in- store and distribute the inventory
4: Serve Customers

(The entire process is monitored for quality)

At the centre is LMIS (logistics management info system) (an automated system on computers in pharmacies etc) (helps to manage inventory) -requires proper staffing, budgeting, supervision and evaluation

Pipeline monitoring- important to maintain healthy r/ship w/ suppliers so it doesn’t cost you too much

Adaptability- be adaptable to any environmental changes

Question 2

Inventory management

Answer 2

Involves making right decisions in terms of how we increase and decrease objectives based on inventory

Question 3

Objectives for IM

Answer 3

The level of inventory throughput (inventory flowing through)

Planning and controlling inventory

Question 4

Steps involved in Logistics Management

Answer 4

Defining the aggregate inventory plan
Developing item level inventory policies
Implementing and monitoring the plan

Question 5

Aggregate Level Plan

Answer 5

Has to do with decisions about general goals and policies (on a “global” level)

Includes service level- determines how much demand we are gonna be meeting. Some we supply 100%, others

In the midst of scare resources we can’t have 100% as service goal. May have to settle for 75%, 80% etc.

Also need to know Inventory Investment Budget- how much money do you have or expecting to have to be able to invest in inventory

Inventory management system and system specs to see what kind of IMS we will be operating.

Top management makes the decisions

Objectives and activities/strategies to be implemented must be integrated- must have resources to achieve goals and knowing the persons who will implement them as well as the availability of resources

Question 6

Item Level

Answer 6

Which items are we gonna order as well as inventory mix

Requires market surveillance- may requires pharmaceuticals as well as confectionaries etc

Classification of items- based on this are we gonna aim to meet 100% of the demand of 80% for example.

When are we gonna order

How many should we order

Monitoring systems

Classification determines service level we are going to set for that item as well as how closely to monitor the item

Question 7

Goal of IM

Answer 7

To maintain as little inventory as possible for as short a time as possible and still meet service level requirements

Delicate balancing act b/w too little and too much inventory

Question 8

Why is inventory so important?

Answer 8

It takes up a lot of the funds that a company has so we have to manage it properly.

It is a major asset investment
It ties up capital
Incurs costs
Must be managed effectively to prevent or minimise a waste of financial resources, shortage or drugs or decreased pt care.

Must cover a functional purpose: It is not necessary unless it covering one of three functional purposes

Question 9

Three functional purposes of IM

Answer 9

Anticipation inventory
Fluctuation inventory
Lot size inventory

Question 10

Anticipation inventory

Answer 10

Maintained to cover anticipated/expected peak demand systems eg seasonality (Allergy meds are expected to go more during allergy season)
At Christmas prices may go up so purchase extra in anticipation before it happens

Aka Hedging inventory- hedges against anticipated price increases or stock outs.

Question 11

Fluctuation inventory

Answer 11

AKA Safety Stock Inventory

SS not carried for every time

Fluctuation inventory guards against unpredictable or random situations so as to reduce stockout when fluctuations occur. For eg- if a supplier is not very reliable then you may have to bring SS of their items because you don’t know if they will get it to you in time to supply the demand

Question 12

Lot size inventory

Answer 12

Justifies purchasing larger quantities that needed immediately or at the moment

This is done to improve operating efficiencies
Take advantage of discounts, lower shipping costs, reduced startup costs
Suppliers delivery policies

Be careful because inventory carries costs. Sometimes goods are given on consignment and this allows you the bear the burden of addition carrying costs even though you don’t have to pay up front, it can expire on you if it is not fast-moving etc

Question 13

Why must we ask if inventory can be reduced or eliminated?

Answer 13

This is done to cut down on the carrying cost to the company for carrying that inventory

Question 14

Types of inventory costs

Answer 14

Carrying costs

Question 15

Carrying costs

Answer 15

Cost incurred by having the item in stock (in your physical space)

Can include: 
Capital investment (cash flow )- the money could have been used for something else so the longer you have it in your inventory, the longer you don't have access to your money, affecting cash flow 

Storage and handling costs- the more you have the more space and staff you need (both cost money)

Security- more goods, more insurance premiums

Run risk of obsolesce and expiration

More inventory, greater chance of pilferage ( it will be harder to keep eye on goods)

Record keeping- more goods, more record keeping

Question 16

Acquisition Costs

Answer 16

Costs to acquire or procure inventory

Cost of writing/calling in the order (takes time, time is money)
Prepare specifications (how many you need)
Record order
Do order follow up- get on phone to follow up to see where it is (takes time)
Transportation changes - suppliers may charge or you have to send for items
Cost of receiving inventory into stock- requires staff manpower (takes time, time=money)
Processing of invoices (take time)

Question 17

Stock Out Costs

Answer 17

Not easy to determine . Usually has to be estimated

Additional expediting effort- rush order of item may take additional cost

Paperwork

Lost customers=lost revenue

Poor service

Poor image

Effects on staff morale and efficiency

Question 18

Inventory Costs for larger orders (less frequent)

Answer 18

Carrying cost - (inc)
Acquisition Cost - (dec)
Stock out costs - (dec)

Question 19

Inventory cost for smaller orders (more frequent)

Answer 19

Carrying costs - (dec)
Acquisition costs- (inc)
Stock out costs- (inc)

Question 20

Larger or smaller orders?

Answer 20

Decision is based on which costs mean more to you as an organization

Question 21

Another name for carrying costs

Answer 21

Holding costs

Question 22

Six key issues to consider when designing an effective inventory management system

Answer 22

1. The supply system’s purpose and the type of distribution system
   - Dependent demand system: usually used in a manufacturing system. Orders inventory based on production demand. Material Requirements Planning System (MRPS)

-Independent demand system: applicable to management of procurement and distribution of finished goods. Order frequency and quantity dependent on historical demand.

Push system- usually a central authority or manufacturers who put out products based on how much is to go out into the marketplace regardless of demand. This like promotions can be used to increase outcomes. Used when stating new programmes (for eg when HIV meds came out and were expensive and agency sponsored some and they were therefore placed in certain critical areas and when there is rationing.

Push system doesn’t usually take stock on hand into consideration, results in over or undersupply, may lengthen lead time when new consignments arrive (takes time to sort out who should get what and where goods should be distributed to and requires effective communication systems and coordination.

Pull system- Operating units order drugs from a warehouse or supplier according to anticipated demand. It is demand-driven by customers demand. Apart from push system stuff, pull system is used.

2. Selection of items to be stocked
   The main reason for holding stock is to ensure an acceptable service level at all times. BUT not all levels are equal.
   Selection should be based on regularity and volume of consumption and classification of the item. This varies depending on public or private sector

Private sector uses ABC analysis
Public sector uses VEN analysis

3. Reordering policy
4. Balance b/w service and stock levels
5. Inventory Control systems (records and reports, auditing)
6. Controlling costs

Question 23

VEN Analysis

Answer 23

Classifies based on therapeutic applications

V (Vital )= Life saving medicines (monitored closesty to not have stockouts) - IV fluids, insulin, oxytocin, epinephrine etc (crash cart items)

E (Essential)= not life saving but need to ensure some stocks are available (hopefully 70-80% of the time) - folic acid, vitamin K, vitamin B12, vitamin B6

N (Necessary)- if any need to be dropped of, these are the first to go. Things that require symptomatic treatment that can be obtained from private pharmacies easily or are low cost eg allergy tabs, cough and cold meds, pain rubs, painkillers, other vitamins etc

After purchasing essentials then necessaries can be considered if anything is left

Question 24

Call-off orders

Answer 24

Order items based on demand on how they are moving

Question 25

ABC Analysis

Answer 25

Classifies items based on how they contribute to revenue

Based on Pareto’s Law or the 80/20 rule

A, B, C classificaitons represent based on descending importance

Unit cost x annual usage= annual value (usage value)

Management determines the cut off point for A items

Question 26

ABC Calc

Answer 26

1. Find annual usage (Unit cost x annual usage)
2. Sort usage value column in descending order
3. Classify them into AB and C items
4. Add a column for cumulative usage value (add the previous value and continue until you get final (total))
5. Add another column for cumulative % and the manufACTURERS cut off point in terms of cumulative usage value would be the percentage the manufacture gave for A x the total

B items - for example if manufacture says B items are 10% then add that 10 % to the A value % for example 85%. The B value cut off point would then be 95% of the cumulative total. If the value is a bit higher then you can still use it if it is closer to a value

Everything below is C items

Carry safety stock for A items but not of B and C because there is a carrying cost to carrying inventory.

A value usually not below 70/75%

Question 26

ABC Calc

Answer 26

1. Find annual usage (Unit cost x annual usage)
2. Sort usage value column in descending order
3. Classify them into AB and C items
4. Add a column for cumulative usage value (add the previous value and continue until you get final (total))
5. Add another column for cumulative % and the manufACTURERS cut off point in terms of cumulative usage value would be the percentage the manufacture gave for A x the total

B items - for example if manufacture says B items are 10% then add that 10 % to the A value % for example 85%. The B value cut off point would then be 95% of the cumulative total. If the value is a bit higher then you can still use it if it is closer to a value

Everything below is C items

Carry safety stock for A items but not of B and C because there is a carrying cost to carrying inventory.

A value usually not below 70/75%

Question 27

Reordering Policy

Answer 27

2 basic approaches

Fixed period, variable quantity (scheduled)
-set frequency (every month or week etc).
-does not require automated support
-visual inspection and physical amount determine amount/quantity to be ordered
OQ=[D(L+RP)+SS]-QOH
D-demand
L-lead time
RP-review period
SS-safety stock
QOH- quality on hand

Variable period, fixed quantity
ROP/EOQ method
Based on ideal inventory model
The concept is that items are being used in a steady pattern such that demand and supply are steady and it aims to minimise inventory levels.

In ICM- the idea is that an order would have been placed at the reorder point. This is based on rate of usage or item and lead time. It should arrive before SS. Should have sufficient quantity to cover lead time as well. But demand is not always constant and suppliers are not always reliable.

Question 28

ROP/EOQ model

Answer 28

Reorder Point System
Automated system

OP= D x L + SS

OP- order point quantity
D- anticipated demand
L- lead time
S- safety stock

Economic Order Quantity
Determine OQ by finding best trade-off b/w order cost and holding cost (competing forces) (computer generated)

Order cost affected by frequency

Holding cost affected by quantity

Q= square root (2DS/H)
D-demand per period
S-cost per period
H-holding cost per unit/period

Disadvantage of ROP/EOQ method
Not many managers know the order cost or holding cost

EOQ assumptions (may not hold true)
Stable demand

Question 29

EOQ assumptions

Answer 29

EOQ assumptions (may not hold true)
Stable demand

Question 30

Two Bin System

Answer 30

ROP/EOQ approach requires real time perpetual inventory management system

Justified for A items

May not be economically feasible for C items

Solution is TWO BIN SYSTEM

Bin refers to where you hold items

Bin 1 holds moving inventory (>ROPQ)
Bin 2 holds ROP quantity [(DxL) + SS]

Complete order form on top of bin 2
When bin 1 runs out it is a signal to place order
Then move inventory from bin 2 to bin 1 while waiting on the order to come in. It should come in before the new bin 1 is finished.

Place order when bin 1 empty and use from bin 2
When order received move balance of bin 2 to bin 1 and new stock goes to bin 2= ROPQ and rest goes into bin 1

Question 31

Min Max Method

Answer 31

Simpler than ROP/EOQ method

Non-consumption approach

Computer signals when you approaching a low quantity

Order quantity to take stock to a pre determined max quantity

Appropriate for steady demand items

Question 32

Inventory Management Dilemma

Answer 32

On the stock minimization side, the argument is that stock is a liability from a financial perspective. Companies often invest a significant amount of money in inventory, and then simply store it in a warehouse. This means that inventory (if it’s not sold) can be a major source of expenditure and debt, and at the same time a loss of financial investments that could have been realized if the capital had not been tied to inventory. Companies should thus strive to minimize the amount of stock they hold – keeping this as close to zero as possible.

The other side of the argument is that stock is a source of potential profits. Companies need enough inventory to be able to consistently fulfill market demand and generate revenue, and should therefore build up and store a healthy amount of stock. Opting not to stockpile inventory can lead to stock-outs and missed sales opportunities – which can take a tremendous toll on the bottom line. This “fear of missing out” on potential profits is why many companies – although they complain about the costs of inventory – don’t dare to lower their stock levels.

Although both arguments have some validity, the ultimate solution to the “Inventory Dilemma” is not stockpiling or stock minimization, and both approaches (if they are not executed in an intelligent and strategic manner) can have a devastating financial impact (leaving companies with too much or not enough stock).

Indeed, the solution to the “Inventory Dilemma” is inventory optimization – which means keeping the optimal amount of stock so that you can satisfy demand and avoid tying up cash. Companies that achieve inventory optimization are able to perfectly calibrate their inventory levels to ensure that they always have the right amount of the right products in the right locations at the right times.

Question 33

4. Balance b/w service and stock levels

Answer 33

Service level is the measurement of service or needs met from supplier to consumer.

quantity ordered/quantity issued x 100%

main determinant is safety stock. higher the SS of items in demand, the higher the SL

Question 34

Buffer Management

Answer 34

Goldratt’s theory of constraints (TOC)- approach to overcome IM dilemma

Response to poor record of traditional

Red, Yellow and Green Zones

If when stock arrives but we have not used more than 1/3 then (green zone) , if when order arrives we are in yellow zone that is our signal to get ready for action but still don’t take any yet
red zone- resize buffer
usually preferred to order more frequently instead of order more
Reserved for “A” items

Question 34

Buffer Management

Answer 34

Goldratt’s theory of constraints (TOC)- approach to overcome IM dilemma

Response to poor record of traditional

Red, Yellow and Green Zones

If when stock arrives but we have not used more than 1/3 then (green zone) , if when order arrives we are in yellow zone that is our signal to get ready for action but still don’t take any yet
red zone- resize buffer
usually preferred to order more frequently instead of order more
Reserved for “A” items

Question 35

Inventory Control Systems

Answer 35

About monitoring stock. Physical count is to agree with stock card (no discrepancies)