WEBVTT Kind: captions Language: en 00:00:00.179 --> 00:00:02.940 Welcome to the Inventory Management Video. 00:00:02.940 --> 00:00:06.529 Good inventory management represents a careful balance 00:00:06.529 --> 00:00:09.700 between risk and opportunity. 00:00:09.700 --> 00:00:13.660 It is essential to maximizing customer satisfaction 00:00:13.660 --> 00:00:16.100 and optimizing operational costs. 00:00:16.260 --> 00:00:22.440 Inventory management has three major goals: Supporting customer service performance objectives 00:00:22.560 --> 00:00:25.199 Optimizing inventory investment 00:00:25.199 --> 00:00:28.080 and aligning with sustainability goals. 00:00:28.080 --> 00:00:34.520 To achieve these goals, inventory management must start with a top-down approach that efficiently 00:00:34.520 --> 00:00:37.820 targets the most important inventory areas. 00:00:37.900 --> 00:00:43.500 Aggregate inventory can be considered in a number of ways, including categories of raw 00:00:43.500 --> 00:00:48.420 material, work in progress, and finished goods. 00:00:48.420 --> 00:00:51.460 One such approach is ABC classification. 00:00:51.460 --> 00:00:56.420 For this video we will focus on ABC inventory in our examples. 00:00:56.420 --> 00:01:02.879 A foundational part of the inventory management process is the aggregate inventory policy, 00:01:02.879 --> 00:01:07.330 which focuses on the overall level of inventory desired. 00:01:07.330 --> 00:01:12.470 Finding the optimal level requires negotiating the competing interests of three areas. 00:01:12.470 --> 00:01:15.150 The first is customer service. 00:01:15.150 --> 00:01:19.310 The marketing team often represents the voice of the customer. 00:01:19.310 --> 00:01:24.909 Customers often want something of everything, in any quantity, at any time regardless of 00:01:24.909 --> 00:01:27.530 if the item has been forecasted or not. 00:01:27.530 --> 00:01:31.619 The second area is operational efficiency. 00:01:31.619 --> 00:01:35.009 Operations wants high efficiency and utilization. 00:01:35.009 --> 00:01:40.580 They want to be able to build what they want, when they want, and in whatever quantity they want. 00:01:40.860 --> 00:01:44.540 The third area is financial return on investments. 00:01:44.549 --> 00:01:49.009 This policy is often guided by earlier strategic decisions. 00:01:49.009 --> 00:01:54.829 Finance often wants low cost operations, satisfied customers, and an effective supply chain with 00:01:54.829 --> 00:01:56.420 associated costs. 00:01:56.420 --> 00:02:01.119 To effectively manage aggregate inventory, it's important to have clearly defined goals 00:02:01.119 --> 00:02:04.660 and objectives which support the strategic plan. 00:02:04.660 --> 00:02:09.669 Having balanced metrics is also important, as it changes the way you look at utilization 00:02:09.669 --> 00:02:13.269 and efficiency or forecast accuracy, among other metrics. 00:02:13.269 --> 00:02:17.909 It is also important to have an effective S&OP process. 00:02:17.909 --> 00:02:24.189 You should stratify your inventory into an ABC classification whereas A items ship the 00:02:24.189 --> 00:02:28.709 same day, or in X days from receipt of order. 00:02:28.709 --> 00:02:35.879 B items ship Y to Z days within receipt of order, and C items are MTO. 00:02:35.879 --> 00:02:40.860 There should be a strong emphasis on continuous improvement, not simply supporting customer 00:02:40.860 --> 00:02:42.900 service with inventory. 00:02:42.900 --> 00:02:48.480 There should also be an emphasis on collaboration within clearly defined supply chain networks. 00:02:48.480 --> 00:02:53.680 Without moving into the area of detailed items, aggregate inventory should also consider the 00:02:53.680 --> 00:02:54.860 following: 00:02:55.020 --> 00:03:01.560 Volume; overall space, transportation, and distribution; control systems, procedures, and policies 00:03:01.569 --> 00:03:06.950 total cost of ownership; and of course, the ongoing balance between 00:03:06.950 --> 00:03:13.560 marketing, operations, and finance all while supporting strategic goals and objectives. 00:03:13.740 --> 00:03:20.159 Aggregate inventory also needs to be concerned with total inventory cost, including inventory 00:03:20.159 --> 00:03:25.540 carrying cost which is often a forgotten element, or possibly an element that is ignored, when 00:03:25.540 --> 00:03:27.700 developing overall inventory strategy. 00:03:27.780 --> 00:03:34.240 Carrying or holding costs reflect all of the expenses associated with owning inventory. 00:03:34.249 --> 00:03:37.909 Carrying costs are directly related to inventory volume. 00:03:37.909 --> 00:03:43.159 They include capital costs, storage costs, and risk costs. 00:03:43.159 --> 00:03:49.250 Capital costs are the cost of money invested in inventory and these can vary by industry. 00:03:49.250 --> 00:03:53.059 Storage costs include things like warehousing and equipment. 00:03:53.059 --> 00:03:57.400 These costs can increase as inventory volume increases. 00:03:57.400 --> 00:04:03.299 Risk costs occur when inventory’s value is reduced, either by reduction of quantity 00:04:03.299 --> 00:04:06.560 or through scrap, theft, or damage. 00:04:06.560 --> 00:04:11.489 Together, these costs are calculated as a percentage of inventory and summed to arrive 00:04:11.489 --> 00:04:13.919 at the carrying costs ratio. 00:04:13.919 --> 00:04:20.819 For example, if we have a 5 percent capital cost, a 13 percent storage cost, and a 2 percent 00:04:20.819 --> 00:04:25.680 risk cost, the total carrying cost is 20 percent. 00:04:25.680 --> 00:04:31.850 As with carrying cost, often companies fail to consider the total landed cost of a product. 00:04:31.850 --> 00:04:36.240 Note the purchase cost is often the smallest element of total landed cost. 00:04:36.240 --> 00:04:42.060 Overall, when a product arrives at a customer’s door—the costs associated are considered 00:04:42.060 --> 00:04:44.530 “landed costs”. 00:04:44.530 --> 00:04:50.740 Landed costs combine item and some carrying costs such as the cost of warehousing, transportation, 00:04:50.740 --> 00:04:51.760 and handling fees. 00:04:51.880 --> 00:04:58.800 Developing the right aggregate inventory policies is crucial to the success of any organization. 00:04:58.810 --> 00:05:04.200 This strategic process will greatly influence one’s ability to support the goals and objectives 00:05:04.200 --> 00:05:06.120 of the organization. 00:05:06.120 --> 00:05:11.159 Meeting the customer’s needs, operational cost objectives, and the financial health 00:05:11.159 --> 00:05:14.800 of the organization are key to this process. 00:05:14.800 --> 00:05:19.490 This all starts with a well designed supply chain strategy that supports each of the functional 00:05:19.490 --> 00:05:22.310 groups while supporting the strategic plan. 00:05:22.310 --> 00:05:27.280 By following these principles and utilizing these inventory methods and techniques, you 00:05:27.280 --> 00:05:31.400 can help to better manage your company’s aggregate inventory. 00:05:31.400 --> 00:05:35.059 Thank you for watching this video, and best of luck with your studies!