Page 170 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 7: Inventory Management

system. Thus, the ideal approach is an adaptive inventory management system that incorporates Notes
elements of both types of logic and allows different strategies to be used with specific customer
or product segments. The rationale for an adaptive system is that customer demand must usually
be treated as independent; however, there are some supply chain collaborations where demand
can be treated as dependent. Thus, at some locations and time within the supply chain, an
interface exists between independent and dependent demand. The closer that interface is to the
final customer, the lower the amount of overall system inventory since dependent demand
environments reduces system demand uncertainty.

Example: A major consumer promotion might cause demand even at the consumer
level to behave like dependent demand since a major demand spike can be anticipated through
knowledge of the promotion schedule.

Self Assessment

Fill in the blanks:
13. …………………… management is the process that implements inventory policy.
14. Inventory control is the ………………… procedure for implementing an inventory policy.
15. …………………… is driven by a production schedule that is defined and controlled by
management policy.

7.6 Inventory Management Practices

An integrated inventory management strategy defines the policies and process used to determine
where to place inventory, when to initiate replenishment shipments, and how much to allocate.
The strategy development process employs three steps to classify products and markets, define
segment strategies, and operationalise policies and parameters.

7.6.1 Product/Market Classification

The objective of product market classification is to focus and refine inventory management
efforts. Product/market classification, which is also called fine-line or ABC classification, groups
products, markets, or customers with similar characteristics to facilitate inventory management.
The classification process recognizes that not all products and markets have the same
characteristics or degree of importance. Sound inventory management requires that classification
be consistent with enterprise strategy and service objectives.
Classification can be based on a variety of measures. The most common are sales profit
contribution, inventory value, usage rate, and nature of the item. The typical classification
process sequences products or markets so that entries with similar characteristics are grouped
together. The products are classified in descending order by sales volume so that the high
volume products are listed first, followed by slower movers. Classification by sales volume is
one of the oldest methods used to establish selective policies or strategies. For most marketing
or logistics applications, a small percentage of the entities account for a large percentage of the
volume. This operationalisation is often called the 80/20 rule or Pareto’s law. The 80/20 rule,
which is based on widespread observations, states that for a typical enterprise 80 percent of the
sales volume is typically accounted for by 20 percent of the products. A corollary to the rule is
that 80 percent of enterprise sales are accounted for by 20 percent of the customers. The reverse
perspective of the rule would state that the remaining 20 percent of sales are obtained from 80
percent of the products, customers, etc. In general terms, the 80/20 rule implies that a majority
of sales results from a relatively few products or customers.

LOVELY PROFESSIONAL UNIVERSITY 165