Page 171 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Logistics and Supply Chain Management

Notes Once items are classified or grouped, it is common to label each category with a character or
description. High-volume, fast-moving products are often described as “A” items. The moderate
volume items are termed the “B” items, and the low-volume or slow movers are known as “Cs.”
These character labels indicate why this process is often termed ABC analysis. While fine-line
classification often uses three categories, some firms use four or five categories to further refine
classifications. Grouping of similar products facilitates management efforts to establish focused
inventory strategies for specific product segments.

Example: High-volume or fast-moving products are typically targeted for higher service
levels. This often requires that fast-moving items have relatively more safety stock.
Conversely, to reduce overall inventory levels, slower-moving items may be allowed relatively
less safety stock, resulting in lower service levels.

7.6.2 Segment Strategy Definition

The second step is to define the integrated inventory strategy for each product/market group or
segment. The integrated strategy includes specification for all aspects of the inventory
management process including service objectives, forecasting method, management technique,
and review cycle.

The key to establishing selective management strategies is the realization that product segments
have different degrees of importance with respect to achieving the enterprise mission.

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Caution Important differences in inventory responsiveness should be designed into the
policies and procedures used for inventory management.
7.6.3 Operationalise Policies and Parameters

The final step in implementing a focused inventory management strategy is to define detailed
procedures and parameters. The procedures define data requirements, software applications,
performance objectives, and decision guidelines. The parameters delineate values such as review
period length, service objectives, inventory carrying cost percentage, order quantities, and
reorder points. The combination of parameters either determines or can be used to calculate the
precise quantities necessary to make inventory management decisions. Once the procedures
and parameters have been implemented, the environment and performance characteristics must
be monitored on a regular basis. Ongoing monitoring is necessary to ensure that the inventory
management system is meeting desired objectives and that the customer and product
environment does not change substantially.

Example: As demand increases for a specific product, inventory process monitoring
should recognize the need and perhaps suggest a shift from a reactive to an inventory planning
system.

Self Assessment

State whether the following statements are true or false:
16. The strategy development process employs five steps to classify products and markets.
17. Classification can be based on a variety of measures.

18. Ongoing monitoring is necessary to ensure that the inventory management system is
meeting desired objectives.

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