Session 7 - Inventory Management:

Maximizing Efficiency in Global Inventory Management

1. What are the types and the control techniques of inventory? Clearly
explain and provide examples for each type and technique.

ABC analysis
ABC analysis is a strategic approach within inventory management that sorts
inventory items into three distinct categories based on their value and sales
frequency. ABC analysis method is pivotal for efficient inventory control and
optimizing the use of resources in supply chain management.

Class A: These are typically your most expensive items, requiring significant
investment but selling slower than others. Examples include luxury cars in
automotive manufacturers or high-end electronics in retail locations.

Class B: These items don’t require as much capital as Class A items and sell more
frequently, i.e., Moderate-value items with moderate frequency of sales. An
example would be furniture in a home goods store or branded apparel in a
fashion outlet.

Class C: Often inexpensive but with a high frequency of sales. They are crucial for
maintaining steady cash flow and customer satisfaction. Common examples
include office supplies in enterprise resource planning or grocery items in
supermarkets.

https://www.inboundlogistics.com/articles/abc-analysis/

Backordering
A backorder is an order for a good or service that cannot be filled at the current
time due to a lack of available supply. The item may not be held in the company's
available inventory but could still be in production, or the company may need to
still manufacture more of the product.

The nature of the backorder and the number of items on backorder will affect the
amount of time it takes before the customer eventually receives the ordered
product. The higher the number of items back ordered, the higher the demand
for the item. Backorders represent any amount of stock a company's customers
have ordered but have not yet received because it currently isn't available in
stock.

A company's backorders are an important factor in its inventory management

analysis. The number of items on backorder and how long it takes to fulfill these
customer orders can provide insight into how well the company manages its
inventory.

Example: When Apple, Inc. releases new products, they're often met with
exuberant demand around the world. Early adopters often want to get their
hands on the latest technology, and many users plan on upgrading their old
technology for the newer product.

According to Apple's website, shipments will be sent when the items of order
become available.

https://www.investopedia.com/terms/b/backorder.asp

Bulk shipments
Bulk shipping is a form of shipping products in masses. It means the
transportation of large quantities of goods in shipping vessels without packing
them. Examples of goods that are usually transported in bulk include iron ore,
wheat, coal, cement, grains, petroleum-based goods, and others.

Special vessels or containers are used for bulk shipping. They make the
movement of large quantities of cargo easy through any mode of transport.
These special containers have features to hold bulk cargo for long distances. They
also have easy loading and unloading efficiency. These vessels and containers are
generally known as bulk carriers or bulk freighters.

https://cargo.shiprocket.in/blog/bulk-shipping/#

Consignment inventory
Consigned inventory refers to goods sent by their owner (consignor) to another
party (consignee), who holds the goods and sells them on behalf of the owner.
The unique aspect of this arrangement is that the consignor retains ownership of
the inventory until the goods are sold.
https://xledger.com/blog/consigned-inventory-definition-accounting-and-
advantages/

An example of consigned inventory is when a manufacturer or supplier provides

goods to a retailer but retains ownership of those goods until they are sold to the
end customer.

In co-manufacturing, the owner of the product collaborates with a contract

manufacturer to produce goods. The inventory used in this production can
remain in the ownership of the original owner until the end product is sold. In
private label manufacturing, a retailer sells goods under its own brand name, but
the inventory used to produce these goods stays in the ownership of the original
supplier until sold.

For instance, a clothing manufacturer might consign its products to a

department store, where the store displays and sells the items to customers.
However, until a customer purchases the clothing, it remains the manufacturer’s
property.

https://mar-kov.com/what-is-consignment-inventory-management/

Cross docking
Cross-docking is a logistics process where products from suppliers or
manufacturers are directly transferred to a customer, with minimal to no storage
time in between. Essentially, it eliminates the traditional storage phase. This
streamlines the supply chain from point of origin to point of sale.

For example, say you have containerised cargo that is bound for different
destinations. Your goods get sorted into consignments at a cross-docking
distribution centre. They're then transferred onto outbound vehicles for onward
distribution.

https://www.maersk.com/logistics-explained/storage-and-warehousing/
2024/06/24/cross-docking#

Drop shipping
Drop shipping is a retail fulfillment method in which a business doesn’t keep the
products it sells in stock. When a drop-shipping retailer sells a product, it
purchases the item directly from a third party (a manufacturer, wholesaler, or
another retailer) that ships the product directly to a customer.

So if your business adopts drop shipping, you act as a storefront that customers
visit and order products from. Once they place an order, you charge the
consumer, and the drop shipper charges you. You never handle the actual
products.
https://squareup.com/us/en/the-bottom-line/operating-your-business/what-
is-drop-shipping#

Just-in-time (JIT)
The just-in-time (JIT) inventory system is a management strategy that aligns raw-
material orders from suppliers directly with production schedules. Companies
employ this inventory strategy to increase efficiency and decrease waste by
receiving goods only as they need them for the production process, which
reduces inventory costs.

Famous for its JIT inventory system, Toyota Motor Corporation orders parts only
when it receives new car orders. Although the company installed this method in
the 1970s, it took 20 years to perfect it.
https://www.investopedia.com/terms/j/jit.asp

Vendor managed inventory (VMI)

VMI, also known as supplier-managed inventory from a customer's point of view,
is a data-driven initiative where suppliers manage the inventory levels of their
own products, components, or materials at the on-site location of the vendor or
distributor. This helps to reduce both shortages and surpluses

From initial stock provision to continuous monitoring and demand forecasting,

the supplier is responsible for managing your inventory. This is a data-driven
process and works best when the supplier can leverage the sophisticated data
management and AI-powered analytics within your business and integrated
supply chain systems.

Vendors do all re-stocking and ordering, allowing you to offload tasks such as
determining order times, sizes, and frequency. The vendor actually still owns the
inventory

Example: Distribution of pharmaceutical medications: To accurately coordinate

drug supplies at healthcare facilities and pharmacies, VMI ensures that essential
medications are available for distribution, particularly those requiring stringent
regulatory compliance and storage conditions.

2. What are the strategies and technologies that can be applied to

manage inventories?

Technology
Enterprise Resource Planning (ERP) System
 - Integrated purchasing and manufacturing system (e.g. materials resource
planning)
- Distribution system (e.g. distribution requirements planning)
- Integrated financial package
- E-commerce or electronic data interchange (EDI) capacity with suppliers
and customers
- Barcoding and RFID tags in warehouses and factories
- Online inventory management
- Online transportation data from carriers

Electronic Data Interchange (EDI)

- International standard computer system that allows company-to-company
electronic exchange
- EDI = quicker communication, improved science, reduced paperwork,
faster recognition sales

Stock Control System

- Computer inventory system to manage and locate raw materials,
components and finished goods
- Provides detailed information on what has sold, how quickly and for how
much

E-Commerce
- Conducting business operations using the Internet
- Advantages: market access and competition, improved communications,
real time access to data, reduced costs

Barcoding and RFID Tags

- Barcodes contain product information
- RFID tags emit radio frequencies detected by reader or sensors up to 100
metres away

Selective Inventory Management Strategies

Improving data collection

- Know where inventory is, lead times, where cuts can be made
- Establish good counting system

Reducing lead times

- Investigate faster ways to get products to customers

Increasing production speed

- Work with less inventory to meet demand by getting goods faster from
manufacturer
Avoiding economies of scale
- Purchasing should match demand for product

Using hedge inventory

- Forecast what is necessary to manage inventories and mitigate risks
- Keep levels aligned with product demand

Basing inventories on market demand

- Pair forecast with market demand

Using partnerships
- Work with supplier partnerships, e.g. share information

Having a quick response

- Collaborate with retailers to minimize inventory

3. What is a circular supply chain? Clearly explain and provide examples

to demonstrate if needed

A circular supply chain involves a company reusing or repurposing waste and

customer returns to convert those into new or refurbished products. A circular
supply chain aims to minimize the use of raw materials and minimize discarded
waste materials. Because of this reuse, unlike the traditional linear supply chain
model, the circular supply chain does not stop at the customer but rather moves
in a continuous cycle. With sustainability a greater concern than ever for
businesses and customers, many companies are shifting to a circular supply
chain
https://www.inteklogistics.com/blog/what-is-circular-supply-chain

The image highlights the linear supply chain process in a traditional

manufacturing system. Each stage represents a step in bringing a product from
raw materials to the final user. Here's a breakdown of each phase:

1. Raw Materials

○ The starting point, where natural resources (metals, wood, plastics,

etc.) are extracted for production.
2. Part Fabrication

○ Raw materials are processed into components used to build more

complex parts.
○ Example: Steel is turned into car body panels, or silicon is used to
make semiconductor chips.
3. Modules Subassembly

○ Smaller components are combined into functional modules.

○ Example: A smartphone's camera module or a car’s braking system.
4. Parts Assembly
 ○ Modules and individual parts are assembled into a complete
product.
○ Example: A laptop is assembled from the motherboard, battery,
keyboard, and screen.
5. Distribution

○ Finished products are shipped to retailers or directly to consumers.

○ Logistics and supply chain management ensure efficient delivery.
6. User

○ The final consumer uses the product.

This is the flow of the traditional linear supply chain model, where products are
typically disposed of at the end of their life.

However, The circular supply chain will not stop at that phase. It integrates reuse,
remanufacturing, and recycling to extend the product life cycle.

Reuse → Distribution → User

● Instead of disposing of a product, it is reused as-is.

● Example: Refillable glass bottles in the beverage industry.

Repair → Parts Assembly → Distribution → User

 ● If a product is damaged, it can be repaired instead of being replaced
entirely.
● Example: Repairing a broken smartphone screen rather than buying a new
phone.

Remanufacture → Modules Subassembly → Parts Assembly → Distribution →

User

● Components from old products are remanufactured into like-new

products.
● Example: Car manufacturers remanufacturing engines instead of
producing new ones.

Recycle → Part Fabrication → Modules Subassembly → Parts Assembly →

Distribution → User

● Materials from end-of-life products are recycled into raw materials for new
products.
● Example: Recycling plastic bottles into synthetic fabric for clothing.

Trash → End of Life

● If none of the above processes are feasible, the product is discarded as

waste.
● This is the least sustainable option and should be minimized.

The circular supply chain prioritizes reuse, repair, remanufacturing, and recycling
before discarding waste.

It extends product life, reduces environmental impact, and promotes resource

efficiency.

4. Describe reasons of product returns and the potential consequences of

each reason
Blue: customer

Red: manufacturer

Green: distributor

Buy outs

Reason: Customers may return products that were purchased in bulk or for a
specific project but are no longer needed.

Consequences: Can lead to excess inventory and potential write-offs if the

returned products cannot be resold or repurposed.

Job-outs:

- Reason: Products may be returned due to job cancellations or changes in

project requirements.

- Consequences: Potential loss of revenue and increased inventory levels.

Recalls and safety issues:

- Reason: Products may be recalled due to safety concerns or regulatory issues.

- Consequences: Significant financial losses, damage to brand reputation, and

potential legal liabilities.

=> Customer do not want the products any more, no problem from the products
Clerical errors:

- Reason: Mistakes in order processing, shipping, or billing can result in incorrect

or unwanted products being delivered.

- Consequences: Increased administrative costs, potential damage to customer

relationships, and lost revenue.

Damaged

- Reason: Products may be damaged during shipping or storage.

- Consequences: Lost revenue, increased disposal costs, and potential damage to

brand reputation.

Overstock/surplus:

- Reason: Excess inventory that cannot be sold through regular channels.

- Consequences: Increased storage costs, potential markdowns or write-offs, and

tied-up capital.

Salvage:

- Reason: Products that are heavily damaged or obsolete may be salvaged for
parts or recycled materials.

- Consequences: Reduced revenue from the original sale of the product.

Close-outs

- Reason: Retailers may return end-of-life or discontinued products to the

supplier.

- Consequences: Can lead to excess inventory and potential write-offs for the
supplier.

Defective or inferior quality

- Reason: Products may not meet quality standards or have manufacturing

defects.

- Consequences: Loss of customer trust, increased warranty claims, and potential

legal liabilities

Non-defective:

- Reason: Customers may return products that are not actually defective but are
simply not desired.

- Consequences: Increased return processing costs and potential damage to

product resale value.
Warranty claims and repair:

- Reason: Customers may return products for repair or replacement under

warranty.

- Consequences: Increased repair and replacement costs, potential loss of

revenue, and impact on customer satisfaction

5. When the Recall is required, what are the possible steps that the
organization needs to take into account?

The chart illustrates the Product Recall Process, showing how a company
manages recalls when a potential issue with a product arises.

1. Initiation of the Recall Process

- The process can start from four sources:

+ Consumer Complaint: Customers report a problem.
+ Internal Inspection or Production Report: Quality control identifies an issue.
+ Regulator Notification: Authorities notify the company of a safety concern.
+ Employee Observation: Workers detect a possible defect.

2. Preliminary Assessment of the Issue

- If no risk is found, the company conducts Internal Follow-Up as Needed.
- If a potential hazard exists, further steps are taken.

3. Managing the Risk

- A Recall Committee is initiated to oversee the response.
- A Comprehensive Hazard/Risk Analysis is conducted to determine the
severity of the issue.
- Management and affected staff are informed about the potential risk.

4. Decision on Actions
- If the risk is significant, the company initiates the recall process to
remove the product from the market.
- If the issue is minor with minimal risk, an action plan is determined for
mitigation without a full recall.