Transcript of Understanding Inventory Management (INSIDE THE SUPPLY CHAIN SERIES) Lesson 1

welcome everyone I'm Professor Rodriguez and today we're going to start out our new series that is called inside the supply chain in this series we're going to dive into some of the most important topics within Supply Chain management in our first lesson today we're going to talk about understanding Inventory management now whether you're a seasoned professional or you're just starting out your journey in supply chain or Logistics this video is going to help you find that knowledge and give you some real world examples on how to effectively manage inventories in your supply chain before we begin don't forget to hit that subscribe button and ring the bell icon to stay updated on our upcoming videos in this series so what do you say let's go inside the supply chain with today's episode understanding Inventory management okay so what exactly we're going to talk about Cynthia in this episode where we're going to talk about the importance of inventory management the types of inventory management inventory costing methods inventory control practices and finally a little bit about technology and inventory management at the end of the lesson we're going to summarize some of the key learnings within this lesson today okay so let's get started with this the first part of the lesson is going to be at the importance of inventory management now Inventory management plays a very crucial or pivotal role in supply chain efficiency it involves balancing supply and demand as well as ensuring the right products are available at the right time while avoiding access or shortage of goods now efficient Inventory management can also significantly impact your organization's profitability as well as customer satisfaction and the companies overall operational performance to give you a bit of an analogy between something you can relate to think of inventory management as the heartbeat of any supply chain because it ensures that there's a smooth flow of goods and resources from The Source all the way to the end user similar to how your heart sort of flows the blood throughout all your different organs and all the parts in your body and it creates this Rhythm as to how your body functions that all comes from your heart and its heartbeat Inventory management can be the heartbeat but of a supply chain or a company and its supply chain especially because it plays a very important role in optimizing that all the different barriers aspects of a supply chain and its operations run as smoothly as possible and can actually function so now we're going to take a look at some of these operations or what is within Inventory management yeah look at those next now some of the aspects we're going to talk about is balancing Supply in demand I mentioned that a little bit earlier but we're gonna talk about it here too Inventory management is going to be all about finding the perfect balance between supply and demand that maintaining the right level of inventory companies or organizations can ensure that the products are readily available when customers need them this reduces stock outs which can lead to Lost sales opportunities and very dissatisfied customers on the other hand holding excess inventory tights up valuable capital and incurs holding costs it also risks product obsoles or spoilage leading to unnecessary losses effective Inventory management helps an organization avoid overstocking and can optimize the use of any warehouse Inventory management also directly impacts customer satisfaction I mentioned that a little bit now having the right products in stock at the right time is going to ensure that there's timely order fulfillment which enhances the overall customer experience if we have what we need in stock and we could get it to the customer when they need it then the whole customer experience is going to be satisfactory satisfied customers are more likely to become repeat buyers or repeat customers and advocate for our brand to others that they know this is all going to contribute to long-term business success Inventory management affects the Financial Health of an organization as well so it has a financial impact by optimizing inventory levels and keeping our inventory management uh controlled correctly businesses can really free up cash that can be used for other strategic initiatives or other Investments it also helps reduce working capital requirements while improving financial ratios and the overall performance effective Inventory management enhances the resilience of the supply chain when disruptions occur and they're bound to happen A disruption is something that alters the flow of your supply chain When A disruption occurs organizations with well-managed inventory are better equipped to respond promptly and mitigate the impact on operations so that's what we mean by supply chain resilience now understanding the importance of inventory management and some of the things I just mentioned is going to be really crucial for supply chain professionals like you and me because we need to know how this impacts the multiple different aspects of our business performance how is going to affect customers satisfaction and also impact our financial stability up next we're going to explore the various Inventory management techniques and I'm going to give you some real world examples that demonstrate their application in the industry now let's talk about types of inventory now there are various types of inventory in a supply chain there's raw material work in progress and finished goods for instance raw materials are crucial for a manufacturing work in progress inventory represent products in various stages of production and finished goods are ready for delivery to customers now keeping a careful or a very structure balance of these inventory types is going to be key to a good supply chain in this particular section we're going to explore the different types of inventory that are present in a supply chain and each type will serve a specific purpose in the flow of goods in materials and understanding this and how they are different and similar it's going to be really crucial for somebody working in Inventory management okay so first up is raw materials raw materials are the basic components required to produce Goods they serve as the starting point of the production process for manufacturers having the right quantity and the quality of our materials is important for ensuring smooth and an uninterrupted production managing raw material inventory efficiently ensures the product lines can run without any kind of delays or disruptions due to shortages next we have work in progress or WIP as sometimes it's referred to work in progress inventory represents products at different stages of the production process this includes partially completed Goods that are still undergoing manufacturing um or some sort of assembly being able to optimize our work in progress inventory is very important for us to be able to maintain a steady production flow and to minimize any kind of bottlenecks in our production lines finally we have finished goods inventory now finished goods are the end products or final products that are ready for delivery to customers these goods are waiting to be shipped from the Distribution Center to their final destination maintaining the right level of finished goods inventory is very important in order to meet customer demand promptly we want to make sure like I mentioned in a couple of slides ago we want to make sure that we have a right balance of supply and demand and having enough supply of finished goods to satisfy the customers needs to better grasp the significance of the different inventory types let's consider a real world example now imagine an automobile manufacturing plant they need a steady supply of raw materials like steel Plastics and electronic components to produce vehicles ensuring that the right quantity of these raw materials is available in the production line is essential for an uninterrupted Vehicle Assembly as the vehicles move through the different stages of assembly they become work in progress inventory a proper management of this work in progress inventory is going to make sure that each stage of the assembly process is running smoothly and efficiently finally once everything's done and once the vehicles are fully assembled they'll become finished goods inventory that will be waiting to be shipped to dealerships or directly to customers the proper management of the Finnish goods inventory ensures that customers can get the vehicles they want promptly and therefore is going to enhance customer satisfaction now all of this is important because understanding the different types of inventory management is going to be really fundamental to comprehending the flow of the goods within a supply chain each type has its unique role in ensuring the smooth operation of production and the timely delivery of products to customers next we're going to explore the various inventory costing methods that are used by organizations to track the value of their inventory so now that we understand the importance of inventory management and now we know the types of inventory you remember those raw materials work in progress and finished goods we're going to explore inventory costing method the way an organization values its inventory affects not only financial reporting but also the calculation of cost of goods sold tax liabilities and the overall profitability of the business there are three primary inventory casting methods used in Supply Chain management which we're going to talk about next that's going to be first in first down or fifo last in first stout or lifo and average cost we're going to start out with first in first out or as sometimes refer to fifo now fifo assumes that the first inventory items purchased or produced are the first to be sold let me repeat that one more time first thing first out assumes that the first inventory items that were purchased or produced are the first to be sold in other words the oldest inventory is recorded as being the sold first this method is often compared to a queue where items are removed from the front or the first in before those from the back or the more recent ones what are the advantages of fifo well it reflects a more accurate representation of current cost since a newer inventory items are valued at their current market prices generally results in a higher net income during periods of inflation as the older lower cost items are recorded as being sold first leaving the higher cost items still in inventory next we have last in first out or lifo lifel assumes that the most recent inventory items purchased or produced are the first to be sold I repeat the most recent inventory items that were purchased or produced will be the first to be sold in other words the newest inventory is recorded as being sold first this method is compared to a stack where the most recent items are the removed first we take from the top of the stack so the newest are the first to be removed the advantages of lifo well it may result in lower income tax liability during periods of inflation as the recent higher cost items are recorded as sold first leaving lower cost items still in inventory this may be more reflective of the actual flow of inventory in certain industries especially those within the food industry that deal with a lot of perishable items next we have average costs the average cost method calculates the cost of goods sold and ending inventory by taking the average cost of all the units in inventory during the accounting period it is computed by dividing the total cost of goods available for sale by the total number of units available for sale the advantages of average costs well it's simple and easy to calculate making it suitable for organizations with a large variety of inventory items this also Smooths out any fluctuation in cost providing a more stable and predictable cost of goods sold keep in mind that choosing the most appropriate inventory costing method depends on various factors such as industry practices financial reporting requirements and even tax considerations each method has its advantages and implications on the financial statements of an organization companies have to fully and carefully assess their unique circumstances to be able to select the method that best aligns with their business needs and goals now to better understand these inventory costing methods I'm going to give you another real world example now imagine at Food retailer that operates in an inflationary Market kind of like the one we're currently fail you see in 2023 during such periods the cost of purchasing inventory tends to rise we've all seen it right food is getting more expensive things are getting more expensive to buy that can also be said for inventory if the retailer uses the fifo first in first cell method the older lower cost items will be recorded as sold first leading to a higher net income on the financial statements we bought it cheaper with sold at our more expensive prices therefore it's going to show up on our income statement or financial statements as making a higher net income on the other hand if the company uses the lifo method last in first out method the most recent higher cost items will be recorded as sold first this is going to result in a lower taxable income meaning we're buying it at higher prices we're selling it also at a higher price but we're not making as much profit therefore what profit we do get taxed on is going to be lower so you can see the choice of inventory costing method can significantly impact the organization's financial performance and their tax liabilities now let's explore some inventory control practices or sometimes known as techniques that can help optimize and control inventory levels in a supply chain effective inventory control is essential to strike the right balance between meeting customer demand and minimizing holding costs in this section we'll discuss two key inventory control techniques ABC analysis economic order quantity first up is ABC analysis ABC analysis is a widely used inventory control technique that characterizes items based on their value and importance to the business items in inventory are divided into three categories a b and c hence the name ABC analysis the category a these are high value items that represent a significant portion of the total inventory cost but they constitute a smaller fraction of the total number of items they require more frequent monitoring and attention as they can significantly impact the organization's financials once again category a items they're higher value items meaning usually more expensive items but they make up a smaller portion of the things we sell all right so category a high value items that represent a significant portion of the total inventory cost but they are a smaller fraction of the total number of items we hold in inventory category B these are items that are moderate in value and in importance they have a medium impact on inventory cost and are managed with a balance approach between category A and C as we're going to see up next they're sort of middle of the way next we have category C these are low value items collectively make up a large portion of the total number of items but account for a smaller fraction of the overall inventory cost they're managed with less frequent monitoring as they have a lower Financial impact once again these are lower value items that make up a larger portion of the total number of items we have in inventory but there are less of an impact on our inventory cause because it might be cheaper in value to understand the practical application of an ABC analysis in Inventory management let's take a look at another real world example within the retail industry in particular now imagine a retail chain that sells a wide range of products including Electronics apparel and Home Goods the chain operates in multiple stores across various regions each with its unique customer preferences and demand patterns the company's inventory includes thousands of skus or stocky B units making Inventory management a complex task the application of the ABC analysis comes into play here to optimize your inventory management and focus on the most critical items this retail chain decides to use ABC analysis this technique classifies inventory into three categories based on their significance in terms of sales volume and value as you learned just now category a they have a high priority items in category a items represent the top 20 percent of products that contribute to approximately eighty percent of the total sales revenue these are high demand high value items with significant sales values examples may include smartphones or popular apparel collections or maybe the best selling home appliances for the company they need to ensure that there's a sufficient stock levels for category a items in order to meet customer demand as well as maximize Revenue generation we move on to category B category B are moderate priority items category B items make up the middle 30 percent of products that contribute to about 15 to 25 percent of the total sales revenue these items have moderate demand and value and examples could include mid-range Electronics seasonal fashion items and small kitchen appliances while these items are important their inventory management requires a balanced approach to avoid overstocking or stock outs finally we go into category C which are the low priority items category C items constitute the remaining 50 of products but contribute to only around five to ten percent of the total sales revenue these items have relatively low sales volumes and low value examples may include Niche electronic accessories or slow moving apparel items and occasional household products Inventory management for category C items focuses on optimizing stock levels to minimize carrying cost while ensuring they are available when needed next we move on to economic order quantity or eoq now economic order quantity is a mathematical formula used to calculate the optimal order quantity for inventory items the objective is to minimize the total cost associated with ordering and holding inventory for economic order quantity it takes into account various factors including ordering costs carrying costs and demand rates now for economic order quantity we need to have a formula or there's a formula we use and the formula that you can see here is eoq or economic order quantity equals the square root of 2 times D times s divided by h where D represents the annual demand or usage rate of the item s represents the order ring cost per order and H represents the holding cost per unit per year now the comparison between the two ABC analysis and economic order quantity they're both valuable inventory control techniques that can help supply chain professionals optimize their inventory levels by focusing efforts on high value items and by calculating the optimal order quantity we can as an organization help reduce costs as well as improve inventory turnover and enhance overall supply chain performance whether your company is a size to implement one or the other or choose both that will depend on the different factors that affect your organization and the decisions that you make as an inventory management professional now let's take a look at another real world example now in this case imagine a retail store that specializes in selling popular electronic gadgets like smartphones tablets and smart watches this store experiences consistent demand for these gadgets throughout the year with occasional spikes during promotional events and the holiday seasons the store aims to minimize inventory holding costs while ensuring that they can meet customer demand promptly at present the store places frequent orders with their suppliers to ensure that they always have enough stock on hand each order has a fixed quantity which is determined based on the store's past sales and anticipated demand however by doing this and using this ordering approach it often results in high holding costs due to excess unnecessary inventory to optimize your inventory management and reduce these holding costs the retail store has decided to use the economic order quantity method or to calculate the economic order quantity for each electronic Gadget that they sell or for each item that they have in inventory the economic order quantity is a widely used inventory management formula as you saw earlier is going to help calculate the optimal order quantity and therefore is going to minimize the total inventory cost for this particular retail store how do we do this well we're going to do this in steps and I'm going to talk about these steps here because it's great to know and we know the example and we know what the goal is but now let's walk you through the steps to actually get there now step one is going to be gathering data store Begins by collecting relevant data such as annual demand for each electronic Gadget in units ordering costs per purchase order which also includes shipping handling and any kind of admin cost as well as the holding costs per unit per year this is going to include any kind of storage insurance and any kind of options cost step two we're going to apply the economic order quantity formula that you can see here by using the economic order quantity formula the retail store calculates the optimal order quantity for each electronic Gadget the electronic formula is going to be as follows is going to be the square root 2 times the annual demand times the ordering cost divided by the holding costs per unit per year step three is going to be the interpretation of this after we calculate the economic order quantity for each candid the store realizes that the optimal order quantity for some high demand gadgets is larger than their current order quantities this means that they can reduce the frequency of orders or order larger quantities at a time for other gadgets with lower demand the economic order quantity suggests ordering smaller quantities more frequently to avoid excess holding costs as you can see by implementing the economic order quantity the retail store can achieve the following benefits they reduce holding costs because ordering optimal quantities results in reduced inventory holding costs as access inventory will be minimized they're going to have optimized ordering frequency the economic order quantity helps the sort determine the right balance between placing frequency more orders and less frequent large orders saving on ordering cost they're also going to have an improved working capital by optimizing inventory levels the store can free up capital or cash or cash flow that can be invested in other aspects of the business such as marketing or product expansion or anything else that the business is looking to expand on in conclusion as you can see applying the economic order quantity model has allowed the retail store to optimize their inventory management practices for their popular electronic gadgets by ordering the right quantity at the right time the store is going to reduce the holding cost and improve the overall supply chain efficiency implementing an economic order quantity method not only enhances the store's profitability but also ensures that customers can get their favorite electronic gadgets promptly enhancing their shopping experience up and next we're going to talk about technology and inventory management now modern technology is like rfids like Barco systems and inventory management softwares have really revolutionized Inventory management and there's technology out there that are still being implemented or is still being created that we're going to get to implement in future years but these are the ones that we're going to talk about here because these tools can provide you with real-time visibility into inventory levels and that's going to help reduce stockouts improve accuracy and also enhance the overall supply chain performance in this section we're going to explore how modern technology has revolutionized Inventory management practices and has empowered supply chain professionals to have real-time visibility and better control things from RFID tags to barcode systems and advanced Inventory management software can really become the tools that help reshape the way that we manage inventory okay first RFID or radio frequency identification RFID is a game-changing technology that uses radio frequency signals to track and identify objects in the context of inventory management RFID tags are attached to products or to packages enabling a seamless tracking throughout the supply chain this technology provides with a real-time visibility that allows businesses to locate products swiftly streamline order fulfillment and to improve overall inventory accuracy we also have barcode systems now you and and I or you know if we've been around the internet for a while and we're familiar with online shopping and e-commerce you might not think of barcode systems as the latest in technology but they were a technology that at one point in time really revolutionized what inventory management was really like so it is a technology that is very relevant to inventory management now Inventory management or barcodes that are used in Inventory management have been unstable in inventory for decades I want to say and they continue to play a vital role in supply chain operations now barcodes allow for a quick and easy way to capture data reduce manual errors and enhance the speed of inventory management processes with the help of barcode scanners supply chain professionals can efficiently track products monitor stock levels and also conduct inventory audits so we can see the beauty import systems and why they're still so relevant to today now modern Inventory management software or the systems that we function with now they really served as the backbone of efficient supply chain operations these software Solutions offer robust functionalities such as the man forecasting order management and inventory optimization the different types of inventory management software out there or the different providers out there can create a system that integrates with various others business instances that provide a very holistic view of inventory levels and the movement across this inventory throughout the entire supply chain but real-time data analytics business information you as a professional can use an inventory management system or software to make more informed decisions respond to Market changes promptly and help reduce access inventory so think of this as sort of an additional tool that's going to help you control your inventory or manage your inventory in a much better way real-time visibility the key advantage of technology in Inventory management is real-time visibility surprising professionals can access accurate inventory data at any time enabling them to make proactive decisions respond to the changes in the market in real time because we have this real-time visibility we can also minimize stockouts in short timely replenishment and we can create a more efficient management of the stock at different locations in real time to illustrate the power of technology and inventory management let's consider the case of a leading e-commerce Giant by implementing RFID technology in its fulfillment centers or this company in particular achieved an unprecedented visibility into its inventory RFID tags on each product allow the system to automatically track items as it moves throughout the warehouse from the moment they arrive until the moment they are shipped to customers there's real-time visibility leads to faster order fulfillment reduce manual errors and increase customer satisfaction incorporating technology into Inventory management you can say is no longer an option for companies it is a necessity so they can stay competitive in a very fast space supply chain landscape technology like RFID tags barcode systems and inventory management software have transformed how businesses manage inventory and it provides a real-time data to streamline processes and enhance the overall supply chain performance to wrap up a discussion on understanding Inventory management is gonna let's recap some of the key points we covered in this lesson Inventory management is a vital aspect of supply chain operations involving the careful balance between supply and demand it ensures that the right products are available at the right time avoiding excess inventory and stockouts efficient Inventory management directly impacts customer satisfaction the Financial Health of our business and the overall resilience of the supply chain and just as a quick guide or advice that I usually give to my students looking to progress in their career within Inventory management is that you need to recognize that Inventory management goes beyond just managing stock levels or managing what you have in your inventory it is really a strategic function that requires careful planning careful analysis and really hard decision making organizations that prioritize Inventory management gain a Competitive Edge by optimizing the operational efficiency and meeting customer demands effectively now in the dynamic world of Supply Chain management there is always room for improvement and I tell this to my students all the time you need to embrace a mindset of continuous Improvement as a professional as an individual and as a member of a supply chain or as a member of a team or an organization because Inventory management leads are good Inventory management and being a good inventory management professional leads to enhanced performance and better outcomes for your business for your company and for your career be open to exploring new techniques be open to learn about new technologies and what are the best practices out there in order to stay ahead in a very challenging but ever evolving supply chain industry understanding inventory management is going to be essential for all supply chain professionals regardless of their specific roles it is the foundation in which successful supply chain operations are built and I encourage you to apply the knowledge that you gained from this video or from your experience or from anywhere else into a real world scenario because implementing effective Inventory management practices will not only benefit your organization but also contribute to your professional growth within the industry now if you want to deepen your understanding of inventory management and Excel in Supply Chain management as well I invite you to explore our comprehensive online courses of the MVC Logistics Academy our courses are designed to equip you the skills and knowledge and the Practical insights needed to thrive in the logistics industry in today's environment if you're interested click in the link below in the description to explore the courses we have open and to take the first step towards advancing your career I want to thank you for joining us in this insightful discussion on Inventory management if you find this video helpful please give it a thumbs up give it a like share it with your colleagues and friends in the supply chain Community your support really helps me and it helps us continue to create valuable content for you stay tuned for more informative videos and more videos on this series about all the different topics in supply chain as we look forward to empower you with more expertise and give you the tools that you need to succeed in this industry don't forget to subscribe and turn on the notifications so you never miss an update once again I'm Professor Rodriguez I want to thank you for watching I look forward to seeing you in our next video bye and take care [Music] foreign [Music]