Table of Contents

Introduction

Reasons to Hold Inventory

Functions of Inventory Management

Area of inventory control

Inventory Management systems in a firm

Inventory management Practices of Fast

Fashion- Flagship of ZARA

Inventory Software provider’s Say on

“Fast Fashion take”—

Model Development

Single Store Inventory-to-Sales Model

Ware house management at ZARA

Introduction- Inventory Management

Stockpile of products a firm is offering for sale and the components that make up the product.

In other words inventory is composed of assets that will be sold in future in the normal course of business operations.

Key points-

Constitute significant part of current assets

On an average approximately 60% of current assets in Public Limited Companies in India

A considerable amount of fund is required

Effective and efficient management is imperative to avoid unnecessary investment

Improper inventory management affects long term profitability and may fail ultimately

10 to 20% of inventory can be reduced without any adverse effect on production and sales by using simple inventory planning and control techniques

Raw Materials – Basic inputs that are converted into finished product through the manufacturing process

Work inprocess

Work inprocess

Work inprocess

Finishedgoods

RawMaterials

Vendors Customer

Work-in-progress – Semi-manufactured products need some more works before they become finished goods for sale

Finished Goods – Completely manufactured products ready for sale

Supplies – Office and plant cleaning materials not directly enter production but are necessary for production process and do not involve significant investment.

Reasons to Hold Inventory

Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amount of inventory to use in this "lead time"

Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.

Economies of scale - Ideal condition of "one unit at a time at a place where user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.

Functions of Inventory Management

Track inventory How much to order When to order

Area of inventory control

Classification problem

Order quantity problem

Order point problem

Safety stocks

Classification problem

ABC analysis

VED (vital, essential , desirable) analysis

FNSD (fast, normal, slow, dead)

SDE(scarce, difficult, ease)

Order quantity problem

EOQ Model

a. Trial and Error (analytical) Approach

b. Mathematical (short cut) Approach

EOQ=√2AB/C

A= Annual usage of inventory (units)

B= buying cost per order

C=carrying cost per unit

Order point problem

Reorder point is the point at which to order inventory expressed equationally as:

Lead time in days × daily usage

Lead time is time taken in receiving delivery after placing order with suppliers

Safety Stock

Safety stock implies extra inventories that can be drawn down when actual lead time and/or usage rate are greater than expected

Inventory Management systems in a firm

Inventory management systems help a firm in managing the flow of raw materials, semi-finished and finished products, and equip the staff to co-ordinate various activities for effective inventory management.

Inventory management systems do not make decisions directly, but help the employees to make decisions. A good inventory management system would also provide help in forecasting the demand and supply apart from ensuring that the confusing paper work is done away with, and making sure that information about warehouses, and links to suppliers of raw materials as well as customers, retailers and wholesalers is readily available for use. The basic constituents of an inventory management system are sales forecast, production planning, advanced planning for procuring raw materials and semi-finished products required for manufacturing and keeping the inventory at a desirable level.

A number of software tools and offline resources are available to help a firm devise a productive inventory management system. In big companies, experts are entrusted with the job of handling inventory management systems. Such companies mostly use customized software.

There are specialized firms which help design operating systems. Companies which have huge inventories prefer to go for inventory management systems. This ensures that there is no pilferage or wastage, warehouses are managed properly and there is no loss of sale due to shortage of finished products or behind-schedule supplies to customers. Information systems need to be upgraded at regular intervals. Several new features can be added to such systems without costing too much. There are several training courses which can help one to learn more about inventory management systems. Many of them are short-term courses which help one learn how to manage these systems optimally.

In every kind of business, inventory management or management of the inventory consists of a series of processes on the multiple functions with reference to the tracking, handling and managing of goods and materials that are held in stock.

Efficiency in effective inventory management will always give a competitive edge to the business, regardless of its nature. With effective control and management over inventory stock, as well as accurate visibility and fast efficient fulfillments, comparative pricing can be given on a customer-to-customer basis.

In addition to cutting down on operating costs, it will also bring satisfied customers back for more businesses in the near future. However, modern day management of the inventory is usually not as simple as the contemporary practices of just keeping abreast with inventory standards and expenditures.

Most businesses, especially those in the process and manufacturing industries, will require varied sets of both simplified as well as complex integrated inventory management controls. Such regulations are streamlined for effectiveness in compliance and distribution as well as making provision for further improvement on software and other protocols.

Primarily, the first and most important step to commence in inventory management is to acquire accurate data in terms of facts and figures. Next, a set of rules and regulations is set up to protect and guard the information efficiently. Such information may become a crux factor in the improvement of inbound operations, strategies and productivity.

In addition to the physical monitoring of materials being moved into and out of the stockrooms and drawing up reconciliations of the inventory balances, other tasks involved in inventory management may include tracking and reporting of replenishment techniques, analysis on the actual and projected inventory status as well as setting periodic targets and re-engineering the execution framework.

Although having proper management of the inventory may create a great difference in attaining and retaining a competitive edge in the sales markets for certain products of any businesses, it remains an integral and essential effort of a company to reduce its inventory management costs.

As a result, several computer software companies have since developed a standardized set of comprehensive inventory management systems to help businesses control and manage their inventory stock.

Aside from certain specialty features, the requisite module should be able to integrate into the pre-existing software system of the business. In addition to providing a quick and easy access to detailed inventory and ordering information, the new inventory management software should also give accurate and timely data.

Although the inventory management system is a beneficial tool, there are some basic and extremely significant points to ensure an effective and proper flow. These will include good practices like making accurate entries on every stock receipts into the computer, setting up a replenishment strategy on all items in the stock houses and drawing up specific guidelines on the control of excess inventory as well as on-going dead stock. Such effective inventory management habits will give any kind of businesses a superior competitive advantage over their competitors, especially with an easy-to-use stock analysis tool that delivers quick and accurate information.

Any kind of manufacturing operation is almost impossible without the support of software. Custom designed software packages meant for all sorts of applications in the production industry are very common. Inventory control is a very important part of the manufacturing process, and it is extremely essential to check what is moving where, current stock levels, supplier details and seller details to ensure proper compliance with the entire process. This becomes enormously arduous without the proper tools and the right software packages.

An ideal inventory control software is easy to use, flexible, powerful, and able undertake all kinds of inventory control activities such as: serial number tracking, checking the minimum stock levels, reordering quantities, assemble items, disassemble items, FIFO/LIFO cost tracking, item sales history, billing of materials, and real-time adjusting stock levels. It also accommodates customer information, vendor/supplier information, sales, and purchases and generates reports for all categories. It can identify in-stock items, out-of-stock items, and sales quantities by item, customer balances, invoice balances, purchase order details, detailed sales lists, sales tax reports and outstanding order details.

Today, there are many inventory control software packages available. Each of them performs most of the basic functions apart from providing additional services like printing barcode labels, barcode scanning, printing vendor mailing labels, printing item pricing labels, printing customer mailing and shipping labels, locating purchase orders, generating purchase orders automatically, searching for invoices by field name, ability to track serial numbers for items, weight tracking, image association, calculating discounts, tracking non-depleting items, filtering only requested information, and printing invoices and purchase orders. The packages also have better database support to keep vendor and customer information and inventory statistics at the fingertips.

There are also customizable inventory control software packages that can be personalized. They also have user-friendly, multi-user interfaces for easier interaction. Many allow complete remote access when connected to the Internet. The minimum system requirement for installing an inventory control system is a Microsoft Windows operating system (95 or above), 32 MB RAM and at least 24 MB of hard disk space. Some of the popular brands of inventory control software packages are: iRenaissance SCM, Track-It!, TRAX, CoreIMS, NetSuite, InveTrak, and Integrated Inventory Management Software. When choosing inventory control software, consider a few important aspects such as the cost, the functions, integration with the current software systems and long-run maintenance costs. Software packages are available from just $199 onwards. Most companies also allow free download of the trail version for a limited period.

Inventory management Practices of Fast Fashion- Flagship of ZARA

The recent impressive financial performance of the Spanish group Inditex (its 2005 income-to sales ratio

of 12% was among the highest in the retail industry) shows the promise of the fast fashion model adopted

by its flagship brand Zara, but also other retailers that include Sweden-based H&M, Japan-based World

Co., and Spain-based Mango. The key defining feature of this new retail model lies in novel product

development processes and supply chain architectures relying more heavily on local cutting, dyeing

and/or sewing, in contrast with the traditional outsourcing of these activities from developing countries.

While such local production obviously increases labor costs, it also provides greater supply flexibility and

market responsiveness. Indeed, fast-fashion retailers offer in each season a larger number of references

produced in smaller series, continuously changing the assortment of products displayed in their stores

(Ghemawat and Nueno 2003 report that Zara offers on average 11,000 references in a given season,

compared to only 2,000 - 4,000 items for key competitors) in order to increase their appeal to customers

(a top Zara executive quoted in Fraiman et al. 2002 states that Zara customers in Spain make on average

17 store visits per year).

In addition, products offered by fast fashion retailers during the selling season may result from design

changes decided after the season has started as a response to actual sales information, which

considerably eases the matching of supply with demand (Ghemawat and Nueno 2003 report that only 15-

20% of Zara's sales are typically generated at marked-down prices compared with 30-40% for most of its

European peers, with an average percentage discount estimated at roughly half of the 30% average for

competing European apparel retailers).

The fast-fashion retail model just described gives rise to several important and novel operational

challenges. The work to be described here, which has been conducted in collaboration with Zara,

addresses in particular the problem of distributing over time a limited amount of merchandise inventory

between all the stores in a retail network. Note that while the general problem just stated is not specific

to fast-fashion retailing, we believe that several features which are specific to this retail paradigm (short

product life cycles, store inventory display policies) do justify new approaches. Indeed, Zara's interest in

this area of collaboration was motivated by its desire to improve the inventory distribution process it was

using at the beginning of our interaction for deciding the quantity of each reference to be included in the

weekly shipment from the warehouse to each store

According to that process, each store manager would receive a weekly statement of the subset of

references available in the central warehouse for which he/she may request a shipment to his/her store.

Note that this weekly statement (dubbed "the other") would thus effectively implement any assortment

decision made by Zara's headquarters for that particular store. It would not mention however the total

quantity of inventory available in the warehouse for each reference listed. After considering the inventory

remaining in their respective stores, store managers would then transmit back requested shipment

quantities (possibly zero) for every size of every one of those references. A team of employees at the

warehouse would then reconcile all those requests by modifying (typically lowering) these shipment

quantities so that the overall quantity shipped for each reference and size was feasible in light of the

remaining warehouse inventory.

At the beginning of our interaction, Zara expressed some concerns about the process just described,

stating that while it had worked well for the distribution network for which it had been originally

designed, the growth of its network to more than a thousand stores (and recent expansion at a pace of

more than a hundred stores per year) may justify a more scalable process. A first issue centered on the

incentives of store managers, who were primarily rewarded for the total sales achieved in their stores. We

believe that as a consequence store managers would frequently request quantities exceeding their true

needs, particularly when suspecting that the warehouse may not hold enough inventory of a top-selling

reference to satisfy all stores (among others, Cachon and Lariviere 1999 study a stock rationing model

capturing this behavior). Another issue was that store managers are responsible for a large set of

responsibilities beyond determining shipment quantities, including building, sustaining and managing a

team of several dozen sales associates in environments with high employee turnover. Finally, we also

believe that the very large amount of data that the warehouse allocation team was responsible for

reviewing (shipments of several hundred references offered in several sizes to more than a thousand

stores) made it challenging to balance inventory allocations across stores and references in a consistent

way, let alone one that would globally maximize sales. Motivated by these observations, we started

discussing with Zara the alternative process for determining these weekly shipment quantities that is

illustrated in the figure. The new process envisioned consists of using some input from store managers

along with past historical sales to build demand forecasts, and then use these forecasts, the inventory of

each reference and size remaining both in the warehouse and each store, and the assortment decisions as

inputs to an optimization model having shipment quantities as its main decision variables.

Inventory Software provider’s Say on “Fast Fashion take”—

“Working in collaboration with Spain-based retailer Zara, we address the problem of distributing over time a limited amount of inventory across all the stores in a fast-fashion retail network. Challenges specific to that environment include very short product life-cycles, and store policies whereby a reference is removed from display whenever one of its key sizes stocks out. We formulate and analyze a stochastic model predicting the sales of a reference in a single store during a replenishment period as a function of demand forecasts, the inventory of each size initially available and the store inventory management policy just stated. Secondly, we formulate a mixed-integer program embedding a piece-wise linear approximation of the model applied to every store in the network and allowing to compute store shipment quantities maximizing overall predicted sales, subject to inventory availability and other constraints. We report the implementation of this optimization model by Zara to support its inventory distribution process, and the ensuing controlled experiment performed to assess the impact of that model relative to the prior procedure used to determine weekly shipment quantities. The results of that experiment suggest that the new allocation process tested increases sales, reduces transhipments, and increases the proportion of time that an important category of Zara's products spends on display.”

Model DevelopmentThe first is descriptive and focuses on the relationship between the inventory of a specific reference available at the beginning of a replenishment period in a single store and the resulting sales during that period. The second model is an optimization formulation that embeds a linear approximation of the first model applied to all the stores in the network, in order to compute a globally optimal allocation of inventory between them.

Single Store Inventory-to-Sales Model

Store Inventory Display Policy at Zara.Proper management of size inventory is thus particularly critical to the brand perception of fast-fashion retailers such as Zara, who offer a large number of references produced in small series throughout the season. Inventory removal ruleThe results of that experiment suggest that the new allocation process increases sales by 3 to 4%, which is equivalent to $275M in additional revenues for 2007, reduces transhipments, and increases the proportion of time that Zara's products spend on display within their life-cycle.

Warehouse and inventory management

DeSL’s solution is highly functional, suitable for use in a wide variety of environments including:3rd party warehousing, owned warehousing, distribution centres.The system supports all the needs of today’s modern warehousing requirements enabling you to survive and win in this ever changing volatile environment. As well as managing all types of warehouse transactions the software delivers the most modern and technologically advanced infrastructure, exploiting technology such as bar codes, RFID and wireless control.The key processes supported are:

Warehouse Definition – multiple physical or logical structures, unlimited and flexible location definition, constraint definition, multiple pick and bulk locations, standard/actual/average/FIFO/LIFO costing.

Receipts – works orders, purchase orders, bar codes, RFID. Multiple SKU’s – box, roll, serial no, pack, carton etc. Put-away – flexible rules, resource allocation.

Replenishment – batching or entire locations, reactive, proactive, resource management, flexible rules.

Picking/Packing – order/order line percentages, summary or detail sheets, resource allocation, walk order, credit checking, multiple selection criteria.

Despatch – document manager integration, 3rd party logistics integration, batch or on-line, XML integration.

Perpetual Inventory – user defined time periods, trend identification, real time reconciliation, user defined reporting.

Key Benefits

Optimize inventory and improve 'on time in full' deliveries Improve resource utilization Increased stock accuracy including perpetual inventory checking Reduce picking/packing/dispatching time lines Reduce or remove paper work using RFID's/Bar codes Eliminate stock losses Increase agility through web service integration to shippers

The key operation between the initial buying decision and the final end of line markdown is in inventory execution – managing the supply of goods to minimize out of stocks, lost sales and overstocking.Inventory management systems have helped retailers to improve in this area of inventory imbalance, but the growing use of markdowns suggests that things are not getting any better for retailers. In fact, there are two separate areas where better decision making is required:• The initial purchase stage – deciding how much product the retailer needs in total• Distribution – how and when to allocate that quantity across stores and channels

Understanding the variability of store performance is critical to achieving effective assortment planning and inventory execution.

It is not just the case that each store performs differently - each product performs differently in every store.

A new holistic approach to retailing integrates merchandising and fulfillment processes while managing and reporting on inventory from the store-level up, in real-time. It provides merchandising plans, goals and strategies that directly drive product fulfillment. This allows the fulfillment process to be driven by a bottoms-up view of item behavior, fused with plans, goals and strategies.