Logistic concept of inventory management.

Safran, Mario ; Rogic, Kristijan ; Tomasic, Dubravko 等

Abstract. In order to consider the problems of inventory management, the organisation of business processes and activities performed with the aim of optimizing inventory management of spare parts warehouses in post-sales logistics of automotive industry has been studied.

In practice, cases are known in which the entire business systems have collapsed due to poor inventory management, and in order to prevent this from happening it is necessary to use the logistics concept of inventory management.

Key words: inventories, logistics, distribution, optimizing

1. INTRODUCTION

The logistic concept may be defined as a systemic way towards making logistics decisions including the logistic infrastructure, logistics control system, logistics information system and staff management. The processes included in the decision-making are strictly hierarchical, although there is a lot of interaction and feedbacks between each decision. It is precisely the planning of these logistic-distribution processes that can be isolated as the most important factor of optimizing the logistic-distribution system.

Well defined logistic concept includes four basic logistic objectives: shortening of transport time, reduction of inventories, increase of delivery performances, increase of flexibility. Figure 1 shows an example of the logistic concept, whose aim is to establish the European Order Management System--"Euroms".

The work studies inventory management, i.e. its optimisation, by comparing the proposals for more efficient inventory management. In order to consider the problems of inventory management, the organisation of business processes and activities performed with the aim of optimizing inventory management of spare parts warehouses in post-sales logistics of automotive industry has been studied.

The observed warehouse has on the average 5,500 items of total sales value of ca. 300.000 [euro]. Half of the items, i.e. half of the warehouse value are the items (goods) that are called consumable materials.

[FIGURE 1 OMITTED]

Source: Van Goor, Ploos van Amstel & Ploos van Amstel: Eurpoean distribution and supply chain logistics, Wolters-Noordhoff bv Groningen/Houten, 2003.

The group of consumable materials, that has several times greater turnover coefficient (goods consumption) than the turnover coefficient of the total warehouse, includes oil, various filters and other material necessary for regular car maintenance that is stipulated by the manufacturer's maintenance plan.

2. CHALLENGES FOR MORE EFFICIENT INVENTORY MANAGEMENT

The introductory consideration indicates that the management of half of the inventory value, i.e. consumable goods inventories is not complex since management of this type of inventories is predictable.

The fact is that differences in price realised by selling the goods that we have called consumable materials are relatively low since the car manufacturers themselves want to make regular vehicle maintenance as affordable as possible for the end user, especially since this moment is often used for comparison with the competition.

The challenge lies in optimising the inventories of the remaining goods in the warehouse whose consumption cannot be predicted. This "other half" of the warehouse value brings substantial revenues, but also significant risk since possible damage due to poor management of that level of inventories is much higher than the possible realised revenue.

3. DEFINING OF NON-MARKETABLE INVENTORIES

A frequently mentioned phenomenon in considering optimisation in inventory management are the non-marketable inventories.

How do they occur and how can they be prevented? According to the guidelines of some vehicle manufacturers, i.e. manufacturers of spare parts in automotive industry, the nonmarketable inventories are goods that have not been sold for two years after having been received to the warehouse. The economic order quantity (EOQ) was developed early last century and has remained a dominant theme for the control of independent demand systems. It remains the best way of tackling a wide range of inventory problems. It is flexible and easy to use, and gives good guidelines for a wide range of circumstances.

Imagine a single item, held in stock to meet a constant demand of D per unit time. Assume that unit cost (U), reorder cost (R) and holding cost (H) are all known exactly, while the shortage cost is so high that all demands must be met and no shortages are allowed. The item is bought in batches from a supplier who delivers after a constant lead time. We want to find the best order quantity, Q, and always place orders of this size. There is no point in carrying spare stock, so we time orders to arrive just as existing stock runs out (Waters, 2003).

At some point an order of size Q arrives. This is used at a constant rate, D, until no stock is left. We can find the total cost for the cycle by adding the four components of cost - unit, reorder, holding and shortage. No shortages are allowed, so we can ignore this cost, and the cost of buying the item is constant regardless of the ordering policy, so we can also leave the unit cost out of the calculations. Then we can show that the cost per unit time is:

C = total reorder costs + total holding costs= RD/Q + HQ/2 (Waters, 2003)

If we plot these two parts separately against Q, we get the results shown in Figure 2. From this graph you can see that: the total holding cost rises linearly with order size, the total reorder cost falls as the order quantity increases, large infrequent orders give high total holding costs and low total reorder costs, small frequent orders give low total holding costs and high total reorder costs, adding the two costs gives a total cost curve that is an asymmetric 'U' shape with a distinct minimum; this minimum cost shows the optimal order size--which is the economic order quantity, EOQ.

A standard analysis shows that the economic order quantity is found from the following equation:

Q = [square root of 2RD/H] (1)

Economic order quantity,

where D = demand

R = reorder cost

H = holding cost

Reduction or complete elimination of non-marketable inventory is possible only by increasing the efficiency of inventory management.

4. MEASURES TO INCREASE EFFICIENCY OF INVENTORY MANAGEMENT

4.1. Analysis of the potential market

This measure which aims at increasing the efficiency in inventory management is implemented by car companies with many years of tradition in selling the spare parts and maintenance of vehicles. Taking into consideration many years of experience of the car companies that use this primary inventory management model, one may notice that their warehouse managers can make a relatively good prediction also of the seasonal oscillations in the purchase and selling of goods. The drawback of this model lies in its inconsistency in recognizing the specific characteristics of the regional market and that it depends too much on the competence or incompetence of the warehouse manager. The model is not universal and can bring substantial risks or financial losses.

4.2. Software solutions

Experiences show that there is no universal software solution and that minimal inventory assumptions that represent the signal for ordering new goods and filling of minimal inventories are not always in compliance with actual requirements.

[FIGURE 2 OMITTED]

For instance, software solution functions on the principle that minimal inventories of every item need to be at the level of their two-month sales.

If oil filter is taken as example, then it holds that 30 vehicles pass daily through a repair shop, out of which 75% are due for regular maintenance which includes obligatory replacement of oil filter. If the repair shop works 50 days during a two-month period, this would mean that there should be about 1000 pieces of various oil filters available at that warehouse at any time. Recognising of such inventory management method only, is not optimal either, and may lead to unnecessary piling of the goods in the warehouse which sells well, and also unnecessary engagement of capital for paying of the goods.

4.3. Manager of inventory management

The novelty in the implementation of new software solutions lies in the fact that the analysis of the potential market and the very sales of spare parts are performed by individual car companies over a period of three to four years. After that period the information technology support (software packages) recognises the real orders of certain items proposed by the inventory management program with the corrective being the warehouse manager. Recognising several basic parameters--several years of analysis that recognises the specific characteristics of the market with the warehouse manager as corrective we arrive at the "individual" software solution for inventory management that will contribute to automation of orders, optimisation of inventory values and elimination of the possibility of the occurrence of non-marketable inventories.

5. CONCLUSION

Due to high warehousing costs and inventory maintenance the tendency is prevailing in the world to operate without inventories (zero inventories). In real economic systems, especially in the post-sales logistics systems in automotive industry this is not possible. In order to optimise the inventories it is necessary to implement the logistics approach to inventory management recognising the mathematical model which describes the economic order quantity (EOQ) that transferred into practice defines the laws of warehouse costs in relation to the size and frequency of order. It is precisely this logistics approach that represents the assumption of developing an "individual" software solution that recognises the market specific characteristics and is in the function of warehouse optimisation and elimination of the occurrence of nonmarketable inventories.

6. REFERENCES

Ghiani, G.; Laporte, G. & Musmano, R. (2004). Introduction to Logistics Systems Planning and Control, John Wiley & Sons Ltd, ISBN 0-470-84916-9, West Sussex

Koether, R. (1993). Technische Logistik, (Technical logistic), Carl Hanser Verlag, ISBN 3-446-17139-8, Munchen Wien

Martin, H. (1995). Transport - und Lagerlogistik,(Transport and warehouse logistic), Vieweg Verlag, ISBN 3-528-0494, Braunschweig/Wiesbaden

Robeson, J. F.; Copacino, W. C. (1994). THE LOGISTICS HANDBOOK, Andersen Consulting, ISBN 0-02-926595-9, New York

Waters, D.; (2003). Logistics: an introduction to supplay chain management,Palgrave Macmillan, ISBN 0-333-96369-5, New York