Inventory management refers to the knowledge and practices of keeping the optimal amount of any amount of material in a given storage facility. When maintaining a storage facility, inventory management becomes an integral part of supply chain management. It is complementary to warehouse facility management and the physical management of stored material.
Correct inventory management helps ensure the timely delivery of supplies. Proper inventory management requires deep knowledge of both the acquisition process and consumption patterns, and is achieved broadly through three key activities:
Inventory management is essential when relief supplies are transiting through a storage facility. There are several reasons why inventory management is key in the supply chain. The primary reason is to help deliver supplies in a timely manner. Managing the stock contributes to coping with the uncertainty acting as a buffer between demand and supply. This includes adjusting for lead times in the supply chain, which is particularly pertinent in international procurement. In addition, a conveniently well managed inventory can contribute to economies of scale: buying large quantities can reduce the cost per item, though the ongoing storage costs must also be considered.
When keeping an inventory of for relief operations, it is highly recommended to develop a “stock policy” aligned with the organisational supply chain strategy. Stock policies guide organisations on the decision process of keeping any type of stock in any location. Applying certain logic to the stock management is the first concern for critical items in the relief operations and applicable to all type types of storage facility without regards to location or scalefacilities.
Stock policy is broadly defined by the following questions:
- Where should the inventory be located?
- What specific products should be available at each location? In , and in which quantities?
- When should inventory at a particular location be replenished?
- How much should be ordered to replace it?
The answers to these questions are dependent on two interrelated issues: the supply chain strategy and the type of stock holding.
For the purpose of this guide, "supply chain strategy" refers to the logic behind the decision of moving goods through the supply chain. There are two main applicable strategies:
In a "push strategy," the need is anticipated before a real demand exists and the supplies are “pushed” into the supply chain. The most typical examples of “push strategy” in relief operations are common in: contingency supplies as part of an emergency preparedness plan, the opening of a new program, or in the supply of seasonal items like winter kits or mosquito nets (respectively stored before winter or before the malaria season starts).
Typically push systems operate when the demand is unknown in quantity or time. Quantities are usually based on estimations and driven by assumption on the situation that can generate the demand.
In a "pull strategy," the need is formally expressed by a consumer and the supplies are “pulled” into the supply chain driven by this demand. In relief operations the “pull strategy” is typically used during short term projects, construction or rehabilitation works or when supplying expensive equipment such as vehicles or telecoms material.
The pull system operates when the demand is known in time and quantity as a project whose outputs are predefined. Quantities are - quantities are clearly defined and the regular supply chain activities trigger demand signals based on quantities informed in the trigged from the final end of itthe supply chain. Generally, the pull supply chain strategy allows agencies to manage small or individual units of inventory accurately.
Buffer stock is stock that acts as a buffer between supply and demand. It is impossible to plan perfect quantities, and buffer stocks help even out unanticipated demand. Most of the decisions in buffer stock are taken based on how much of these items should be kept in the organisation's warehouse.
Consolidate Consolidated supplies of different nature for further assembling is known as kitting. In kitting, supplies are dependent on each other for delivery. Imbalances of stock levels may lead to inefficiency , though as parallel inbound streams must be coordinated within the inventory. In addition, two different stocks should need to be managed: one for the original supplies and one for the assembled kits.
Splitting is when stock is split from large consignments in smaller lots to be delivered to different locations or consumers, sometimes at different moments. Splitting is mostly used to gain procurement efficiency and economies of scale. Planners only need to manage a single inbound stream, but respond to demand signals from multiple consumers with uneven demands. Consolidating these demands to calculate the amount to be ordered can be challenging, and larger buffer stocks may be required.
Contingency stock is kept as part of a contingency plan. There is little inventory management as contingency stock suffers minimal rotation. Nevertheless, if perishables are part of the contingency stock, they may be included in a rotational stock system.
Vendor Managed Inventory (VMI) or virtual stock is kept in the vendor facilities until a release order is activated. The vendor reserves specific amount of supplies as part of its own inventory or grants certain manufacturing capacity with a specified delivery time. Although this type of stock can be used for many purposes, it is commonly used as part of certain contingency plans.
- Procurement using donor funding.
- Procurement using own organisational internal funds.
- In Kind Donation -kind donation from an International Organisationorganisation, private sector, or NGO.
- Remaining materials from a particular project transferred to one or several on-going projects.
Depending on its origin, some management restrictions could be applicable: if products in stock are acquired with specific funding or for a specific purpose, the inventory levels must be managed accordingly. In some cases, these items can be considered committed inventory.
Nature of the Stored Goods
The type and nature of stock can also influence how inventory is managed. Particular considerations should be taken with perishables, consumables (i.e., stationary) or products that are essential to the program implementation , such as drugs in a health program, food in a nutritional program, or fuel.
Dependency Between Stock Items
Storing products with dependent demand means that products in the stock are directly related to other stock items, including:
- Kitting - The consumption of one stock item entails the consumption of both.
- Support Equipment - Spare parts for machinery; the use of the generator requires the use of its replacement parts.
The demand for both products can either move in tandem (i.e., products belonging to a Non-food items kit) or in the opposite direction. Demand for a given product can be estimated based on the consumption of another supply.
Stock can be categorised according to its financial value, while stock management can be influenced by relative sock values. Understanding stock value can help to manage risks, plan expenditures on new and replacement stocks, or to prioritise resources on the areas of greatest value. However, low-cost items can be crucial to some relief operations and should not be neglected.
In the field of inventory management, a Stock Keeping Unit (SKU) refers to a specific product type stored in a specific location. The term SKU also refers to a code made of letters and numbers , which that identifies a product in the store. An A SKU is not unique to each item (like bar-codes are), but the number used to identify each product type in the store. It designates a single item of a larger consignment. SKUs may be tied to a specific production run or expiration date and may denote only a product of specific characteristics.
The SKU is intended as to be the most dis-aggregated level of dealing with inventory, consequently, an . An inventory with multiple SKUs will require very different handling procedures than an inventory with few SKUs.
For example, when storing buckets , a decision must be taken regarding the pertinent characteristics that will define it as a SKU. Is it appropriate to account for all buckets under the same SKU? Or is it pertinent to differentiate buckets by specific characteristics like: colour, size and material, thus creating three different SKUs? The correct SKU design will depend on the type of program and the product's intended use. For example - if If buckets are only used as part of an NFI kit, the colour of the bucket may not be important. If buckets are used to segregate waste in health care facilities, the colour of the bucket may be determinant to design SKUsvery important. Possible attributes for designation of a SKU:
- Dimensions (size)Dimensions
- Technical information
- Anything else
While SKUs are designed to keep track of inventory to the level of a specific product, they can also help to reconcile stock levels, to analyse which products are more demanded, or to identify reorder point for products.
Keeping inventory levels optimal at all times is achieved when demand is fulfilled on time while resources such as time, space, effort, and expenditures are efficiently managed. Deciding what is the appropriate inventory level requires a good knowledge of demand patterns (forecast) and supply capacity (scheduling) - both are necessary to decide when to order and the period to be covered.
Despite keeping a buffer stock, "stock-outs" may occur. Stock-outs are defined as stock of one or more items being fully depleted. Stock-outs occur when the anticipated orders are long-overdue, when actual lead times are longer than expected lead times, or when consumption is significantly increased. To prevent stock-outs from occurring, a safety stock should be maintained. “Safety Stock” is a quantity of extra stock that is kept to mitigate risk of stock-outs caused by uncertainties in supply and demand. Access constraints due to insecurity or Common examples uncertainties in relief operations might include access constraints, harsh climate events, or increased needs due to amplified vulnerability or to increased population in need, are common examples of context uncertainties in relief operationschanging social conditions. Awareness changing situations and the associated potential supply chain bottlenecks can help planners design a safety stock appropriate to the operational context.
Once buffer stock and safety stock levels are defined, a “reorder level” should be established. Reorder level (or Re-Order Point - ROP) is the minimum stock level of any given item before another order is placed. Reorder levels must be sufficient sufficiently high to allow regular replenishment of stock before reaching a critical situation and a potential stock out. The reorder level is calculated by adding the safety stock to the buffer stock.
When defining reorder levels, agencies should consider that storage facilities have a limited capacity. Planners should define the maximum space available for each of the stored items and establish a maximum stock level for each item. This is especially critical when storing items requiring specific storage conditions, such as temperature sensitive goods or dangerous materials, for which allocating extra space may not be immediately available. To allow a certain degree of manoeuvrability, the “maximum stock” level should not be reached.
A correct Correct inventory management requires a broader vision than just inbound and outbound movements. Understanding different ways to visually manage inventory is important in supply chains with long transport periods, limited storage capacity, or high rotation of items or where different orders overlap in time.
From the moment an item is ordered until the moment the item is received and dispatched, the item passes through different states:
- On hand/Running inventory is the Inventory - The current stock in the storage facility. It is the number of available units of a certain SKU for running operations.
- In transit inventory is the Inventory - The stock being transported between two locations. Although not in a warehouse, these supplies in transit remain property of the organisation and should be recorded/accounted. It is common for senders to deduct an item from inventory controls before the receiver accepts it. In transit tracking is particularly important when transit between facilities or to a delivery location may take long periods.
- Committed inventory is the stock - Stock that is committed to a particular order or transfer. While “On Hand” “on hand” inventory is the number of available units, “committed” inventory are items which are physically in the warehouse but are not technically available.
- Ordered inventory is the stock Inventory - Stock that has been ordered to replenish the inventory but was is not yet received. If an order is partially received, the remaining quantity (pending to be received) is called back-order.In case that there is not enough inventory to cope with a request, it is referred to as inventory back-order. If inventory back- If inventory back-orders are a frequent occurrence, it may be necessary to evaluate the inventory control procedures.
"Demand forecasting" aims at predicting the is the process of attempting to predict future demand as accurately as possible using available data. Demand forecasting can be a simple task, but it becomes more complex when managing many different products and/or when multiple customers with differing demand cycles place orders concurrently.
A good forecast can be achieved by reviewing historical orders and consumption patterns. Consumption data is normally arranged in discrete time slots. Different time slots can be used depending on the frequency of outbound movements from the inventory: years, quarters, months, weeks, days. Though the time period granularity has to be defined according the context, “monthly consumption” is the most commonly used. A monthly consumption is is the quantity of a particular item leaving the warehouse per month.