INVENTORY MANAGEMENT WORKBOOK by PolisasLib3

INVENTORY

MANAGEMENT WORKBOOK

SHERAFEIZA IBRAHIM

PREFACE PUBLISHER POLITEKNIK SULTAN HAJI AHMAD SHAH SEMAMBU 25350 KUANTAN PAHANG DARUL MAKMUR

Material published in this book under the copyright of Politeknik Sultan Haji Ahmad Shah. All rights reserved. No part of this publication may be reproduced or distributed in any form or by means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers.

WRITER: SHERAFEIZA BINTI IBRAHIM POLITEKNIK SULTAN HAJI AHMAD SHAH 25350 KUANTAN PAHANG DARUL MAKMUR

PREFACE With the name of Allah, Most Gracious, Most Merciful, Greetings to our beloved Prophet Muhammad (Pbuh), I am grateful for His mercy and consent for this workbook to be prepared properly. This workbook is suitable as supplementary material for the course of Inventory Management, specifically for Semester 5 students of Diploma Logistics and Supply Chain Management. This Workbook, Inventory Management is comprised all the six chapters; Introduction to Inventory Management, Basic Inventory Concept, Basic Inventory Management, Symptoms of Poor Inventory Management, Methods in Improving Inventory Management and Reverse Logistics. This workbook should be carried out at the end of each class lesson as to fill the required knowledge and understanding of the students for them to achieve the learning objectives. Furthermore, this will benefit them in gaining excellent results in the examinations.

III

ACKNOWLEDGEMENTS

The completion of this Inventory management Workbook is not possible without the participation and assistance of so many not all be enumerated.

This contributions are sincerely appreciated and gratefully acknowledged. However, I would like to express their deep appreciation and indebtedness particularly to the following Ahmad Rizal Bin Ahmad Kamal for the endless supported, kind and understanding spirit during the preparation of this workbook.

I also would like to acknowledge the contributions and support from Commerce Departments, Polytechnic Sultan Haji Ahmad Shah (POLISAS).

Table of Contents Chapter 1 Introduction to Inventory Management

Chapter 2 Basic Inventory Concept

Chapter 3 Basic Inventory Management

Chapter 4 Symptoms of Poor Inventory Management

Chapter 5 Method in Improving Inventory Management

Chapter 6 Reverse Logistics

CHAPTER 1

INTRODUCTION TO INVENTORY MANAGEMENT At end of this chapter, student should be able to; 1.0 Explain the concept of Inventory Management 1.1 Define Inventory Management 1.2 Distinguish the class of Inventory 1.3 Identify the examples of different of Inventory 1.4 Explain the types of Inventories 1.5 Identify reason for speculative Inventory 1.6 Identify reason for seasonal Inventory 1.7 Identify how to remove dead Inventory Crossword Activity 01

1.1 INTRODUCTION

Inventory management helps companies identify which and how much stock to order at what time. It tracks inventory from purchase to the sale of goods. The practice identifies and responds to trends to ensure there’s always enough stock to fulfil customer orders and proper warning of a shortage. Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an asset on the balance sheet) ties up cash. Therefore, too much stock costs money and reduces cash flow. One measurement of good inventory management is inventory turnover. An accounting measurement, inventory turnover reflects how often stock is sold in a period. A business does not want more stock than sales. Poor inventory turnover can lead to deadstock, or unsold stock. What Is Inventory? Inventory is the raw materials, components, and finished goods a company sells or uses in production. Accounting considers inventory an asset. Accountants use the information about stock levels to record the correct valuations on the balance sheet. Inventory management is a systematic approach to sourcing, storing, and selling inventory— both raw materials (components) and finished goods (products). In business terms, inventory management means the right stock, at the right levels, in the right place, at the right time, and at the right cost as well as price. Inventory is the stock of any item or resource used in an organization and can include raw materials, finished products, component parts, supplies-intransit, and work-in-process. An inventory system is the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be. As a part of your supply chain, inventory management includes aspects such as controlling and overseeing purchases — from suppliers as well as customers — maintaining the storage of stock, controlling the amount of product for sale, and order fulfilment. Naturally, your company’s precise inventory management meaning will vary based on the types of products you sell and the channels you sell them through. But if those basic ingredients are present, you’ll have a solid foundation to build upon. Small-to-medium businesses (SMBs) often use Excel, Google Sheets, or other manual tools to keep track of inventory databases and make decisions about ordering.

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1.2 DIFFERENT CLASS OF INVENTORY

a) Raw materials are any items used to manufacture components or finished products? These can be items produced directly by your business or purchased from a supplier. For example, a candle-making business could purchase raw materials such as wax, wicks, and decorative ribbons. b) Works-in-progress inventory refers to unfinished items moving through production but not yet ready for sale. In the case of a candle-making business, work-in-progress inventory might be candles that are drying and unpackaged. c) Finished goods are products that have completed the production process and are ready to be sold: the candles themselves. d) Distribution Inventory is inventory held at points as close to the customer as possible. Distribution points, such as warehouses or stores, may be owned and operated by the manufacturer or may be independently owned and operated. However, managing inventories is necessary regardless of ownership, so the term ―distribution centres is used throughout this book to indicate intermediate storage locations, pending delivery to the final customer. e) Maintenance, repair, and operations (MRO) goods are items used to support and facilitate the production of finished goods. These items are usually consumed because of the production process but aren’t a direct part of the finished product. For instance, disposable moulds used to manufacture candles would be considered MRO inventory.

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1.3 DIFFERENT TYPES OF BUSINESS INVENTORIES

Manufacturing businesses. For the manufacturing business, you buy inventory to change it into another good that you sell to your customers. Your customers may be consumers and other businesses. Examples of inventory that a manufacturing business may have include raw materials, such as wood, to make a shelf, work-inprocess inventory, such as an unfinished cake in a food manufacturing business, finished goods inventory, such as a bed you’ve finished making.

Retailers and distributors. Retailers and distributors don’t usually have raw materials inventory and unfinished goods inventory. If you’re a retailer or distributor, most inventory you have is finished goods inventory, such as toys that you sell to customers, cans of soft drink that you sell to other businesses as a retailer if you’re a distributor. Service businesses. Like other businesses, service businesses have inventory. For service businesses, inventory is any supplies you use up to provide your services. Check out these examples, if you’re an acupuncturist, inventory may include needles you use to provide acupuncture. If you have a gardening business, your inventory may include herbicides you use to remove weeds. If your business is a hairdressing business, your inventory may include dyes you use to change people’s hair colour.

1.4 TYPES OF INVENTORIES

1) CYCLE STOCK. It is a type of inventory accumulated due to ordering in lots/sizes to avoid carrying the cost of inventory. In other words, it is the inventory to balance the carrying cost and holding cost for optimizing the inventory ordering cost as suggested by Economic Order Quantity (EOQ). Cycle stock inventory is among the most important parts of an overall inventory since it's the first-place customer purchases will come from. Cycle stock is an inventory

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that results from replenishment of inventory sold or used in the production. The periodically replenished stock that keeps the supply chain moving. 2) IN-TRANSIT STOCK. Under normal conditions, a business transports raw materials, WIP, finished goods etc. from one site to other for various purpose like sales, purchase, further processing etc. Due to long distances, the inventory stays on the way for days, weeks and even months depending on distances. These are called Inventory / Goods in Transit. Goods in transit may consist of any type of basic inventories. In transit stock is defined as the inventory that is currently being transported (for example, on a truck or train). In-transit inventories are items that are end-route from location to another. In transit inventory is usually referred for on the place of shipment as it is not available at the destination. 3) SAFETY@BUFFER STOCK. Buffer inventory is the inventory kept or purchased for the purpose of meeting future uncertainties. Also known as safety stock, it is the amount of inventory besides the current inventory requirement. The benefit is smooth business flow and customer satisfaction, and disadvantage is the carrying cost of inventory. Raw material as buffer stock is kept for achieving nonstop production and finished goods for delivering any size, any type of order by the customer. Safety stock is inventory held in reserve to protect against the uncertainties of supply and demand and used to cover unpredictable fluctuations in demand. Uncertainty in demand and supply can be due to any number of reasons like, demand could increase due to changes in government policies and supply decrease, due to strike in the factory. 4) SPECULATIVE STOCK. Based on the past experiences, a businessman can foresee the future trends of the market and takes certain decisions based on that. Expecting a price rise, a spurt in demand etc. some businessman invests money in stocking those goods. Such kind of inventory is known as anticipatory stock. It is normally the raw materials or finished goods and this strategy is executed by traders. It refers to inventory that a business obtains and holds in anticipation of future demand, rather than to meet current demand. Page | 5

Speculative inventory is most commonly a cost-saving measure, though businesses also use it to get ahead of the market. 5) SEASONAL STOCK. Seasonal stock is a form of speculative stock that involves accumulation of inventory before a seasonal period begins. This is product that is stockpiled to allow for expected large increases in demand. Inventory additional to expect needs kept in case of an unusually heavy seasonal demand or for promotional campaigns. This only occurs with agricultural products and seasonal items. The fashion industry is also subjected to seasonality with new fashions coming out many times in a year. The back-to-school season is a particularly important time. 6) DEAD STOCK. A term used to describe merchandise that was never sold to or used by consumers before being removed from sale, usually because it was outdated. Dead inventory refers to product for which there is no demand—at least under current marketing practices. Because dead inventory has often been associated with overproduction of items that customers do not want (or need). Dead stock is inventory that hasn't moved in at least a year. Dead stock is locked up money that isn't contributing to the growth of the business. It uses up warehouse space that could otherwise be used for fast-moving products. It also spends on money storing and taking care of it.

1.5 REASON FOR SPECULATIVE INVENTORIES

PRICE INCREASES One of the strategic reasons a company purchases speculative inventory is based on the anticipation of higher prices. When a company has reason to believe that economic factors will drive supplies of materials or goods higher, it may purchase more inventory than is immediately needed or buy in bulk to take advantage of current market prices. This is especially likely if the

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inventory is non-perishable, has no expiration and is less likely to lose value over time. ii)

SEASONALITY Companies also buy speculative inventory to protect against uncertain demand due to seasonality. For instance, a company that operates in a region with four distinct seasons may buy extra snow-based products heading into the fall and winter if it believes a harsh winter is in store. This may lead to extra inventory on hand if demand does not measure up, but it does protect against a shortage if demand is high, and the company has not ordered enough inventory to cover it.

iii)

AVAILABILITY Another potential risk to retailers that may cause them to build up speculative inventory is a lack of available labour and materials. If union workers in a manufacturing industry are contemplating a strike, for instance, buyers may stock up on inventory while it is available to protect against a future loss of availability. Similarly, manufacturers may have concern about loss of materials affecting production, for example, if weather conditions wipe out raw materials or they are in short supply.

iv)

MANUFACTURING Manufacturers also must adapt when buyers purchase speculative inventory. While buyers are concerned with materials and goods, manufacturers are concerned with keeping production at optimum and efficient levels. If manufacturers anticipate higher demand from buyers, they can maintain enough staff and equipment to keep up. When buyers spring larger than expected orders on manufacturers, these companies may have to hire extra workers, pay overtime, and purchase additional resources in a hurry.

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1.6 REASON FOR SEASONAL INVENTORIES

a) HOLIDAYS. The holidays are a big driver of seasonal inventory. Supermarkets typically stock up on chicken and stuffing the weeks leading up to festival and holidays, all of which lead to high prominence of meals. Similarly, many retailers set up special seasonal aisles before the festival days that are full of costumes, accessories, and significantly more candy than is normally maintained in stores. Do people use your product or services mostly indoors or outdoors? If outdoors, the weather will affect your sales and demand for your products or services. Don’t use only a calendar to plan your inventory levels. If winter arrives a week earlier than normal or your area experiences high temperatures two weeks earlier than usual, your competition might grab market share from you if you’re not ready to take advantage of early demand, points out inventory management software company. If the weather affects your sales at all, keep a close eye on weather forecasts and be prepared to produce, sell, and ship a seasonal product earlier than normal. Think about the activities people enjoy outdoors, such as sports, exercise, camping and picnicking, and make sure your inventory is ready to meet demand. You can promote off-season sales by tying your outdoor products to Christmas gift-giving or winter birthdays. b) FASHION. The fashion and apparel industry are very seasonally driven. Fashion buyers and retailers carefully strategize when to merchandise new fashions in stores to take advantage of peak seasonal demand. Usually, buyers are at trade shows looking at new apparel and styles two to three seasons ahead of when clothes arrive in stores. A few weeks ahead of the winter season, retailers usually put out seasonal inventory on coats, hats, scarves, gloves, and boots. c) RECREATION. Leisure and recreation activities vary by season. In mid-to-late spring, retailers build up inventory levels on swim wear, suntan lotion, baseball gear, golf equipment, bikes, coolers, beach tents and sandals. In mid-to-late fall, snow gear, snowmobiles, snowblowers, sleds, shovels and sandbags

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appear in higher levels. Often, these types of products go on sale if companies overbuy or if customer demand is low during the peak season. d) BACK-TO-SCHOOL. December is a major back-to-school time for many retailers. Tens of millions of kids head back to school each fall, and retailers rely on heavier sales volume in several product categories. Book bags, notebooks, pens, pencils, erasers, pencil boxes, folders, glue, rulers, crayons, and markers are all among items included in back-to-school aisles and displays. Stores normally receive supply requirements from schools to aid in buying.

1.7 HOW TO REMOVE DEAD STOCK

Reduce the price. A significant price reduction might be enough to trigger demand for the product. You may not sell at a profit and perhaps suffer a loss but clearing the dead stock off your shelves is better for the long-term health of your business.

Bundle it with other products. Combine and sell it with related products at a discount. If these related products are fast movers, then so much the better. You will quickly get the dead stock off your hands. These bundles can be a product if sold as a kit. For example, there are facial kits, first aid kits, fire pit kits, repair kits, survival kits, and so forth.

3. Offer discount coupon. One common trick to offload your stock is to offer a discount. Showcase your discount code on the homepage or relevant landing pages so that visitors can always see it. You can also send a message to your existing customers attached with a personalized code. After all, a tactful application ensures expected returns. Announce offers for a limited time. This strategy never fails. There is an urgency created in the buyer’s mind and you get to sell your deadstock items. Giving higher discounts with higher quantity. Offering a minimum discount on individual items and a higher discount on multiple purchases works perfectly. One last note: though it’s effective to clear dead stock, don’t overuse discount offers. This might leave a doubt regarding your product quality. Plan discounts occasionally and strategically to exert the best impact. Page | 9

Sell on online marketplaces. There are lots of websites that sell surplus inventory. Many well-known sites get thousands of visitors a day who are looking for bargains.

Return it to the supplier. Depending on the items and your supplier, you may be able to negotiate a return. The reason you can't sell the items may not exist with your supplier who has no problem selling them. This means she should willingly take them back. However, you may have to pay a restocking fee.

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Activity 1.1 - Define of Inventory management

INVENTORY

MANAGEMENT

INVENTORY MANAGEMENT

Activity 1.2 – Distinguish Class of Inventories

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Activity 1.3 – Identify examples of different Inventories

 Different types of business inventories.

M____________

R_____________

S______________

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Activity 1.4 – Match the types of Inventories

A term used to describe merchandise that was never sold to or used by consumers before being removed from sale, usually because it was outdated.

Stock is a form of speculative stock that involves accumulation of inventory before a seasonal period begins. This is product that is stockpiled to allow for expected large increases in demand.

It refers to inventory that a business obtains and holds in anticipation of future demand, rather than to meet current demand.

An inventory held in reserve to protect against the uncertainties of supply and demand and used to cover unpredictable fluctuations in demand.

Inventories are items that are end-route from location to another. Inventory is usually referred for on the place of shipment as it is not available at the destination.

Inventory is among the most important parts of an overall inventory since it is the first-place customer purchases will come from. An inventory that results from replenishment of inventory sold or used in the production.

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Activity 1.5 – Reason for speculative inventories

S_____

M______

P______

A______ REASON FOR SPECULATIVE INVENTORY

Activity 1.6 – Reason for seasonal inventories

______________________ ______________________ ______________________ ______________________

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Activity 1.7 – Identify how to remove dead inventories

R P

I H S

B W P

N T O

L N

T O

R T

I E

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CROSSWORD ACTIVITY O E N D I N V E S T M E N T H J K L B W E R F C Q G B H T I

A V C B C W A C G H J M V F W F E G B E Y U I O P Q X F Y W

B B E P V C T F E A C D G T T G V B N V R Y T Q E D M R E U

C N E R B Q B B H S V V E H Y R I N V E J N B M N R A Y J Q

E D V E V A R I O U S B D R U W T M C N Y C G N M Q N K U L

H E B C W I P A E R D A S E I R A K X S V A R T H Q U O S T

I C N A E G E X R F F X A E O U L L W U N U S E D N F M T N

J O M U R Q R W Q V V Z W O P T U X R R C U H G Q D A Y I O

K U Q T B A V Z X B H C Q T A K C C T E B H F S G Q C E N T

L P X I C D A D S N N R X F X B E V Y W R Y R E J L T Y T O

Q L F O N E D T F D Q G D W C L P B T H Q E H R F D U C I B

W I G N J R E Q U I R E M E N T S N K S M N K V W T R J M L

D N H A M C F D H S Y D Q N V A H S Y O V R Q I T U I C E D

R G K R L V G V C T U V E M G D T F T V N E F C H J N B R H

T G L Y E P S C D R I N T H B F N S H D M G R E U K G T Y B

H B V R W R D N S I O M F D H B U V R M I H T H N M J K L W

Y J S M O O T H A B F Y B W J C D B W E N Q H M J Q A Q D F

K L B B C F R Z X U D R Q R K U Q H Q C I E Y N K A S E H G

L C H Z V I C A Z T E W D A L R F Y O R M W J L L A Y W B S

O T J X B T S Q W O D Q A R R R S H P N I G Y Q I N H D H Q

P Y K C A G Q E V R E V A L U E R W A E S T O C K G J A J A

B N D V C A X V B S Q F E T R N T Q B C E V U F M D K W B S

Z M N Q T C A R N Q A B V F W T M S N U M B N A J W L A Q F

1. 'Sorry were out of that item'. "How often have you heard that during shopping trips?" It is wording base on ________________________. 2. In fact, inventories __________________ the business world. 3. Every enterprise needs inventory for __________________ running of its activities. 4. The greater the time-lag, the higher the ______________________________ for inventory.

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5. The investment in inventories constitute the most significant part of ________________________ assets/working capital in most of undertakings. 6. The purpose of inventory management is to _____________________ availability of

materials in sufficient quality as and when required and also to ___________investments in inventories. 7. Inventory is the _________________________ of any item or resources used in an organization. 8. Inventory is an ___________________ asset, which lies in stock without participating in _________________ adding process. 9. The purpose of owning the assets must be to sell them to _____________________. 10. Finished goods inventory is held by the organisation at ________________________ stoking points or dealers and stockiest until it reduces the market and end customers. 11. __________________________ business buy inventory to change it into another good that you sell to your customers. 12. Retailer and ______________________________ do not have raw materials inventory and unfinished goods inventory. 13._____________________ business never inventory. It is supplies you use up to provide your services. 14. There are _________________________ motives for holding inventory. 15. ________________________ motive is taking the advantages of price fluctuations and hedge against price increase in materials or labour. 16. _______________________________ motive have a cushion against unpredicted business. Page | 17

17. Replacing inventories in extremely small quantities result in low ________but high ordering costs. 18. The _____________________________ effect of inventories allows a physical distribution manager to choose amongst various inventory management policies. 19. _______________ equals to the final income after subtracting the variable cost. 20. A common approach to inventory managements in the later 20th and every 21st centuries are _____________.

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CHAPTER 2

BASIC INVENTORY CONCEPT At the end of this chapter, student should be able to: 2.0

Explain concept of Inventory Management

2.1

Define concept of Inventory

2.2

List Inventory locations

2.3

Define the purposes of Inventory

2.4

Identify why we need Inventory

2.5

Identify why company should have Inventory

2.6

Identify the Inventory cost

2.7

List the factors that effect of Inventory management

Crossword Activity

2.1 INTRODUCTION First, the assets must be part of the company’s primary business. For instance, a sandwich shop’s delivery truck is not considered inventory because it has nothing to do with the primary business of making and selling sandwiches. This is considered a fixed asset for the sandwich shop. To a car dealership, on the other hand, this truck would be considered inventory because they are in the business of selling vehicles. Second, the assets must be available for sale or will soon be ready to sell. If some business assets could be sold but are never actually made available for sale, they aren’t inventory. These are just assets or investments of the company.

2.2 INVENTORY LOCATION

Inventories are located at every single part of the logistics pipeline, either it been use or not. Below is the location of inventory during the logistics process:

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2.3 PURPOSES OF INVENTORY

Formulation of an inventory policy requires an understanding of the role of inventory in production and marketing. Inventory serves five purposes within the firm. 1. Economies of Scale Inventory is required if an organization is to realize economies of scale in purchasing, transportation, or manufacturing. For example, ordering large quantities of raw materials or finished goods inventory allows the manufacturer to take advantage of the per unit price reductions associated with volume purchases. Purchased materials have a lower transportation cost per unit if ordered in large volumes. Suppliers sometimes offer price discounts to encourage customers to purchase larger quantities at one time. Similarly, buying in large quantities might result in savings associated with transporting larger quantities at one time. Also, anticipating some type of price increase, shortage, or disruption might lead companies to buy larger quantities. Purchasing larger quantities in anticipation of shortages, for example, is a common supply chain strategy. There are cost to place an order: labour, phone calls, typing, postage, and so on. Therefore, the larger each order is, the fewer the orders that need be written. Also shipping costs favour larger orders - the larger the shipment, the lower the per-unit cost. 2. Balanced Supply and Demand Balancing supply on one side of the supply chain with demand on the other is always a challenge. Demand is never known with certainty and holding extra inventory enables an organization to meet unexpected surges in demand. Also, consider that demand occurs intermittently, rather than on a continuous basis. An example might be retail sales, which are slower on weekday mornings but high over the weekends. Not having extra inventory might mean missed sales. Carrying inventory helps to address these natural variations in demand.

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Seasonal demand patterns also contribute to high and low periods of demand, such as ice cream sales in the summer or snow shovel sales in the winter. It would be costly for production facilities to produce products in unison with the seasonality of demand. This might mean closed facilities and unemployed workers during low seasons, and overtime production during high seasons. A more common strategy is for companies, and their supply chains, to produce at a more uniform rate during the year. In this case extra products are stored in inventory and used during peak seasons. 3. Enables specialization in manufacturing Inventory makes it possible for each of firm’s plants to specialize in the products that it manufactures. The finished products can be shipped to field warehouse where they are mixed to fill customer orders. The economies that result from the longer production runs and from savings in transportation costs more than offset the costs of additional handling. Companies such as Whirlpool Corporation have found significant cost saving in the operation of consolidation warehouses that allow the firm to specialize manufacturing by plant location. The specialization by facility is known as focused factories. 4. Provides protection from uncertainties in demand and order cycle Many unexpected events occur that impact both supply and demand. This is due to randomness and could be anything from a batch of damaged goods being received, to an unexpected delay due to weather, or a strike at a supplier’s plant. Companies carry extra inventory in stock to protect themselves, or buffer, against these uncertainties. This is a “just in case” scenario. However, companies know that they must be prepared so that they don’t run out of stock. Inventory is held as protection from uncertainties that are to prevent a stock out in the case of variability in demand or variability in demand or variability in the replenishment cycle. Raw materials inventories more than those required to support production can result from speculative purchases made because management expect a price increase or supply shortage, perhaps due to a potential strike. When material is ordered from a vendor, delays can occur for a variety of reasons: a normal variation in shipping time, a shortage of material at the vendors’ plant causing backlogs, an Page | 22

unexpected strike at the vendors’ plant or at one of the shipping companies, a lost order, or a shipment of incorrect or defective material. 5. Act as a buffer between critical interfaces within supply chain Inventory is held throughout the supply chain to act as a buffer for the following critical interfaces: a) Supplier – procurement (purchasing) b) Procurement – production c)

Production – marketing

d) Marketing – distribution e) Distribution – intermediary f)

Intermediary – consumer/user

During the production process as well as the supply chain, the product is moved through many different operations that have different processing rates. The challenge is balancing different processing capabilities, and it is not always possible. Therefore, you need a cushion between operations, and inventory at different points in the system serves this purpose. Extra inventory strategically placed evens out differences in processing capability. Extra stores of inventory can be placed at various points in the supply chain network, or at work centres within a facility, to give it flexibility. Just consider the high interdependence of workstations on an assembly line. Inventory is typically placed between workstations to decrease their interdependence. Otherwise, work stoppage at one station may disrupt or otherwise shut down the entire assembly line. Also consider that there is natural variation in processing times between identical operations due to randomness. As a result, it is desirable to create a cushion of inventory so that output can occur at a constant rate. Inventory must be considered at each of the planning levels with production planning concerned with overall inventory, master planning with end items and materials requirements planning with components parts and raw material. The primary function of inventory is buffering and decoupling. It serves as a shock absorber between customer demand and the manufacturer’s production capability, between input materials required for an operation and the output of the preceding operation, between the manufacturing process and the supplier of raw materials. Page | 23

Because channel participants are separated geographically, it is necessary for inventory to be held throughout the supply chain to successfully achieve time and place utility.

2.4 WHY DO WE NEED INVENTORY From the resource management point of view, we should not have inventories as these constitute the idle resources. However, if we did not have inventories, there will be shortages, production delays, and project delays. Some of the reasons for having inventories in the production/service system are as follows: 1. Time lag between placing orders and getting supplies at the point of consumption Whenever we place a replenishment order, there is a time lag between placing the order and getting the materials at the point of use. This is called “replenishment lead time.” In most cases the lead time is nonzero, and a t times it is quite high. This necessitates holding of inventory to take care of demand during the lead times 2. Demand variability If either we are unable to estimate the demand correctly or if there are uncertainties in demand, additional inventory will be required to act as a shield to absorb the demand variability. The greater the demand variability, the greater the amount of additional inventory required. 3. Seasonal inventory If the demand is cyclic or seasonal, then sometimes building inventory in the lean period to meet the peak period demand is employed as a strategy in aggregate production planning. This strategy results in inventory in some part of the year. 4. Pipeline inventory This is the inventory due to the distribution of a product or a commodity over long distances, so that the “goods in transit” become substantially important. This constitutes the pipeline inventory. In the context of production processes, this is called in-process inventory or work in progress (WIP) which is also inventory in terms Page | 24

of idle resource blocked in the non-productive form. This can be reduced by making the supply chain move faster. 5. Other factors Sometimes inventory is maintained to take care of other situational parameters such as inflationary pressures, shortage of materials in the markets, and quantity discounts to encourage bulk purchasing or simply the desire to spend the budget allocated for materials before the end of the financial year resulting in large and at times unnecessary purchases which naturally become dead stock.

2.5 WHY SHOULD COMPANY HAVE INVENTORY Inventory is one of the most important assets of a business. Its management needs to be proactive, accurate and efficient. Whilst holding either too much or too little inventory places a burden on both productivity and profitability, it is always still essential for most businesses to hold enough inventory. 1. Improve customer service To ensure customer who desire or must have immediate stock availability or short delivery times are satisfied in their dealing with the firm. 2. Encourage production economies Items manufactured or purchased in quantities greater than what is needed immediately will create lot size inventories. This is to take advantage of quantity discounts, to reduce shipping, clerical, setup costs. 3. Permit purchase & transportation economies Inventory acts as buffer between demand & supply so that production can be geared to a more constant output than fluctuating demand. Therefore, lowest per-unit cost is possible since production runs at a constant quantity. 4. Protect against uncertainties in demand & lead time In most cases the level of demand on a logistics system & the time required for Page | 25

resupply cannot be known. To assure product availability, additional amounts of stock are maintained. 5. Act as a hedge against price changes Goods that are purchased on the open market are subject to the price levels dictated by changing supply-demand patterns. Purchases may be made in advance of need because of anticipated price increases. 6. Act as a hedge against contingencies Labor strikes, fire & floods are just a few of contingencies that can happen. Therefore, maintaining backup inventories is one way in which normal supplies can be maintained for a period.

2.6 INVENTORY COST

In making any decision that affects inventory size, the following costs must be considered: 1. Holding (carrying) costs Inventory carrying involves Inventory storage and management either using in house facilities or external warehouses owned and managed by third party vendors. This broad category includes the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital. Obviously, high holding costs tend to favour low inventory levels and frequent replenishment. Inventory storage and maintenance involves various types of costs namely, Inventory Storage Cost and Cost of Capital. In both cases, inventory management and process involve extensive use of Building, Material Handling Equipment’s, IT Software applications and Hardware Equipment’s coupled managed by Operations and Management Staff resources. 1.1 Inventory Storage Cost Inventory storage costs typically include Cost of Building Rental and facility maintenance and related costs. Cost of Material Handling Equipment’s, IT Page | 26

Hardware, and applications, including cost of purchase, depreciation or rental or lease. Further costs include operational costs, consumables, communication costs and utilities, besides the cost of human resources employed in operations as well as management. 1.2 Cost of Capital Includes the costs of investments, interest on working capital, taxes on inventory paid, insurance costs and other costs associate with legal liabilities. The inventory storage costs as well as cost of capital is dependent upon and varies with the decision of the management to manage inventory in house or through outsourced vendors and third-party service providers. 2. Setup (production change) costs To make each different product involves obtaining the necessary materials, arranging specific equipment setups, filling out the required papers, appropriately charging time and materials, and moving out the previous stock of material. If there were no costs or loss of time in changing from one product to another, many small lots would be produced. This would reduce inventory levels, with a resulting savings in cost. One challenge today is to try to reduce these setup costs to permit smaller lot sizes. 3. Ordering costs These costs refer to the managerial and clerical costs to prepare the purchase or production order. Ordering costs include all the details, such as counting items and calculating order quantities. The costs associated with maintaining the system needed to track orders are also included in ordering costs. Cost of procurement and inbound logistics costs form a part of Ordering Cost. Ordering Cost is dependant and varies based on two factors - The cost of ordering excess and the Cost of ordering too less. Both these factors move in opposite directions to each other. Ordering excess quantity will result in carrying cost of inventory. Whereas ordering less will result in increase of replenishment cost and ordering costs.

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This functional analysis and cost implications form the basis of determining the Inventory Procurement decision by answering the two fundamental questions How Much to Order and When to Order. How much to order is determined by arriving at the Economic Order Quantity or EOQ. 4. Shortage costs When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be cancelled. When the demand is not met and the order is cancelled, this is referred to as a stock out. A backorder is when the order is held and filled later when the inventory for the item is replenished. There is a trade-off between carrying stock to satisfy demand and the costs resulting from stock outs and backorders. This balance is sometimes difficult to obtain because it may not be possible to estimate lost profits, the effects of lost customers, or lateness penalties. Frequently, the assumed shortage cost is little more than a guess, although it is usually possible to specify a range of such costs. Establishing the correct quantity to order from vendors or the size of lots submitted to the firm’s productive facilities involves a search for the minimum total cost resulting from the combined effects of four individual costs: holding costs, setup costs, ordering costs, and shortage costs.

2.7 FACTORS THAT AFFECT MANAGEMENT OF INVENTORY

Stockkeeping Units (SKUs)

Dead Inventory

Complementary Items

Deals

Informal Arrangement Outside the Distribution Channel

Substitute Items

Repair or Replacement Parts

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1. Stock-Keeping Units (SKUs) A SKU is a number or string of alpha and numeric characters that uniquely identify a product. For this reason, SKUs are often called part numbers, product numbers, and product identifiers. A stock-keeping unit (SKU) is a code that consists of letters, numbers, symbols, or any combination thereof that uniquely identifies a product or service. SKUs may be a universal number such as a code or supplier part number or may be a unique identifier used by a specific a store or online retailer. For example, one company may use the 10-character identifier supplied by the manufacturer as the SKU of an external hard drive. Another company may use a proprietary 6- digit number as the SKU to identify the part. Many retailers use their own SKU numbers to label products so they can track their inventory using their own custom database system. SKUs are used in inventory data management for distinguishing, sorting and recording a tangible or nontangible product. When shopping online or at retail stores, knowing a product's SKU can help to locate the exact product later. It will help to identify a unique product when there are many similar options, such as a TV model

that

comes in different colors, sizes, etc.

2. Dead Inventory Refers to inventory that is at the end of its product life cycle and has not seen any sales or usage for a set period usually determined by the industry. This type can cause large losses for a company. Dead stock is merchandise that has not been sold to or used by consumers. This merchandise hardly leaves inventory shelves and is difficult to market for most retailers or wholesalers. Some businesses have closed because of an excess in unsold stock. Good stock is merchandise that is moving off the warehouse shelves. The ability to recognize this type of stock can Page | 29

save the business. Items are often declared dead after 12 months without sales. Large amounts of obsolete inventory are a warning sign for investors: they can be symptomatic of poor products, poor management forecasts of demand, and poor inventory management. Looking at the amount of obsolete inventory a company creates will give investors an idea of how well the product is selling and of how effective the company's inventory process is. 3. Deals An agreement entered by two or more parties for their mutual benefit, especially in a business or political context. It also related how does supplier and buyer make a deal in buying product or stock. When doing a deal, the relation between supplier and buyer will build and can give a benefit to each other doing business. 4. Substitute Items Substitute items refer to products that customers view as being able to fill the same need or want. A substitute is a product that is comparable and similar in functionality to the current item. Substitute goods are goods which, as a result changed conditions, may replace each other in use (or consumption). The goods are different that can satisfy the same needs of consumers, therefore can be used to replace one another. The concept of substitutes and replacements is widely used in different industries such as retail, automotive, and manufacturing. Examples of substitute goods include margarine and butter, tea and coffee. Substitute goods not only occur on the consumer side of the market but also the producer side. 5. Complementary Items A product can be considered a complement when it shares a beneficial relationship with another product offering. Complementary goods are goods that go together or are related. It is an item that often has an interrelated use with another good. Material or good whose use is interrelated with the use of an associated or paired good such that a demand for one (tires, for example) generates demand for the other (gasoline, for example). Examples to define a complementary Page | 30

product, such as hot dogs and hot dog buns, printers and ink cartridges, DVD players and DVDs, Computer hardware and computer software, automotive vehicles and rubber tires, torch and battery or hamburgers and hamburger buns. The demand for one of these goods often drives the demand for the other due to their interrelated use. 6. Informal Arrangement outside the Distribution Channel Leave the responsibility to the other agents in ensuring that goods arrive on time as promised. Informal does not follow an act that has been set. Ensuring that goods are always available. 7. Repair or Replacement Parts A replacement is a product that supersedes the current item. A spare part, service part, repair part, or replacement part, is an interchangeable part that is kept in an inventory and used for the repair or replacement of failed parts. A replacement product is assigned when the current item becomes temporarily or permanently unavailable. When receive any queries for the purchase or replenishment of the current item then the replacement product is selected when the current item is not available. A replacement is a product that supersedes the current item.

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Activity 2.1 – Define concept of Inventories

Concept

•_____________________________________________

Definition

•______________________________________________

Examples

•______________________________________________

Activity 2.2 – Inventory location

List Eight (8) Inventory locations from the above picture. 1. _________________________________________ 2. _________________________________________ 3. _________________________________________ 4. _________________________________________ 5. _________________________________________ 6. _________________________________________ 7. _________________________________________ 8.

__________________________________________

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Activity 2.3 – Purposes of Inventories

E________________________________

Purposes of Inventory

B________________________________

E________________________________

P_______________________________

A________________________________

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Activity 2.4 – Identify why do we need inventory

______________ ______________ ______________ _________

_____________ _____________ _____________ ____________

______________ ______________ ______________ _________

Whenever we place a replenishment order, there is a time lag between placing the order and getting the materials at the point of use. This is called “replenishment lead time.”

If either we are unable to estimate the demand correctly or if there are uncertainties in demand, additional inventory will be required to act as a shield to absorb the demand variability.

If the demand is cyclic or seasonal, then sometimes building inventory in the lean period to meet the peak period demand is employed as a strategy in aggregate production planning. This strategy results in inventory in some part of the year.

This is the inventory due to the distribution of a product or a commodity over long distances, so that the “goods in transit” become substantially important. This can be reduced by making the supply chain move faster.

Sometimes inventory is maintained to take care of other situational parameters such as inflationary pressures, shortage of materials in the markets, and quantity discounts to encourage bulk purchasing or simply the desire to spend the budget allocated for materials before the end of the financial year.

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Activity 2.5 – Why company should have inventory

Improve _______ Act as ________

Encourage _________

Act as _________

Permit _________ Protect _________

Activity 2.6 – Identify the inventory cost

INVENTORY COST

H________ COST

INVENTORY _________ COST

S________ COST

O________ COST

SH_________ COST

COST OF _________

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Activity 2.7 – List factors that affect inventory management

_______________

______________

_______________

______________

______________ Page | 36

Activity 2.7 - Crossword I W P M P S D V O C H A N G I N G H

N R R A R A E Z P R Q K J T U H B J

S G O T O F M L E A V E B X K Y R K

T G C E C M A B R F N U M B E R S L

I R E R E K N N A H V L M B Y Q E C

T E S I S L D S T R I K E S W I D U

U A S A S C S S I M I L A R F O J R

T T K L I E I C O N S U M E R L O R

I E L O N G Z I N C L U D E L B P E

O R M L G M E A S A K B H T T F R N

N P U R C H A S E D M I R Y N U Q T

HORIZONTAL 1. Inventories are materials and supplies that a business or ____________ carry either for sale or to provide inputs or supplies to the production _________. 2. Inventory also determine as a ________ held in an idle incomplete state waiting for future sale or transformation process. 3. Seasonal _______ patterns also contribute too high and low periods of demand, such as ice cream sales in the summer or snow shovel sales in the winter. 4. During the production process as well as the supply chain, the products is moved through many different _______ that have different ______ rates. 5. Items manufactured or purchased in quantities ______ than what is needed immediately will create lot ____ inventories. 6. Substitute goods not only occur on the ______ side of the market also the producer side. 7. A replacement product is assigned when the _____ items becomes temporarily or permanently unavailable.

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VERTICAL 1. Goods that are ______on the open market are subject to the price levels dictated by changing supply-demand patterns. 2. Labour _____, fire & floods are just a few of contingencies that can happen. 3. Ordering costs _______ all the details, such as counting items and calculating order quantities. 4. A substitute is a product that is comparable and _____ in functionality to the current item. 5. ______ the responsibility to the other agents in ensuring that goods arrive on time as promised. 6. If there were no costs or loss of time in ______ from one product to another, many small lots would be produced. 7. SKU’s help suppliers be able to track efficiently, the _____ of individual variants of products.

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CHAPTER 3

BASIC INVENTORY MANAGEMENT At the end of this chapter, student should be able to: 3.0

Explain the basic Inventory Management

3.1

Define objective of Inventory Management

3.2

Define the Inventory Management System (IMS)

3.3

List components of Inventory Management

3.4

List reason for Holding Inventory Management

3.5

Define Inventory Planning Technique

3.6

List of Inventory Demand Technique

3.7

Define Just in Time (JIT)

3.8

List Seven (7) waste, by Taiichi Ohno

3.9

Define Vendor Managed Inventory (VMI)

3.1 OBJECTIVE OF INVENTORY MANAGEMENT Many different organizational units have an interest in the creation and control of inventories. These objectives often conflict and must be resolved through negotiation and consideration of the overall benefits to the company. Some of the major objectives that underlie the use of inventories are: 1. Customer Service Customer Service is the ability of a company to satisfy the needs of the customer. Inventory Management helps achieve this in several ways, including delivering in a timely manner, buffering against uncertainty, and providing variety to meet individual customer needs. Beside to achieve satisfactory levels of customer service, it also drives to keep inventory costs within reasonable bounds. The total cost of logistics activity can be reducing while meeting customer service requirements. 2. Buffering against Uncertainty Inventory Management are often held because either the demand for goods or the replenishment of goods is subject to uncertainty. Anticipated demand for products is often forecasted in various ways. Inventories allow delivery even when demand exceeds those that were expected. Sometimes there is also uncertainty regarding supply; that is, how quickly can goods be replenished? Transportation, quality problems, excessive scrap, and supplier lead times are often factors contributing to uncertainty for which Inventory Management can compensate. 3. Maximizing profit Profit can be maximized by increasing revenue or decreasing cost. One of the best ways to do this is by proper management system. Besides, it can minimize investment in inventory at minimum level to maximize profitability.

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4. Protect company against theft, obsolescence, and wastage Make sure that the only people in the warehouse belong in the warehouse. Pilferage is a larger problem than most distributors realize. 5. Continuously of the goods To ensure that the supply of raw material and finished goods will remain continuous so that production process is not halted and demands of customers are duly met. Inventory is at sufficiently high level to perform production and sales activities smoothly.

3.2 INVENTORY MANAGEMENT SYSTEM Inventory Management system provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with customers. It is an inventory system is the set of policies and controls that monitors levels

of inventory and determines what

levels should be maintained, when stock should be replenished, and how large orders should be.

3.3 COMPONENTS OF AN INVENTORY MANAGEMENT SYSTEM

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3.4 REASON FOR HOLDING INVENTORY MANAGEMENT Inventory is a necessary evil that every organization would have to maintain for various purposes. Optimum inventory management is the goal of every inventory planner. Over inventory or under inventory both cause financial impact and health of the business as well as effect business opportunities. Inventory holding is resorted to by organizations as hedge against various external and internal factors, as precaution, as opportunity, as a need and for speculative purposes. 1. Meet variation in Production Demand 2. Cater to Cyclical and seasonal Demand 3. Economics of scale in Procurement 4. Take advantage of price Increase and Quantity Discounts 5. Reduce transit cost and transit times 6. Long lead and high demand items need to be held in Inventory 7. Markets and Supply Chain Design 8. Market penetration 9. Market Size, Location and Supply design 10. Transportation and Physical Barriers

1. Meet Variation in Production Demand 

If the demand for the product is known precisely, it may be possible to produce the product to exactly meet the demand. Usually, however, demand is not completely known, and a safety or buffer stock must be maintained to absorb variation. Production plan changes in response to the sales, estimates, orders, and stocking patterns. Accordingly, the demand for raw material supply for production varies with the product plan in terms of specific SKU as well as batch quantities. Holding inventories at a nearby warehouse helps issue the required quantity and item to production just in time.

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2. Cater to Cyclical and Seasonal Demand 

Market demand and supplies are seasonal depending upon various factors like seasons, festivals, and past sales data help companies to anticipate a huge surge of demand in the market well in advance. Accordingly, they stock up raw materials and hold inventories to be able to increase production and rush supplies to the market to meet the increased demand.

3. Economics of Scale in Procurement 

Buying raw materials in larger lot and holding inventory is found to be cheaper for the company than buying frequent small lots. In such cases one buys in bulk and holds inventories at the plant warehouse. Can make savings from unit price reduction when purchases are made in volume. Manufacturer can make products in long run production, saving on setup and changeover times.

4. Take Advantage of Price Increase and Quantity Discounts 

If there is a price increase expected few months down the line due to changes in demand and supply in the national or international market, impact of taxes and budgets, the company’s end to buy raw materials in advance and hold stocks as a hedge against increased costs. Companies resort to buying in bulk and holding raw material inventories to take advantage of the quantity discounts offered by the supplier. In such cases the savings on account of the discount enjoyed would be substantially higher that of inventory carrying cost.

5. Reduce Transit Cost and Transit Times 

In case of raw materials being imported from a foreign country or from a faraway vendor within the country, one can serve a lot in terms of transportation cost buy buying in bulk and transporting as a container load or a full truck load. Part shipments can be costlier. In term of transit time too, transit time for full container shipment or a full truck load is direct and faster unlike part shipment load where the freight forwarder waits for other loads to fill the container which can take several weeks. There could be a lot of factors Page | 43

resulting in shipping delays and transportation too, which can hamper the supply chain forcing companies to hold safety stock of raw material inventories. 6. Long Lead and High Demand Items Need to Be Held in Inventory 

Often raw material supplies from vendors have long lead running into several months. Coupled with this if the item is in high demand and short supply one can expect disruption of supplies. In such cases it is safer to hold inventories and have control.

7. Markets and Supply Chain Design 

Organizations carry out detailed analysis of the markets both at national as well as international / global levels and work out the supply chain strategy with the help of SCM strategists as to the ideal location for setting up production facilities, the network of and number of warehouse required to reach products to the markets within and outside the country as well as the mode of transportation, inventory holding plan, transit times and order management lead times, etc., keeping in mind the most important parameter being, to achieve Customer Satisfaction and Demand Fulfillment.

8. Market Penetration 

Marketing departments of companies frequently run branding and sales promotion campaigns to increase brand awareness and demand generation. Aggressive market penetration strategy depends upon ready availability of inventory of all products at nearest warehousing location so that product can be made available at short notice – in terms of number of hours lead time, at all sales location throughout the state and city. Any non-availability of stock at the point of sales counter will lead to dip in market demand and sales. Hence holding inventories becomes a necessity.

9. Market Size, Location and Supply Design 

Supply Chain design considers the location of market, market size, demand pattern and the transit lead time required to reach stocks to the market and

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determine optimum inventory holding locations and network to be able to hold inventories at national, regional, and local levels and achieve two major objectives. First, would be to ensure correct product stock is available to service the market. Second, stocks are held in places where it is required and avoid unwanted stock build up. 10. Transportation and Physical Barriers 

Market location and the physical terrain of the market coupled with the local trucking and transportation network often demand inventory holding at nearest locations. Hilly regions for example, may require longer lead time to service. All kinds of vehicles may not be available, and one may have to hire dedicated containerized vehicles of huge capacities. In such cases they will have to an inventory holding plan for such markets. Far away market locations mean longer lead times and transportation delays. Inventory holding policy will consider these factors to work out the plan.

3.5 INVENTORY PLANNING TECHNIQUE Managing the supply of stock is notoriously difficult. There are lots of different balls that need to be juggled in the air to keep stock levels at their optimum levels. In addition, there are demands made that stock levels must not be too high; but at the same time, stock outs must be avoided at all costs. Selecting the proper ordering technique, is the primary responsibility of inventory management who must facilitate the actualization of business objectives while executing inventory planning and control functions designed to achieve least total cost and high serviceability for inventory, transportation, warehousing, and staffing.

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3.5.1 INVENTORY DEMAND Inventory Management deals essentially with balancing the inventory levels. Inventory is categorized into two types based on the demand pattern, which creates the need for inventory. The two types of demand are Independent Demand and Dependent Demand for inventories. a) Independent Demand An inventory of an item is said to be falling into the category of independent demand when the demand for such an item is not dependent upon the demand for another item. Independent demands for inventories are based on confirmed Customer orders, forecasts, estimates and past historical data. In dependent demand, the need for any one item is a direct result of the need for some other item. Independent demand (i.e., the demand by consumers) is influenced by market conditions outside the control of operations. In independent demand, the demands for various items are unrelated to each other. Independent demand calls for a replenishment philosophy. Orders are made to replenish inventory. The sources of independent item demand come from direct orders arising from customer and inter branch requirements. b) Dependent Demand If the demand for inventory of an item is dependent upon another item, such demands are categorized as dependant demand. Dependent (or derived) demand is related to the demand for another item. Dependent demand calls for a requirements philosophy. Orders are made if there is a demand or requirement for the final product. For example, parts, intermediate goods, and raw materials face a demand dependent on the demand for the final goods. Raw materials and component inventories are dependent upon the demand for Finished Goods and hence can be called as Dependant demand inventories. Take the example of a Car. The car as finished goods are a held produced and held in inventory as independent demand item, while the raw materials and components used in the

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manufacture of the Finished Goods - Car derives its demand from the demand for the Car and hence is characterized as dependant demand inventory.

3.5.2 INVENTORY ORDERING TECHNIQUE Techniques by which management sets a minimum stock level or re-order point (ROP). When the number on-hand reaches or drops below the ROP, an order is generated. This can be done through a manual process or generated automatically by inventory management software. There are many types of systems for planning and controlling inventories. Some of the very simple techniques are:

1. Visual Review System Visual review systems can be used effectively for every low-volume or low-cost items with short lead times and for controlling floor stocks located near the point of use, such as nuts and bolts. It involved with the replenishment which is determined by physically reviewing the quantity on hand. If replenishment is required, a target quantity is ordered that restores balances to a pre-established stocking level. Replenishment levels are determined by such simple decision rules as reorder when the bin is half-full, or when there are two pallets of stock remaining. Example: Using pallets as your card or signal and drawn-out boxes on the floor as your bins. Take one or more away and this is the signal to buy or produce more to fill the bin.

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2. Two Bin System An inventory control system used to monitor the quantity of an item left behind. This technique is a fixed order system in which inventory is carried in two bins (or some other form of container), one of which is in the picking area and the other is held in reserve in a non-picking location in the stockroom. Procedurally, when the picking bin is emptied, the reserve bin is brought forward demand. The empty bin serves as the trigger for replenishment. The quantity required per bin is calculated as the minimum stock necessary to service demand while waiting for the arrival of the replenishment stock from the supplier. When the purchased quantity arrives, it is placed in the empty bin and stocked in a nonpicking location until the picking bin’s inventory is depleted. The two-bin inventory control method is mainly used for small or low value items. For example, when items in the first bin have finished, an order is placed to refill or replace these items. The second bin is supposed to have enough items to last until the placed order arrives. The first bin has a minimum of stock, and the second bin keeps reserve stock or remaining material. Bin cards and store ledger cards are used to record the inventory.

3. Periodic Review In this ordering system, a fixed review cycle is established for each product, and replenishment orders are generated at the conclusion of the review to meet a predetermined max stock level. The review cycle can be established in days, weeks, months, or quarters, whichever best satisfies the demand requirements. This method is also called a fixed-cycle/variable order quantity system. Periodic review is best used to control large inventories characterized by many small issues, such as occurs in a grocery store or an automotive small parts service business.

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4. Time Phased Order Point (TPOP) TPOP is a method for determining when to buy based on the time-phased grid used in MRP. The purchase quantity is usually a fixed lot size, but TPOP does allow for buying discretely, in response to actual demand. TPOP is a computerized management tool that plans inventory needs in a prioritysequenced, time phased manner to meet customer and forecast demand as it occurs. This technique is at the heart of MRP and DRP systems used for the control of manufacturing and distribution channel inventories. The time-phased order point (TPOP) is used for the planning & control of independent demand is not continuous. Using the time phased order point approach for independent demand items allows the system to tell people; when to order more materials, how to reschedule material already on order to earlier or later time periods and when to generate planned order releases for lower-level Material Requirement Planning. 5. Supply Chain Optimization Inventory management in the 21st century will require planning systems that enable the optimization of inventory, not just within an individual company, but within entire supply chains. As product life cycles continue to shrink and global sourcing, spurred on by the internet, it will be the ability of whole supply chains to move product rapidly and efficiently through the supply channel network that will determine market leadership. Based on TPOP application logic and JIT principles, a new breed of inventory control system term Supply Chain Planning (SCP) has begun to supplant the primacy of former methods of inventory management that were restricted to the four walls of the enterprise. Optimization means providing a balance of supply to meet the demand at a minimum total cost, Inventory level and workload to meet customers service goal for each item in the link of Inventory Chain.

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3.5.3 JUST IN TIME (JIT) Just-in-time, or JIT, is an inventory management method in which goods are received from suppliers only as they are needed. The main objective of this method is to reduce inventory holding costs and increase inventory turnover. Just-in-time also known as JIT is an inventory management method whereby labour, material, and goods (to be used in manufacturing) are re-filled or scheduled to arrive exactly when needed in the manufacturing process. JIT approach has the capacity, when adequately applied to the organisation, to improve the competitiveness of the organisation in the market significantly by minimizing wastes and improving production efficiency and product quality. JIT is a manufacturing management process. It was first developed and applied in the Toyota manufacturing plants to meet consumer demands with minimum delays. Taiichi Ohno of Japan is referred to as the father of Just in Time. Toyota met the increasing challenges for survival through a management approach that was entirely focused on people, systems, and plants. Toyota realised the Just in Time approach would only be successful if every person within the Toyota was committed and involved in it, and if plant and processes were properly arranged for maximum efficiency and output, and if the quality of the goods produced and production programs were scheduled to meet demands exactly. The focus of JIT is to identify and correct the obstacles in the production process. It shows the hidden problems of inventory. The prime objective of JIT is to increase the inventory turnover and reduce the holding and all connected cost. Just In Time method prevents a company from using excessive inventory and smoothens production operations if a specific task takes longer than expected or a defective part is discovered in the system. This is also one of the main reasons why the companies (which are opted for JIT) invest in preventive maintenance; when a part/equipment breaks down, the entire production process stops.

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This concept was made applicable again by the Japanese firms, placing an order for the material, the same day of the production of the product. The Just in Time approach eliminates the requirement to carry voluminous inventories and incur heavy carrying other related costs to the manufacturer. To avail the benefits of JIT system, there should be an optimum synchronization between the manufacturing cycle and delivery of material. Just In Times requires a good understanding of the supplier and the manufacturer in terms of the quantity and delivery of the material. In the event of any misunderstanding between the manufacturer and supplier of the material, the entire production process may come to a halt. One example of a JIT system is a car manufacturer, a manufacturer of cars operates with bare minimum inventory levels, as there is a strong reliance on the supply chain to deliver the parts required to manufacture cars. The parts required in the manufacturing of cars do not arrive before or after they are needed; rather, they arrive only when they are needed. Successful JIT implementation wholly depends on how the manufacturer manages its suppliers. A lot of pressure is exerted on them, as the supplier of the materials must be ready with ample quality material, as the need arises. Just-in-time (JIT) inventory management, also known as lean manufacturing and sometimes referred to as the Toyota production system (TPS), is the process of ordering and receiving inventory for production and customer sales only as it is needed and not before. This means that the company does not hold safety stock and operates with low inventory levels. This strategy helps companies lower their inventory carrying costs by increasing efficiency and decreasing waste. Following are the seven wastes, as categorized by Taiichi Ohno: 1) Overproduction -- Manufacture of products in advance or more than demand wastes money, time, and space. 2) Waiting -- Processes are ineffective and time is wasted when one process waits to begin while another finishes. Instead, the flow of operations should be

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smooth and continuous. According to some estimates, as much as 99 percent of a product's time in manufacture is spent waiting. 3) Transportation -- Moving a product between manufacturing processes adds no value, is expensive and can cause damage or product deterioration. 4) Inappropriate processing -- Overly elaborate and expensive equipment is wasteful if simpler machinery would work as well. 5) Excessive inventory wastes resources through costs of storage and maintenance. 6) Unnecessary motion -- Resources are wasted when workers have to bend, reach or walk distances to do their jobs. Workplace ergonomics assessment should be conducted to design a more efficient environment. 7) Defects -- Inspecting and quarantining inventory takes time and costs money.

3.5.3.1 IMPORTANCE OF JUST IN TIME (JIT) Just in time requires carefully planning the entire supply chain and usage of superior software to carry out the entire process till delivery, which increases efficiency and eliminates the scope for error as each process is monitored. Here are some of the important effects of a just-in-time inventory management system: a) Reduces inventory waste A just-in-time strategy eliminates overproduction, which happens when the supply of an item in the market exceeds the demand and leads to an accumulation of unsalable inventories. These unsalable products turn into inventory dead stock, which increases waste and consumes inventory space. In a just-in-time system you order only what you need, so there’s no risk of accumulating unusable inventory. b) Decreases warehouse holding cost Warehousing is expensive, and excess inventory can double your holding costs. In a just-in-time system, the warehouse holding costs are kept to a minimum. Because you order only when your customer places an order, your item is already Page | 52

sold before it reaches you, so there is no need to store your items for long. Companies that follow the just-in-time inventory model will be able to reduce the number of items in their warehouses or eliminate warehouses altogether. c) Gives the manufacturer more control In a JIT model, the manufacturer has complete control over the manufacturing process, which works on a demand-pull basis. They can respond to customers’ needs by quickly increasing the production for an in-demand product and reducing the production for slow-moving items. This makes the JIT model flexible and able to cater to ever-changing market needs. For example, Toyota doesn’t purchase raw materials until an order is received. This has allowed the company to keep minimal inventory, thereby reducing its costs and enabling it to quickly adapt to changes in demand without having to worry existing inventory. d) Local Sourcing Since just-in-time requires you to start manufacturing only when an order is placed, you need to source your raw materials locally as it will be delivered to your unit much earlier. Also, local sourcing reduces the transportation time and cost which is involved. This in turn provides the need for many complementary businesses to run in parallel thereby improving the employment rates in that demographic. a) Smaller investments In a JIT model, only essential stocks are obtained and therefore less working capital is needed for finance procurement. Therefore, because of the less amount of stock held in the inventory, the organization’s return on investment would be high. The Just-in-time models uses the “right first time” concept whose meaning is to carry out the activities right the first time when it’s done, thereby reducing inspection and rework costs. This requires less amount of investment for the company, less money reinvested for rectifying errors and more profit generated out of selling an item.

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3.5.3.2 HOW DOES JUST IN TIME (JIT) WORK

3.5.3.3 ADVANTAGES OF JUST IN TIME (JIT) i.

Just-in-time approach keeps stock holding costs to a minimum level. The released capacity results in better utilization of space and bears a favourable impact on the insurance premiums and rent that would otherwise be needed to be made.

ii.

The just-in-time approach helps to eliminate waste. Chances of expired or out of date products; do not arise at all.

iii.

As under this management method, only essential stocks which are required for to manufacturing are obtained, thus less working capital is required.

iv.

Under this approach, a minimum re-ordering level is set, and only when that level is reached, order for fresh stocks is made and thus this becomes a boon to inventory management too.

Due to the abovementioned low level of stocks held, the ROI (Return on Investment) of the organizations be high in general.

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vi.

As this approach works on a demand-pull basis, all goods produced would be sold, and thus it includes changes in demand with unanticipated ease. This makes JIT appealing today, where the market demand is fickle and somewhat volatile.

vii.

JIT emphasizes the ‘right-first-time’ concept, so that rework costs and the cost of inspection is minimized.

viii.

By following JIT greater efficiency and High-quality products can be derived.

ix.

Better relationships are fostered along the production chain under a JIT system.

Higher customer satisfaction due to continuous communication with the customer.

xi.

Just In Time adoption result in the elimination of overproduction.

3.5.3.4 DISADVANTAGES OF JUST IN TIME (JIT) i.

IT approach states ZERO tolerance for mistakes, making re-work difficult in practice, as inventory is kept to a minimum level.

ii.

A successful application of JIT requires a high reliance on suppliers, whose performance is outside the purview of the manufacturer.

iii.

Due to no buffers in JIT, production line idling and downtime can occur which would have an unfavourable effect on the production process and on the finances.

iv.

Chances are quite high of not meeting an unexpected increase in orders as there will be no excess inventory of finished goods.

Transaction costs would be comparatively high depending upon the frequency of transactions.

vi.

JIT may have certain negative effects on the environment due to the frequent deliveries as the same would result in higher use and cost of transportation, which in turn would consume more fossil fuels.

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3.5.4 VENDOR MANAGED INVENTORY (VMI) Vendor Managed Inventory (VMI) is a business model where the buyer of a product provides information to a vendor of that product and the vendor takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer's consumption location. A third-party logistics provider can also be involved to make sure that the buyer has the required level of inventory by adjusting the demand and supply gaps. VMI makes it less likely that a business will unintentionally become out of stock of a good and reduces inventory in the supply chain.

3.5.4.1 ADVANTAGES OF USING VMI One of the benefits of VMI is that the vendor is responsible for supplying the customer when the items are needed. That can lead to: i.

Removal of safety stock.

ii.

Lower inventory levels.

iii.

Reduction in purchasing-related admin costs.

iv.

VMI removes the need for the customer to have significant safety stock because the supplier manages the resupply lead times. Lower inventories for the customer can lead to significant cost savings.

The customer also can benefit from reduced purchasing costs. Because the vendor receives data and not purchase orders, the purchasing department must spend less time on calculating and producing purchase orders.

vi.

In addition, the need for purchase order corrections and reconciliation is removed which further reduces purchasing costs. Cost saving can also be found in reduced warehouse costs. Lower inventories can reduce the need for warehouse space and warehouse resources.

vii.

The supplier/manufacturer can gain some benefits from vendor managed inventory as they can gain access to a customer's point of sale (POS) data makes their forecasting somewhat easier. Manufacturers can also work their Page | 56

customers' promotional plans into forecasting models, which means enough stock will be available when their promotions are running. viii.

As a manufacturer has more visibility to their customer inventories level, it is easier to ensure that stockout will not accrued as they can see when items need to be produced.

ix.

VMI - when deployed correctly - is one way to help you supply your customers what they want, when they want it - because - assuming your vendors are managing your inventory in an optimized fashion - you should always have stock on hand. And will be able to ship on time.

VMI can also help you keep your costs down, since the goal of VMI is to keep your inventory levels lowered and provide your resupply as needed.

3.5.4.2 DISADVANTAGES OF USING VMI i.

The disadvantages of VMI include needing to allow a non-employee access to your inventory data and sometimes your actual physical inventory. You're also relying on a third party to keep your inventory levels where you need them to be, and that perceived lack of control can sometimes be unnerving to supply chain professionals.

ii.

One of the biggest drawbacks to VMI, however, can be its impact on sourcing. Oftentimes, supply chain managers will feel like they can't find another source for a product that is being managed by a supplier they trust.

iii.

If a supply chain manager becomes too reliant on a supplier to manage its inventory, the supply chain manager may live with higher prices, reduced quality, or other supplier-related issues. Supply chain managers also find it difficult, at times, to have multiple sources for a product that’s being managed by a supplier.

iv.

As a supplier, if you can earn the trust of your customer and demonstrate the ability to optimize your customer's inventory using VMI, you know that you are likely going to remain the supplier of that product for the long haul. It's difficult enough for a supply chain manager to engage in a sourcing project when there is no VMI impact. A well-run VMI makes a re-sourcing exercise not just onerous, but a very low priority. Page | 57

Activity 3.1 – Define objective of inventory management

B A

I S

C F

U E

U G

L O

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Activity 3.2 – Inventory Management System (IMS)

Provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with customers.

Define of IMS?

_____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________

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Activity 3.3 – List Components of Inventory Management

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Activity 3.4 – Reason for holding Inventory Management

M I

E N

P M

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A G I

H V

R O

I S

N P

E L

R Page | 62

Activity 3.5 – List of Inventory Planning Technique

I________________ O________________ T________________

I____________ D____________

INVENTORY PLANNING TECHNIQUE J____________ I____________ T____________

V______________ M______________ I______________

Activity 3.6 – List of Inventory Demand Technique

_____ _____ V____ R____ S______

T_____ B____ S______

IOT

P______ R_____

O______ P_____

T______ P______ O_____ P______

S_____ C_____ O________

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Activity 3.7 – Define Just In Time (JIT)

What is definition of Just In-Time (JIT)?

An Inventory strategy companies ____________________________

__________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________

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Activity 3.8 – List seven (7) waste, as categorized by Taiichi Ohno

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Activity 3.9 – Define Vendor Managed Inventory (VMI)

Vendor Managed Inventory (VMI) is a ________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________

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CHAPTER 4

SYMPTOMS OF POOR INVENTORY MANAGEMENT At the end of this chapter, student should be able to: 4.0 Explain the symptoms of Poor Inventory Management 4.1 List several issues in logistics 4.2 List the effect of poor Inventory on business 4.3 Define the symptoms of poor Inventory Management 4.4 List ways to reduce the level of Poor Inventory Management 4.5 Define the ways to reduce the levels of poor Inventory Management Puzzle Activity

4.0 INTRODUCTION Inventory management is the very definition of a necessary evil. You can't run a business without it, but managing inventory requires resources like good partners, time, space and of course money. It's a cost of doing business to keep your manufacturing operation running efficiently. There is no surprise then that a lack of inventory control has negative effects that reach many parts of the supply chain. It's important to know the signs - here’s some of the symptoms of poor inventory control.

A challenge faced by many small business owners is the maintenance of a proper product inventory. Unlike large chains, small businesses rarely have the luxury of abundant storage space, so owners must be vigilant to ensure they don't run out of key items or carry too much inventory. Business owners should also be aware of factors that can lead to poor inventory control. Inventory should not be excessive or inadequate. If the inventories are kept at a high level, there were higher interest and storage cost occurs. On the other hand, if the inventory is kept in low level, it may result in frequent interruption in the production schedule, thus resulting in underutilization of capacity and lower sales. Logistics must help to work effectively.

4.1 SEVERAL KEY ISSUES

For effective logistics, there are several key issues: movement of product, movement of information, time, service, and costs.

a) Transport of products is often the way that logistics is viewed in many companies. Moves of products should complement the company strategy. If the emphasis is on cost reduction, lower inventories, customer service or whatever, then products must move in a way that is consistent with the emphasis. Product must also flow, not just move. If it does not flow, then there Page | 68

is not a supply pipeline. Instead, there are imbalances in inventories with components and finished goods not being where they should be. The movement may be extremely broad in geographical scope. Raw materials and completed units can move between and among all regions of the world. While other departments in the company may focus on select geographical regions for sourcing, manufacturing or sales, logistics must deal with all of these. b) Transfer of Information. It is not enough to move product and materials. We must know where they are. We must know what orders are coming in and when they must be delivered. Information (timely and accurate) is vital for sound decision-making. The information must flow between the company and its suppliers, carriers, forwarders, warehouses, and customers. It must also move internally among purchasing, customer service, logistics, manufacturing, sales, marketing, and accounting. Investment in information technology is not an alternative anymore; it is a requirement for logistics and company effectiveness. c) The view of Time. Ability to respond to the dynamics of the global marketplace must be quick. Raw materials and components must be ordered and arrive completely, accurately, and quickly. Orders must be filled completely, accurately, and quickly. It is no longer months or weeks for lead times. Hours may decide customer service, competitiveness and value-added. Back orders are not tolerated. If company cannot properly respond customers will look for those who can. Time is one of the critical issues in logistics. There are external and internal factors, which must be recognized if time is to be reduced effectively. Management must understand the process and the co-operation and integration required. Their customers will not accept excuses, mistakes, and failure. d) Service is more than having to expedite a shipment. Service is a factor of competition, customer requirements, the company’s position in the industry, the company culture. Logistics is the link among all this. And the more diverse the geographical scope of vendors, manufacturing, warehouses, and

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customers, the more critical is time. Distance means time. Time delays are not acceptable now. Movement of product and movement of information show their impact here. e) Cost is the key measure by which logistics effectiveness is often measured. The highest price does not mean the best service, and it may not be the service we need. Nor does the lowest price necessarily meet our needs. There is no doubt about how important costs are. But the company must be careful. Minimizing the cost of the various logistics elements, such as freight and warehousing can sub-optimize the effectiveness of the logistics group and of the company in satisfying its customers. Cost has a relation to service.

4.2 POOR INVENTORY EFFECT ON BUSINESS

Inventory is among the more significant sources of revenue for a company. After all, inventory equals profit, so an accurate accounting of product in stock and inventory to be ordered can have a dramatic financial impact on your business. In fact, bad inventory can have a damaging effect on your organization and can affect more than just the bottom line.

a) Poor Customer Service The lack of inventory control can result in delayed product shipments to customers. Moreover, the bad inventory due to lack of control can create a scenario in which you don't have the proper parts available for a product because you failed to check your inventory. This result in customer dissatisfaction and overall poor service to the clients you serve. b) Loss of Cost Effectiveness Bad inventory can be quite costly to your organization. Entrepreneur.com states that if you have too much inventory, it has the potential to be destroyed or damaged over time due to reasons beyond your control. If you have no system to weed out bad inventory, you also may end up with shrinkage (inventory lost to Page | 70

theft). If you are spending more on additional inventory that you don't need -because you don't know what you have -- you are wasting money. c) Poor Planning Businesses track inventory so that they are always able to fulfil customer orders. However, many businesses also plan, and when you start with a bad cache of inventory, then you cannot properly plan. Moreover, if you have an unexpectedly large order which is great for business, but your bad inventory may again cost you money if you can't fulfil it.

4.3 SYMPTOMS OF POOR INVENTORY MANAGEMENT

Unqualified employees in charge of inventory.

Too many companies set their people to in charge the inventory, but many of them do not have enough experience and don’t have adequate training thus resulting the neglectful in their job. Lack of formal training program or professional peer interaction. Inventory management is a professional skill that requires upfront and on-going education. ii.

The processes or job specification that worker use is not wide enough.

The inventory workers just do the simple task in the management, and they do not encompass all the job spec and factors in the company. Example, the workers do not make some record and copy whiles the process if inbound and outbound. iii.

Misinformed or miscommunication between staff.

When the staff or worker is not informed about the high-selling and slowmoving products, they will continue to make mistakes ordering, resulting in costly under stock and overstock situations. Two ways communication are important to reduce miscommunication.

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iv.

Ping-pong situation.

The Ping-pong situation happens between the supervisor and management thus cause the exact quantity of inventory cannot be measure. A supervisor in charge in inventory management are failed to check their inventory on a regular basis to make enough product are in stock. The shortage of inventory in company can lead to bad customer relationship because customer needs to wait the shipment of inventory come to the company. v.

An unrealistic business plans for a business for the future.

To forecast how well a company will perform in future, we must gain and collect the enough data accurately analyzed it. This step will affect the inventory management, because if a company predict more growth than they experience, it can lead to an overstock of inventory. vi.

Missed Sales from Under-Stocking.

This happens when you can’t immediately fulfill an order because of a stockout of the ordered item. When this happens, the customer looks elsewhere to make his purchase. The damage caused by lost sales depends on the price of the item and the order quantity. Having a stock-out of a popular item during a peak buying season can be very costly. vii.

Lost Customers from Under-Stocking.

Customers rarely look back after they find a company that can promptly fulfill their orders at a competitive price. They will continue to give the company their business until they have a reason to do otherwise. If these customers were turned away because of a stock-out problem in your inventory, you have lost their repeat business. Every one of these lost customers is a lost source of recurring profit for your company. As with the previous point, having a stock-out and losing many customers during a peak buying season will have a long-term impact on your business.

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viii.

Tied Up Money from Over-Stocking

Conversely, inventory that doesn’t move is tied up money that could have been put to better use. It is money that could have been used to pay wages, pay off debts, purchase more fast-moving inventory, pay the rent, or expand your business. Inventory often has a limited shelf life because of spoilage, obsolescence, material degradation, or changing consumer trends. If your inventory exceeds its shelf life, this tied-up money is lost.

4.4 WAYS TO REDUCE LEVEL OF POOR INVENTORY MANAGEMENT Inventory takes on a lot of different identities within a manufacturing company, depending on who's doing the looking. An accountant sees inventory as an asset, a controller sees it as a liability, a production supervisor considers it a safety net, while a materials manager finds it a tightrope. One common aspect to inventory, though, is that everybody agrees that holding it can be costly. The following are a dozen ways to reduce inventory. i.

Counting current Stock.

Counting current stock is important because it is the only ways to know if there was some problem with theft occurring at some point in the supply chain. It made us to more aware of such problem you can take steps to eliminate them. ii.

Cyclical Counting.

Many companies prefer to count inventory on a cyclical basis to avoid the need for shutting down operations while stock is counted. This means that a particular section of the warehouse or plant is counted at times, rather than counting all inventory at once. In this way, the company takes a physical count of inventory, but never counts the entire inventory at once. While this method may be less accurate than counting the whole, it is much more cost effective.

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iii.

Controlling Supply and Demand.

Whenever possible, obtain a commitment from a customer for a purchase. In this way, you ensure that the items you order will not take space in your inventory for long. When this is not possible, you may be able to share responsibility for the cost of carrying goods with the salesperson, to ensure that an order placed result in a sale. You can also keep a list of goods that can easily be sold to another party, should a customer cancel. Such goods can be ordered without prior approval. iv.

Stock Control.

You should set minimum and maximum quantities which your buyers can order without prior approval. This ensures that you are maximizing any volume discounts available through your vendors and preventing overordering of stock. It is also important to require pre-approval on goods with a high carrying cost. v.

Managing Small Items.

The company may use the ABC analysis to control the inventory in the company. This is because, inventory control simply knows how much inventory that we have, and it is also to control loss of the goods. By the ABC analysis, the company mane made segregation according to the moving of the items. For example, ‘A’ item is top valued 20 % of the company inventory, both in the terms of the cost and the need of the product in the manufacturing or sales process. ‘B’ items are the item is those of middle range and ‘C’ item are cheap and rarely in demand. Through this classification, the company may know how to manage their inventory and may monitor the stock according to the value of the stock. In the ABC classification, we can see that ‘A’ item would be counted and tracked regularly, while ‘B’ and ‘C’ item would be counted only monthly or quarterly only.

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vi.

Keeping Accurate Records.

Any time items arrive at or leave a warehouse, accurate paperwork should be kept, itemizing the goods. When inventory arrives, this is to find breakage or loss on the goods you order. Inventory leaving your warehouse must be counted to prevent loss between the warehouse and the point of sale. Even samples should be recorded, making the salesperson responsible for the goods until they are returned to the storage facility. Records should be processed quickly, at least in the same day that the withdrawal of stock occurred.

vii.

Using technology.

While inventory control software can certainly provide with the correct numbers and give them a nudge when it’s time to reorder certain items. By technology, human error can be reducing. Pairing barcoding technology with an innovative inventory management solution is critical, as both can provide the company with real-time data and analytics to make the right inventory decisions. viii.

Multichine inventory planning. ABC analysis is an example of such planning.

ix.

Lead time analysis.

Delivery time analysis. This may lead to a change in carriers or negotiation with existing carriers.

xi.

Elimination of low turnover and/or obsolete items.

xii.

Analysis of pack size and discount structure.

xiii.

Installation of formal reorder review systems.

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Activity 4.1 – List several issues in logistics 1.

N O

Activity 4.2 – List the effect of poor inventory in business P L R A S F G H N P C V E

R O R S V I K B O L N M F

B S O C D N Y O V A N T F

J S F R F T R Y B N A J E

C B Q V C J H R I N Z E C

A C W N I U T V S I N Q T

S A F B K N S G A N K V I

V I T J N E E T Q G O D V

N N H K O A R B O A O E E

P B J L I X V Z F M V B N

O V O P B Z I R I E E T E

O E I R L V C S N Q B R S

T S L T S T E Y K C N I S

1. _______________________________________________________ 2. _______________________________________________________ 3. _______________________________________________________

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Activity 4.3 – Match the symptoms of poor inventory management

Unqualified employees in charge of inventory

To forecast how well a company will perform in future, we must gain and collect the enough data accurately analyzed it.

The processes or job specification that worker use is not wide enough.

The situation happens between the supervisor and management thus cause the exact quantity of inventory cannot be measure.

Misinformed or miscommunication between staff

Too many companies set their people to in charge the inventory, but many of them do not have enough experience and do not have adequate training thus resulting the neglectful in their job.

Ping-pong situation

An unrealistic business plans for a business for the future

The inventory workers just do the simple task in the management, and they do not encompass all the job spec and factors in the company.

When the staff or worker is not informed about the high-selling and slowmoving products, they will continue to make mistakes ordering, resulting in costly under stock and overstock situations.

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Activity 4.4 – Match ways to reduce level of poor inventory management

Counting current Stock

Cyclical Counting

Controlling Supply and Demand

Managing Small Items

Keeping Accurate Records

Whenever possible, obtain a commitment from a customer for a purchase. In this way, you ensure that the items you order will not take space in your inventory for long. The company may use the ABC analysis to control the inventory in the company. This is because, inventory control simply knows how much inventory that we have, and it is also to control loss of the goods.

Counting stock is important because it is the only ways to know if there was some problem with theft occurring at some point in the supply chain.

Any time items arrive at or leave a warehouse, accurate paperwork should be kept, itemizing the goods.

Many companies prefer to count inventory on a cyclical basis to avoid the need for shutting down operations while stock is counted.

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Activity 4.5 – Puzzle Activity 1 P

5 A 4 O 6 U

2 D

9 R

3 A

7 S

10 E

8 R

1. Inventory management is a ______________ skill that requires upfront and on-going education. 2. ________Distressed product is the ______ or material in inventory that has or will soon pass the point where it can be sold at normal prices. 3. A small business may be tempted to take _______ of a special price on an item by purchasing it in bulk. 4. This is _____________ by a company to changes in the market demand. As the demand of the market changes, a company may panic and order an overstock of inventory. 5. The data input of the storages was not ____________. 6. When the system ____ by the company are not user-friendly, it was causing the improper management if inventory in company. 7. While inventory control _____ can certainly provide with the correct numbers and give them a nudge when it’s time to reorder certain items. Page | 79

8. The in-store logistics managers use an inventory ______ management process to respond to store-level inventory reorder points and reorder products. 9. ______ should be processed quickly, at least in the same day that the withdraw of stock accurate. 10. Reward systems should be set in place that ______ high levels of customer service and return on investment for the product lines the buyer manages.

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CHAPTER 5

METHODS IN IMPROVING INVENTORY MANAGEMENT At the end of this chapter, student should be able to: 4.0

Explain the symptoms of Poor Inventory Management

4.1

List several issues in logistics

4.2

List the effect of poor Inventory on business

4.3

Define the symptoms of poor Inventory Management

4.4

List ways to reduce the level of Poor Inventory Management

4.5

Define the ways to reduce the levels of poor Inventory Management

Puzzle Activity

5.0 INTRODUCTION INVENTORY VALUATION Inventory valuation is an accounting practice that is followed by companies to find out the value of unsold inventory stock at the time they are preparing their financial statements. Inventory stock is an asset for an organization, and to record it in the balance sheet, it needs to have a financial value. This value can help you determine your inventory turnover ratio, which in turn will help you to plan your purchasing decisions. To give you an example, if you run a shoe business and you’re left with 50 pairs of shoes at the end of the year, then you need to calculate their financial value and record it in your balance sheet. Let’s look at how and why you’ll calculate the value.

5.1 IMPORTANCES OF INVENTORY VALUATION Identifying the unsold items is just one step in inventory valuation. You also need a rate that you can multiply by the quantity to arrive at a final value. You may have paid different prices for these items throughout the year, so you need to choose a technique to calculate a common rate.

5.2 REASON OF INVENTORY VALUATION

Inventory valuation is important for the following reasons: i)

Impact on cost of goods sold. If you record a higher valuation in ending inventory, this leaves less expense to be charged to the cost of goods sold, and vice versa. Thus, inventory valuation has a major impact on reported profit levels.

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ii)

Loan ratios. If an entity has been issued a loan by a lender, the agreement may include a restriction on the allowable proportions of current assets to current liabilities. If the entity cannot meet the target ratio, the lender can call the loan. Since inventory is frequently the largest component of this current ratio, the inventory valuation can be critical.

iii)

Income taxes. The choice of cost-flow method used can increase or reduce the amount of income taxes paid. The LIFO method is commonly used in periods of rising prices to reduce income taxes paid.

5.3 METHODS OF INVENTORY VALUATION

The valuation of an inventory directly affects the inventory, total current asset, and total asset balances. Inventory cost at the end of an accounting period may be determined in the following ways: a) First In First Out (FIFO) - This method assumes that the first inventories bought are the first ones to be sold, and that inventories bought later are sold later. b) Last In First Out (LIFO) - This method assumes that the last inventories bought are the first ones to be sold, and that inventories bought first are sold last. c) Weighted Average (WA) - This method assumes that we sell all our inventories simultaneously. d) Highest In, First Out (HIFO) - According to this method, the inventory of materials or goods should be valued at the lowest possible prices. Materials or goods purchased at the highest prices are treated as being first issued/sold irrespective of the date of purchase. e) Lowest in First Out (LOFO) - LOFO means that first the reserves or material with low purchase price are consumed.

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f) Next in, first out (NIFO) - This valuation method attempts to keep the production cost accurate according to the prices prevailing in the accounting period in which material was consumed and not based on the prices prevailing in the period when material was bought. g) First Expired First Out (FEFO) - is most practiced in the food and beverage and the pharmaceutical industries, where expiration dates and shelf-life cycles are of critical importance. 5.4 DEFINITION OF SIX SIGMA (6-SIGMA)  A set of practices designed to improve manufacturing processes and eliminate defects, but its application was subsequently extended to other types of business processes as well.  A management program that seeks to improve the quality of process outputs by identifying and removing the causes of defects and variation in various processes.  Seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes.  A highly disciplined process that helps us focuses on developing and delivering near- perfect products and services.

5.5 WHY SIX SIGMA (6-SIGMA)

Why "Sigma"? The word is a statistical term that measures how far a given process deviates from perfection. The central idea behind Six Sigma is that if you can measure how many "defects" you have in a process, you can systematically figure out how to eliminate them and get as close to "zero defects" as possible. To achieve Six Sigma Quality, a process must produce no more than 3.4 defects per million opportunities. An "opportunity" is defined as a chance for nonconformance, or not meeting the required specifications. This means we need to be nearly flawless in executing our key processes Page | 84

5.6 CONCEPT OF SIX SIGMA (6-SIGMA)

Critical to quality

Attributes most important to the customer

Defect

Failing to deliver what the customer wants

Process capability Variation Stable operations Design for six sigma

What your process can deliver What the customer sees and feels Ensuring consistent, predictable processes to improve what the customer sees and feels Designing to meet customer needs and process capability

5.7 METHOD TO APPLY SIX SIGMA (6-SIGMA)

DMAIC: The DMAIC method is used primarily for improving existing business processes. The letters stand for: •

Define the problem and the project goals

•

Measure in detail the various aspects of the current process

•

Analyse data to, among other things, find the root defects in a process

•

Improve the process

•

Control how the process is done in the future

DMADV: The DMADV method is typically used to create new processes and new products or services. The letters stand for: •

Define the project goals

•

Measure critical components of the process and the product capabilities Page | 85

•

Analyse the data and develop various designs for the process, eventually picking the best one.

•

Design and test details of the process.

•

Verify the design by running simulations and a pilot program, and then handing over the process to the client.

5.7 METHOD OF INVENTORY CONTROL a) ABC Analysis b) Economic Order Quantity (EOQ) c) Pareto Principles d) Forecasting

5.7.1 ABC ANALYSIS This inventory categorization technique splits subjects into three categories to identify items that have a heavy impact on overall inventory cost. •

Category A serves as your most valuable products that contribute the most to overall profit.

•

Category B is the products that fall somewhere in between the most and least valuable.

•

Category C is for the small transactions that are vital for overall profit but don’t matter much individually to the company altogether.

5.7.2 ECONOMIC ORDER QUANTITY (EOQ) •

Economic order quantity, or EOQ, is a formula for the ideal order quantity a company needs to purchase for its inventory with a set of variables like total costs of production, demand rate, and other factors.

•

The overall goal of EOQ is to minimize related costs. The formula is used to identify the greatest number of product units to order to minimize buying. The Page | 86

formula also takes the number of units in the delivery of and storing of inventory unit costs. This helps free up tied cash in inventory for most companies. •

Only one product is involved.

•

Annual demand requirements known.

•

Demand is even throughout the year.

•

Lead time does not vary.

•

Each order is received in a single delivery.

•

There are no quantity discounts.

5.7.3 PARETO PRINCIPLE •

The Pareto principle (also known as the 80–20 rule) states that, for many events, roughly 80% of the effects come from 20% of the causes. For an example, 20 percent of your inventory on hand occupies 80 percent of your warehouse space. The distribution is claimed to appear in several different aspects relevant to entrepreneurs and business managers. For example:

•

80% of a company's profits come from 20% of its customers

•

80% of a company's complaints come from 20% of its customers

•

80% of a company's profits come from 20% of the time its staff spend

•

80% of a company's sales come from 20% of its products

•

80% of a company's sales are made by 20% of its sales staff Therefore, many businesses have an easy access to dramatic improvements in profitability by focusing on the most effective areas and eliminating, ignoring, automating, delegating, or retraining the rest, as appropriate.

5.7.3.1 HOW TO USE IT •

Identification: The first step in a Pareto analysis is identifying what factors cause the issue.

•

Period: A time for the analysis is then established.

•

Graph: The Pareto analysis requires summarizing and graphing the causes and frequency. The graph is then analysed with respect to the 80/20 concept to Page | 87

determine the frequency of causes. •

A Pareto chart illustrates the Pareto principle by mapping frequency, with the assumption that the more frequently something happens, the more impact it has on outcome. It is a vertical bar graph in which values are plotted in decreasing order of relative frequency from left to right. Pareto charts are extremely useful for analyzing what problems need attention first because the taller bars on the chart, which represent frequency, clearly illustrate which variables have the greatest cumulative effect on a given system.

5.7.4 FORECASTING Forecasting refers to the practice of predicting what will happen in the future by taking into consideration events in the past and present. Basically, it is a decisionmaking tool that helps businesses cope with the impact of the future’s uncertainty by examining historical data and trends. It is a planning tool that enables businesses to chart their next moves and create budgets that will hopefully cover whatever uncertainties may occur. Businesses choose between two basic methods when they want to predict what can possibly happen in the future, namely, qualitative, and quantitative methods. 1. Qualitative method Otherwise known as the judgmental method, qualitative forecasting offers subjective results, as it is comprised of personal judgments by experts or forecasters. Forecasts are often biased because they are based on the expert’s knowledge, intuition, and experience, and rarely on data, making the process non-mathematical. One example is when a person forecasts the outcome of a finals game in the NBA, which, of course, is based more on personal motivation and interest. The weakness of such a method is that it can be inaccurate. Three important qualitative forecasting methods are: the Delphi method, scenario writing, and the subject approach (expert judgement). Page | 88

2. Quantitative method The quantitative method of forecasting is a mathematical process, making it consistent and objective. It steers away from basing the results on opinion and intuition, instead utilizing large amounts of data and figures that are interpreted. Four important quantitative forecasting methods are: the casual (explanatory), time series, smoothing, and trend and seasonal).

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Activity 5.1 – Define Inventory Valuation

An Inventory Valuation ______________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ _________________________________________________________________

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Activity 5.2 – Identify reason of Inventory Valuation

P O

C T

F S

Activity 5.3 – List method of Inventory Valuation 1.

FIFO (___________________________)

LIFO (___________________________)

WA (____________________________)

HIFO (___________________________)

LOFO (___________________________)

NIFO (___________________________)

FEFO (___________________________)

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Activity 5.4 – Definition of Six Sigma

 A set of ___________________________________________________________ _____________________________________________________________________ _____________________________________________________________________  A management program _____________________________________________ _____________________________________________________________________ _____________________________________________________________________  A highly disciplined _________________________________________________ _____________________________________________________________________ _____________________________________________________________________

Activity 5.5 – Reason of Six Sigma

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Activity 5.6 – Key concept of Six Sigma

_____________________________________

Critical to quality

_____________________________________ _____________________________________

__________

Process Capability

__________

Failing to deliver what the customer wants

_____________________________________ _____________________________________ _____________________________________

What the customer sees and feels

_____________________________________

__________

Design for Six Sigma

_____________________________________ _____________________________________

_____________________________________ _____________________________________ _____________________________________

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Activity 5.7 – Method to apply Six Sigma

DMAIC

DMADV

_____

_____ _

______

_____

______

_______

Activity 5.8 – Method of Inventory control

R Q

E A

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R R

T N

Activity 5.9 – Define ABC Analysis

CATEGORY A

• ________________________ • ________________________

CATEGORY B

• ________________________ • ________________________

CATEGORY C

• _________________________ • _________________________

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Activity 5.10 – Define Economic Quantity (EOQ)

Only one ___________ are involved.

ii.

Annual _______ requirements known.

iii.

Demand is even _____________ the year.

iv.

Lead time is not _________.

Each order is received in a single _________.

vi.

There is no quantity _________.

Activity 5.11 – Define Pareto Principles

 The ________________ (also known as the 80-20 rule) states that, for many events, roughly 80% of the effects come from 20% of the causes.  Examples:  _______ of a company’s profits come from 20% of its __________.  80% of a company’s __________ come from 20% of its customers.  _______ of a company’s profits come from 20% of the time its staff ______.  _______ of a company’s sales come from 20% of its ________.  80% of a _________ sales are made by 20% of its _______ staff.

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Activity 5.12 – Define Forecasting

FORECASTING

_____

C_____

T______

______

S______

T______

D_______

S________

E________

Activity 5.13 – Crossword

I J T O H Y P L A U K A D M A D V H O S N A

A M U P L Z Q M B V L B I A B P W L P G O B

B K P Q J A R N C W M C R B C R X M Q H P Z

C L V R K B S O D X N D E C D O Y N R Y Q D

P M W T O C T P E Y P E C F E D Z P S U R F

A N X U L V U Q F Z O W T O F U A R T J S G

R O Y W M D I R G A Q F L R G C B O Y K T T

E P Z F N E V N H B R D A E F E C D M A I C

T Q A I O F X S G C S E B C H A D U J Y E S

O I B F P G Y T I D T F O A I D E C K Z O E

A N C O Q H Z U J A U G R S J E F T L A Q R

N C D W R I A V K S V H F T K F G I M E A F

A O E X L J B W L S W I S I L E H O N D N H

L M F Y I K C X M E X J I N M C I N O E A J

Y E G Z F L D Y N T Y K X G N T J O P F L S

S T H A O M E X I S Z L S A O S K V Q T Y G

I A I B S H F Z O E A M I N P G L E R Y S K

S X J C T I G A P F B N G A Q J M R S J I T

D E K D U F H L Q G C O M L R L N H T K S U

E S L E V O I O R H D P A Y S K O E U L U I

F R M F W N J F S I E Q B S T T P A V P V S

1. In chapter 5, we discuss about the method in _______ inventory management. 2. At the end of each financial year business must account for all their __________. Page | 97

G S N G X O K O T J F R C I U V Q D W N W Q

H A B C A N A L Y S I S D S V W R W B M B R

3. The costs that can be included in an inventory valuation are: i)______ ii)_____ 4. Importance of inventory valuation: ____. 5. Method to inventory valuation: i)________ ii)______ iii)_______ iv)_______ 6. A set of practices designed to improve manufacturing processes and eliminate are _____. 7. To achieve six-sigma quality, a process must _________no more than 3.4 _____ per million opportunities. 8. We have _______ key concepts of six-sigma. 9. This is accomplished using _______ six sigma sub-methodologies. i)_______ ii) _____ 10. Inventory control method are: i)_______ ii) ________ iii) ________ iv) __________

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CHAPTER 6

REVERSE LOGISTICS At the end of this chapter, student should be able to: 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7

Explain reverse logistics Define reverse logistics and forward logistics Define traditional reverse logistics Define reverse logistics activity List ten (10) examples of reverse logistics Explain reverse logistics process Explain terms of reverse logistics Distinguish between reverse logistics and forward logistics 6.8 Identify eleven (11) element keys of reverse logistics 6.9 List the impact of reverse logistics 6.10 Define reverse logistics and the environment 6.11 Explain environment consideration impact on Industry 6.12 Explain differences and similarities in reverse logistics and green logistics Puzzle Activity

6.0 INTRODUCTION Reverse logistics is the process of handling the return of products from a consumer or a retailer to a manufacturer using the supply chain. Reverse logistics also encompasses the recycling of packaging and containers, reconditioning or refurbishing the products and disposition of obsolete goods. Reverse Logistics delivers condition-based returns processing, including execution and management of associated processes, such as exchange orders, refurbishment, and repair requests, and return disposition. Reverse logistics is one of the least focused areas for many companies. However, the ability to recuperate assets and revenue in the supply chain is causing a refocus in this area. There is a lack of understanding of what is being returned and why. The strategies followed in reverse logistics are disparate due to the type of SKUs being handled. For example, an online consumable retailer and an electronics retailer. Reverse Logistics provides comprehensive capabilities to manage the end-to-end process of reverse logistics for all types of companies including retailers, manufacturers, and third-party reverse logistics providers. The reverse logistics process covers all aspects like creating a return authorization, disposition of the product and the inventory returned is restocked, returned to vendor, or scrapped. Reverse Logistics breaks up a return into individual SKUs along with their disposition. Visibility provided to the disposition in the returns department allows for aggregation and routing of inventory to the respective areas. Routing is a multi-step process that incorporates requirements like refurbishment and repackaging before an inventory is restocked. The additional fields inventory attributes recorded include reason code, lot number, revision numbers and serial number. The granular visibility provided through recording of the information allows tracking of inventory from the time of receipt and through the multi-step disposition process before an item is put away to the appropriate area. Audit trail is also provided to track

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activities performed at a granular level, which includes return number, item, reason codes, disposition, inventory attributes and user. Many companies are unaware of the amount of inventory tied up in the return and repair process. High-value products and parts may sit in technicians' vans or inspection centres for weeks before they are sent for repair or returned to stock. Often these parts require no repair and could immediately be resold to another customer. Reverse Logistics enables companies to effectively track items throughout the return and repair process and automates the procedures that return items to stock. Real-time status updates from service and repair organizations enable your company to truly leverage the reverse logistics cycle as a source of supply.

6.1 DEFINE REVERSE LOGISTICS “The process of planning, implementing, and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods, and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements”.

6.2 DEFINE FORWARD LOGISTICS “The process of planning, implementing, and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal.”

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A sales forecast is used to project sale requirements, when a certain amount of product is required, they will be shipped to the warehouse or DC (distribution centre) and then shipped to the retail stores from DC. At every single level of the supply chain, ASNs (Advanced Shipping Notices) will be assisting the useful information as the products flow.

When a return occurs, the returned product will be collected (in many ways) and sent to the distribution centre. At the same time the relevant information about the return item description, condition of return, customer information and more will be transferred to the return processing centre, but unfortunately, given the current state of the reverse logistics status quo, this information capture process rarely occurs or is inaccurate. Yes, there is the possibility of using a returns management authorization (RMA) process to capture data and track everything, but still, that can begin with instore interaction at the point of return. It’s all very subject to the nuances of each customer, their preferences, and where customers choose to return an item.

6.3 WHY REVERSE LOGISTICS Traditionally, manufacturers did not feel responsible for their products after consumer use. The bulk of used products were dumped or incinerated with considerable damage to the environment. Today, consumers and authorities expect manufacturers to reduce the waste generated by their products. Therefore, waste

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management has received increasing attention. If no goods or materials are being sent "backward", the activity probably is not a reverse logistics activity.

6.4 DIFFERENCES BETWEEN REVERSE LOGISTICS AND TRADITIONAL LOGISTICS Reverse logistics deals with recapturing value from products, parts and materials that have been returned from the end consumer. Traditional logistics, on the other hand, deals with the flow of products from the manufacturing factory all the way to the consumer. The reverse logistics process usually involves returns, recalls, repairs, repackaging for restock or resale, recycling, and disposal. Traditional logistics involves direct order fulfilment, hub services, pick-and-pack services, and shipping. Retail and e-commerce businesses use traditional logistics for moving products to customers, but not all use reverse logistics. Companies that collect and reuse some part of their distributed goods usually use reverse logistics, which can translate to anything from a spring water company that collects and recycles used bottles to a shipping service that allows customers to reuse boxes or recycles them to make new ones. Apple is one of the best examples of reverse logistics. The company encourages customers to trade in their old devices for discounts on new products. The returned items are then sent back to factories, broken down and recycled into new parts that are used in the production of new devices.

6.5 REVERSE LOGISTICS ACTIVITY Reverse logistics also includes: •

Return of goods from customer for non-performance

•

Short term rental returns

•

Returns sent to manufacturer for repairs/re-filling

•

Reusable containers/Packages Page | 103

•

Return of inputs not used by manufacturer/ Goods not sold by distributions

•

Exchange of new product for the old ones

•

Goods sent for up-gradation/modification

•

Recycling of product

•

processing returned merchandise due to damage

•

seasonal inventory

•

restock

•

salvage of outdated product

• •

recalls excess inventory

•

recycling programs

•

hazardous material programs

•

obsolete equipment disposition

•

asset recovery

6.6 TEN (10) EXAMPLES OF REVERSE LOGISTICS Reverse logistics is any process that involves moving things from the customer back to the producer. This includes business processes that involve transport from distribution endpoints such as retail locations back in the supply chain to locations such as warehouses and factories. The following are common types of reverse logistics. 1) Returns Handling customer returns of goods such as claims under a warranty. 2) Returns Avoidance Processes that seek to minimize returns such as support websites or local repair shop partners. 3) Remanufacturing Building products with a combination of reused, repaired, and new parts. 4) Refurbishing Reconditioning used goods for resale.

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5) Packaging The use of durable packaging that is reused by continuously returning it backwards in the supply chain. This may include packages that the customer uses and returns such as beverage bottles. 6) Unsold Goods In some cases, unsold goods may be returned by distribution partners according to the terms of their contract. 7) End-of-Life Accepting goods at the end of their life for reuse and recycling. 8) Delivery Failure Deliveries that don't complete such as refusal of delivery by customers. 9) Rentals & Leasing Customers returning things that are on loan such as an equipment rental. 10) Repairs & Maintenance Returning things to the producer for repair and maintenance.

6.7 REVERSE LOGISTICS FLOW VS TRADITIONAL LOGISTICS FLOW

Reverse logistics is quite different from the traditional logistics, or forward logistics, activities. The below figure is a traditional logistics flow:

Sales forecast is used to project sale requirement, when certain amount product is required, they will be shipped to the DC (distribution centre) and then shipped to the retail stores from DC. At every single level of the supply chain, ASNs (Advanced Shipping Notices) will be assisting the useful information as the products flow.

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Reverse logistics flow, however, is a different story. Shippers generally do not initiate reverse logistics activity because of planning and decision making on the part of the firm, but in response to actions by consumers or downstream channel members. Here is the figure outlining what is reverse logistics flow:

Ter Resell Reuse Repair/ Repackage Recycling Reconditioning Refurbishing

Definition When a returned product may be sold again as new. e.g.: sale to another country. The packaging is reused, or a product is sent back for resale to another customer. Where a moderate amount of repair or repackaging will allow the product to be reused. After sale service, the goods will be repaired to forward back to the customer. When a product is reduced to its basic elements, which are reused. e.g.: recycle paper turn to name card. When a product is cleaned and repaired to return it to a “like new” state (to its basis element which are reused). e.g.: wash the chili bottle and refill it. Similar with reconditioning except with perhaps more works involved in repairing the product. The goods will be renewed.

Remanufacturing Similar with reconditioning but requiring more extensive works, often requires completely disassembling the product. The goods will reproduce.

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6.9 DIFFERENCE OF REVERSE LOGISTICS AND FORWARD LOGICTICS

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6.10 KEYS ELEMENT OF REVERSE LOGISTICS

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6.11 IMPACT OF REVERSE LOGISTICS Positive: 1. Increase in aftermarket efficiencies. 2. Helping the customer to get advantage when customer know the product have some problem. 3. Creates a more productive logistics process. 4. Enables the customer to increase profits by focusing attention on other core competencies. 5. Decrease in service, inventory, and processing costs. 6. Allowing a third-party service provider to perform this crucial will save the customer, a valuable time and money. 7. Increased revenues realized from secondary sales. 8. Offering new products in place of unsold or slow selling stock. 9. Reduced operating costs from reuse of recovered products and components. 10. Higher asset turnover due to better management of returns inventory. 11. Reduced administrative, transportation and aftermarket support costs. 12. Increased velocity. 13. Increased service market share. 14. Higher achievement of sustainability goals. Negative 1. Lack of trained personals. 2. Lack of inventory information. 3. Lack of Clear Strategy. 4. Lack of Proper Process Documentation. 5. Improper Costing. 6. Lack of Legal Documentation. 7. Lack of Customer Support. 8. Improper Project Management. 9. Unclear Objectives. 10. If third party logistics are involved, there is a chance of loss of control. Page | 109

11. Unexpected fees are incurred, like labour cost. 12. Inability to understand the rationale of returns. 13. Inadequate labour resources to “handle” returns. 14. Cycle times tend to be longer. It refers to the time an organisation takes to routinely fill customer orders and related activities.

6.12 GREEN LOGISTICS AND ENVIRONMENT Green logistics, in the context of humanitarian logistics encourages all stakeholders to consider the impact of their actions on the environment. The main objective of green logistics is to coordinate the activities within a supply chain in such a way that beneficiary needs are met at "least cost" to the environment. It is a principal component of reverse logistics. In the past “cost” has been defined in purely monetary terms, whereas "cost" can now also be understood as the external costs of logistics associated with climate change, air pollution, dumping waste (including packaging waste), soil degradation, noise, vibration, and accidents. Green or sustainable logistics is concerned with reducing environmental and other negative impacts associated with the movement of supplies. Green supply chains seek to reduce negative environmental impact by redesigning sourcing/distribution systems and managing reverse logistics to eliminate inefficiencies.

6.13 ENVIRONMENTAL IMPACT ON LOGISTICS a) Green Logistics and Reverse Logistics •

Reverse Logistics refers to all efforts to move goods from their typical place disposal to recapture value.

•

Green Logistics refers to minimizing the ecological impact of logistics, for example, reducing energy usage of logistics activities and reducing usage of materials.

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b) Landfill costs and availability •

There is a shortage of landfill space

•

Prices of landfill usage have been rising.

•

Considering the rate at which Americans generate waste, landfill alternatives must be developed.

•

New ways are considered to prolong the lives of existing landfills by reducing the volume of material that goes into them.

•

The reduction in material sent to the landfill can be achieved through recycling, composting and incineration.

c) Disposal Bans and Reverse Logistics •

Products are banned from being placed in a landfill either because they present a health risk, example the cathode ray tubes (CRTs) in computer monitors, or because they take up too much space.

•

Products banned from landfills are motor oil, household batteries, household appliances, paper products, tires, and some medical and electrical equipment.

•

Product ban represents a new reverse logistics opportunity.

d) Product Take-Back •

Several societal changes regarding the environment are having a profound impact on reverse logistics.

•

Firms are forced to take their products back when they are banned; this benefits the firms in two ways. They reuse the products and recapture their value. The firm is exposed as an environmentally friendly company.

•

Companies have begun to examine new ways to regain value from products once they have reached the end of their useful lives.

•

Companies have begun to realize the potential marketing benefits of a take-back program.

•

Many companies such as Compaq, Hewlett-Packard, and Xerox have adopted the Extended Product Responsibility (EPR) program. EPR focuses on the total life of the product, looking for ways to prevent pollution and reduce resource and energy usage through the product’s life cycle. Page | 111

6.14 DIFFERENCES AND SIMILARITIES IN REVERSE LOGISTICS AND GREEN LOGISTICS

The most significant difference is that reverse logistics concentrates on saving money and increasing value by reusing or reselling materials to recover lost profits and reduce operational costs. Green logistics concentrates on transportation issues, recycling, and re-use. A comparison between reverse logistics and green logistics the differences and the overlap between the two conceptions are presented in the figure. The overlap means there are some activities applied both to reverse logistics and to green logistics, such as recycling, remanufacturing and reusable packaging. Reverse logistics differs from green supply chain as the latter concentrates on environmental impact of all logistics activities especially the activities involved in traditional forward logistics. The environmental issues in green logistics are reduced consumption of natural resources, air emissions, congestion and road usage, noise pollution, and both hazardous and non-hazardous waste disposal. So green logistics investigate supply chain with respects to environmental and ecological activities while reverse logistics emphasizes more on the profitability of strategic recovery options. The overlap means there are some activities applied both to reverse logistics and to green logistics. Green logistics investigate supply chain with respects to environmental and ecological activities while reverse logistics emphasizes more on the profitability of strategic recovery options

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Activity 6.1 – Define Reverse and Forward Logistics

REVERSE LOGISTICS____________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ FORWARD LOGISTICS__________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

Activity 6.2 – Define Traditional Forward Logistics

Traditionally, ________________ did not feel responsible for their ____________ after ____________ use. The bulk of used products were ___________ or _______________with considerable damage to the environment. Today, consumers and authorities expect manufacturers to _________ the waste generated by their __________. Therefore, waste management has received increasing attention. If no goods or materials are being sent "backward", the activity probably is not a __________________ activity. Page | 113

Activity 6.3 – Define Reverse Logistics Activity

Return sent to _____________ for repairs/re-filling.

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Activity 6.4 – List Ten (10) Examples of Reverse Logistics

R A

T O

R D

S N

3. 4.

N F

U G

S O

L S

G N

D F

L I

V U

R E

R L

N A

A I

L G

10.

R M

I T

P I

S N

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Activity 6.5 – Explain Reverse Logistics Process

When a return occurs, __________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________

Activity 6.6 – Explain Terms of Reverse Logistics

TERMS

DEFINITION

Resell Reuse Repair/Repackage Recycling Reconditioning Refurbishing Remanufacturing

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Activity 6.7 – Distinguish between Reverse Logistics and Forward Logistics

REVERSE LOGISTICS

FORWARD LOGISTICS

1. 2. 3. 4. 5. 6. 7. 8.

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Activity 6.8 – Identify Eleven (11) Elements Keys of Reverse Logistics

C D C

M S C

A O E

I I T

G I M

R L I S

V G F S

R S R E

E I A S

S I

C R C

N T N

R R E

Z R R A R

R T

M D F

A R N

10.

F M

11.

R N

S C G

T V T

N N T

R A

N G O

I I M

N L N

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Activity 6.9 – List the Impact of Reverse Logistics

POSITIVE

NEGATIVE

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Activity 6.10 – Define Green Logistics and The Environment

Green Logistics is ____________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

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Activity 6.11 – Explain Environmental Considerations impact in Logistics

1. Green logistics and Reverse Logistics. 2. Landfill costs and availability

3. Disposal Bans and Reverse Logistics

4. Product Take-Back

Activity 6.12 – Explain Differences and Similarities in Reverse Logistics and Reverse Logistics

The most significant difference is ______________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

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Activity 6.13 – PUZZLE ACTIVITY

1 R

2 E 7 E 4 G 5 A 3 B

5 A

8 G

10 G

6 C 1. The product would travel in ______ through the supply chain network to retain any use from the defective product. 2. The difference is that reverse logistics _________ all these activities as they operate in reverse. 3. If no goods or materials are being sent “_______”, the activity probably is not a reverse logistics activity. 4. ______ retailers were the first to begin to focus serious attention on the problem of returns and to develop reverse logistics innovations. 5. Today, consumers and _______ expect manufacturers to reduce the waste generated by their products.

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6. Once a product has been returned to a company, the firm has many disposal options from which to ______. 7. Many organisations do not have the _____, manpower or infrastructure for processing returns and expanding to start up a new operating system of returns. 8. Reverse logistics can include _____ feedback to make improvements and to improve the understanding of real reasons for product returns. 9. _______ is the screening of defective and unwarranted returned merchandise at the entry point into the reverse logistics process. 10. _____ or sustainable logistics is concerned with reducing environmental and other negative impacts associated with the movement of supplies.

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ANSWERS CHAPTER 1 Activity: 1.1 Inventory Inventory is the stock of any item or resources used in an organization. Inventory is an idle stock of physical goods that contains economic, value, and are held in various from by an organization. Management Mainly to a form strives to attain and uphold an optimal of goods while also taking note of all orders company and handling, and other associated costs. Inventory Does not decisions or manage operations, they provide the Management information to managers who make more accurate and truly decisions to manage their operations. Activity: 1.2 R Raw Material W Work in Process F Finished Goods D Distribution Inventory M Maintenance, Repair and Operating (MRO) Supplier Activity: 1.3 M Manufacturing Business R Retailer and Distribution S Services Business Activity: 1.4 CYCLE STOCK Inventory is among the most important parts of an overall inventory since it is the first-place customer purchases will come from. An inventory that results from replenishment of inventory sold or used in the production. IN-TRANSIT Inventories are items that are end-route from location to another. Inventory is usually referred for on the place of STOCK shipment as it is not available at the destination. SAFETY An inventory held in reserve to protect against the uncertainties of supply and demand and used to cover @BUFFER unpredictable fluctuations in demand. STOCK SPECULATIVE It refers to inventory that a business obtains and holds in anticipation of future demand, rather than to meet current STOCK demand. SEASONAL Stock is a form of speculative stock that involves accumulation of inventory before a seasonal period begins. This is product STOCK Page | 123

DEAD STOCK

that is stockpiled to allow for expected large increases in demand. A term used to describe merchandise that was never sold to or used by consumers before being removed from sale, usually because it was outdated.

Activity: 1.5 S Seasonality M Manufacturing P Price Increase A Availability Activity: 1.6 Holidays

Fashion

Recreation

Back to school

1 2 3 4 5

Activity: 1.7 REDUCE THE PRICE BUNDLE IT WITH OTHER PRODUCTS OFFERS DISCOUNT COUPONS SELL ON ONLINE MARKET PLACE RETURN IT TO THE SUPPLIER

1 2 3 4 5 6 7

Cross Activity Inventories Persuade Smooth Requirements Current Ensure, minimize Stock Page | 124

8 9 10 11 12 13 14 15 16 17 18 19 20

Unused, Value Customer Various Manufacturing Distributor Services Three Speculative Percolative Investment Decoupling Profit Just in time

ANSWERS CHAPTER 2 Activity: 2.1 Meaning Inventory refers to all the items, goods, merchandise, and materials held by a business for selling in the market to earn a profit. Definition Inventory management refers to the process of ordering, storing, using, and selling a company's inventory. Explanation This includes the management of raw materials, components, and finished products, as well as warehousing and processing of such items. Example: If a newspaper vendor uses a vehicle to deliver newspapers to the customers, only the newspaper will be considered inventory. The vehicle will be treated as an asset.

1 2 3 4 5 6 7 8

Activity: 2.2 Material Sources Inbound transportation Production material Production In-process Finished good Outbound transportation Finished Goods Warehousing Customers

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Activity: 2.3 E Economies of scale B Balanced Supply and Demand E Enables specialization in manufacturing P Provides protection from uncertainties in demand and order cycles A Act as a buffer between critical interfaces within supply chain

1 2 3 4 5

Activity: 2.4 Time lag between placing orders and getting supplies at the point of consumption Demand variability Seasonal Inventory Pipeline Inventory Other factors

Activity: 2.5 Improve Improve customer service Encourage Encourage production economies Permit Permit purchase and transportation economies Protect Protect against uncertainties in demand and lead time Act as Act as a hedge against price changes Act as Act as hedge against continencies Activity: 2.6 Holding Costs (Carrying Cost) Setup (production change) Costs Ordering Costs Shortage Costs

1 2 3 4 5 6 7

Inventory Storage Cost, Cost of Capital -

Activity 2.7 Stock-keeping Units (SKUs) Dead Inventory Deals Substitute Items Complementary Items Informal Arrangement Outside The Distribution Channel Repair or Replacement parts

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Activity: Cross Word HORIZONTAL 1 Institution, process 2 Material 3 Demand 4 Operations, processing 5 Greater, size 6 Key 7 Market VERTICAL 1 Purchased 2 Strike 3 Include 4 Similar 5 Consumer 6 Changing 7 Number

ANSWERS CHAPTER 3

1 2 3 4 5

Activity: 3.1 Customer Services Buffering against Uncertainty Maximizing Profit Protect company against theft, obsolescence, and wastage Continuously of the goods

Activity: 3.2 A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.

1 2 3 4 5 6 7

Activity: 3.3 Barcode Scanner Mobile Computer Inventory Software Barcode Printer Drones Autonomous Intelligent Robotic Automation Page | 127

1 2 3 4 5 6 7 8 9 10

Activity: 3.4 Meet variation in production demand Cater to cyclical and seasonal demand Economics of scale in procurement Take advantage of price increase and quantity discounts Market penetration Reduce transit cost and transit times Long lead and high demand items need to be held in inventory Market and supply chain design Market size, location, and Supply design Transportation and physical barriers

Activity: 3.5 ID Inventory Demand IOT Inventory Ordering Technique JIT Just in Time VMI Vendor Managed Inventory Activity: 3.6 ID Independent Demand, Dependent Demand IOT Visual Review System Two Bin System Periodic Review Order Point Time Phased Order Point Supply Chain Optimization Activity: 3.7 Just in Time - An Inventory Strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. This method requires to forecast demand accurately.

1 2 3 4 5 6 7

Activity: 3.8 Overproduction Waiting Transportation Inappropriate processing Excessive Inventory Unnecessary motion Defects Page | 128

Activity: 3.9 VMI – Vendor Managed Inventory (VMI) is a business model where the buyer of a product provides information to a vendor of that product and the vendor takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer's consumption location. The vendor creates orders for their customers based on demand information that they receive from the customer. Customers provide information to the key supplier, including historical usage, current inventory levels, minimum and maximum stock levels, sales forecasts and upcoming promotions, who then takes on the responsibility and risk for planning, managing and monitoring the replenishment of inventory. The supplier may even own the inventory until the product is sold.

ANSWERS CHAPTER 4

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Activity: 4.1 Transport of products Transfer of information The view of time Service Cost

Activity: 4.2 1 Poor Customer Services 2 Loss of Cost Effectiveness 3 Poor Planning Activity: 4.3 Unqualified employees in charge of Inventory

The processes or job specification that worker use is not wide enough Misinformed or miscommunication between staff

Too many companies set their people to in charge the inventory, but many of them do not have enough experience and don’t have adequate training thus resulting the neglectful in their job. The inventory workers just do the simple task in the management, and they do not encompass all the job spec and factors in the company. When the staff or worker is not informed about the high-selling and slowmoving products, they will continue to make mistakes ordering, resulting in costly under stock and overstock situations. Page | 129

Ping Pong Situation

An unrealistic business plans for a business for the future

Activity: 4.4 Counting Current Stock

Cyclical Counting

Controlling Supply and Demand

Managing Small Items

Keeping Accurate Records

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The situation happens between the supervisor and management thus cause the exact quantity of inventory cannot be measure. To forecast how well a company will perform in future, we must gain and collect the enough data accurately analysed it.

Counting current stock is important because it is the only ways to know if there was some problem with theft occurring at some point in the supply chain. Many companies prefer to count inventory on a cyclical basis to avoid the need for shutting down operations while stock is counted. Whenever possible, obtain a commitment from a customer for a purchase. In this way, you ensure that the items you order will not take space in your inventory for long. The company may use the ABC analysis to control the inventory in the company. This is because, inventory control simply knows how much inventory that we have, and it is also to control loss of the goods. Any time items arrive at or leave a warehouse, accurate paperwork should be kept, itemizing the goods.

Activity: Puzzle Activity Professional Distressed Advantages Over-reaction Accurate Usage Software Replenishment Record Encourage

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ANSWERS CHAPTER 5 Activity: 5.1 An Inventory Valuation – allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current assets of a business, and proper measurement of them is necessary to assure accurate financial statements. Activity: 5.2 1 Impact on cost of goods sold 2 Loan ratios 3 Income taxes

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Activity: 5.3 FIFO – First in, First Out LIFO – Last in, First Out WA – Weighted Average HIFO – High in, First Out LOFO – Lowest in, First Out NIFO – Next in, First Out FEFO – First Expired, First Out

Activity: 5.4 A set of – practices designed to improve manufacturing processes and eliminate defects, but its application was subsequently extended to other types of business processes as well. A management program that seeks to improve the quality of process outputs by identifying and removing the causes of defects and variation in various processes. A highly disciplined process that helps us focuses on developing and delivering near-protect products and services. Activity: 5.5 Why Six-Sigma – The word is statistical term that measures how far a given process deviates from perfection. The central idea behind Six Sigma is that if you can measure how many defects you have in a process, you can systematically figure out how to eliminate them and get as close to Zero defects as possible. To achieve Six Sigma Quality, a process must produce no more than 3.4 defects per million opportunities. An ‘Opportunity” is defined as a chance for nonconformance, or not meeting the required specifications. This means we need to be nearly flawless in executing our key processes. Page | 131

Activity: 5.6 Critical to quality Defect Process Capability Variation Stable Design for Six Sigma

Attributes most important to the customer Failing to deliver what the customer wants What your process can deliver What the customer sees and feels Ensuring consistent, predictable processes to improve what the customer sees and feels Designing to meet customer needs and process capability

Activity: 5.7 DMAIC Define Measure Analyse Improve Control

1 2 3 4

DMADV Define Measure Analyse Design Verify

Activity: 5.8 ABC Analysis Economic Order Quantity Pareto Principle Forecasting

Category A Category B Category C

Items are very important for an organization Items are important, but of course less important, than A items and more important than C items Items are marginally important

Define Economic Order Quantity Product Demand Throughout Vary Delivery Discounts Define Pareto Principles Pareto Principles 20%, accidents Workers Page | 132

20%, speed 80%, products Company’s, sales Define Forecasting Quantitative method Qualitative method Casual(explanatory), Time Series, Delphi, Scenario Writing, Expert Smoothing, Trends & Seasonal Judgement,

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Activity: Crossword Improving Assets Direct labour, Production Overhead Income taxa FIFO, LIFO, LOFO, NEFO Defect Produce, Defect Six Two, DMAIC, DMADV ABC, EOQ, PARETO, FORCASTING

ANSWERS CHAPTER 6 Activity: 6.1 Reverse The process of planning, implementing, and controlling the Logistics efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal. Forward “Process of planning, implementing and controlling the efficient, Logistics cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements” Activity: 6.2 Traditionally, manufacturers did not feel responsible for their products after consumer use. The bulk of used products were dumped or incinerated with considerable damage to the environment. Today, consumers and authorities expect manufacturers to reduce the waste generated by their products. Therefore, waste management has received increasing attention. Page | 133

If no goods or materials are being sent "backward", the activity probably is not a reverse logistics activity.

Activity: 6.3 •

Return of goods from customer for non-performance

•

Short term rental returns

•

Returns sent to manufacturer for repairs/re-filling

•

Reusable containers/Packages

•

Return of inputs not used by manufacturer/ Goods not sold by distributions

•

1 2 3 4 5 6 7 8 9 10

•

Exchange of new product for the old ones

•

Goods sent for up-gradation/modification

•

Recycling of product

Processing returned merchandise due to damage •

Seasonal inventory

•

Salvage of outdated product

Activity: 6.4 Returns Returns Avoidance Remanufacturing Refurbishing Packaging Unsold Goods End Of life Delivery Failure Rental & Leasing Repairs & Maintenance

Activity: 6.5 When a return occurs, the returned product will be collected (in many ways) and sent to the distribution centre. At the same time the relevant information about the return item description, condition at return, customer information etc., will be transferred to the return processing centre, but unfortunately, given the current state of the reverse logistics status quo, this information capture process rarely occurs, or occurs with less accuracy.

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Activity: 6.6 TERMS Resell

DEFINITION When a returned product may be sold again as new. E.g.: sale to another country. Reuse The packaging is reused, or a product is sent back for resale to another customer. Repair/Repackage Where a moderate amount of repair or repackaging will allow the product to be reused. After sale service, the goods will be repaired to forward back to the customer. Recycling When a product is reduced to its basic elements, which are reused. E.g.: recycle paper turn to name card. Reconditioning When a product is cleaned and repaired to return it to a “like new” state (to its basis element which are reused). e.g.: wash the chili bottle and refill it Refurbishing Similar with reconditioning except with perhaps more works involved in repairing the product. The goods will be renewed. Remanufacturing Similar with reconditioning but requiring more extensive works, often requires completely disassembling the product. The goods will reproduce.

Activity: 6.7 REVERSE LOGISTICS Product quality uniform Disposition options clear Routing of product unambiguous Inventory management consistent Financial Management issues clearer Negotiation between parties more straightforward Type of customer easy to identify and market Product life cycle manageable

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Activity:6.8 Avoiding Gatekeeping Compacting Disposition cycle time Reverse Logistics Information Systems Centralized Return Centers Zero Return

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FORWARD LOGISTICS Product quality not uniform Disposition options not clear Routing of product ambiguous Inventory management not consistent Financial Management issues uncleared Negotiation less straightforward Type of customer difficult to identify and market Product life cycle less manageable

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7 8 9 10 11

Remanufacture and Refurbishment Asset Recovering Negotiation Financial Management Outsourcing Activity: 6.9

1. 2.

3. 4.

5. 6.

7. 8. 9. 10.

POSITIVE

Increase in aftermarket efficiencies Helping the customer to get advantage when customer know the product have some problem Creates a more productive logistics process Enables the customer to increase profits by focusing attention on other core competencies Decrease in service, inventory, and processing costs Allowing a third-party service provider to perform this crucial will save the customer, a valuable time and money. Increased revenues realized from secondary sales Offering new products in place of unsold or slow selling stock Reduced operating costs from reuse of recovered products and components Higher asset turnover due to better management of returns inventory.

11.

Reduced administrative, transportation and aftermarket support costs.

12.

Increased velocity.

13.

Increased service market share.

14.

Higher achievement of sustainability goals.

NEGATIVE Lack of trained personals: Lack of inventory information

Lack of Clear Strategy Lack of Proper Process Documentation Improper Costing Lack of Legal Documentation

Lack of Customer Support Improper Project Management Unclear Objectives

If third party logistics are involved, there is a chance of loss of control Unexpected fees are incurred, like labour cost Inability to understand the rationale of returns. Inadequate labour resources to “handle” returns. Cycle times tend to be longer. It refers to the time an organisation takes to routinely fill customer orders and related activities.

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Activity: 6.10 Green logistics is in the context of humanitarian logistics encourages all stakeholders to consider the impact of their actions on the environment. The main objective of green logistics is to coordinate the activities within a supply chain in such a way that beneficiary needs are met at "least cost" to the environment. It is a principal component of reverse logistics. Green or sustainable logistics is concerned with reducing environmental and other negative impacts associated with the movement of supplies. Green supply chains seek to reduce negative environmental impact by redesigning sourcing/distribution systems and managing reverse logistics to eliminate inefficiencies. Activity: 6.11 1. Green Reverse Logistics refers to all efforts to move goods from logistics and their typical place disposal to recapture value. Reverse Green Logistics refers to minimizing the ecological impact logistics of logistics, for example, reducing energy usage of logistics activities and reducing usage of materials. 2.

Landfill costs and availability

There is a shortage of landfill space. Prices of landfill usage have been rising. Considering the rate at which Americans generate waste, landfill alternatives must be developed. Several societal changes regarding the environment are having a profound impact on reverse logistics. New ways are considered to prolong the lives of existing landfills by reducing the volume of material that goes into them. The reduction in material sent to the landfill can be achieved through recycling, composting and incineration.

Disposal Bans and Reverse logistics

Products are banned from being placed in a landfill either because they present a health risk, example the cathode ray tubes (CRTs) in computer monitors, or because they take up too much space. Products banned from landfills are motor oil, household batteries, household appliances, paper products, tires, and some medical and electrical equipment. Product ban represents a new reverse logistics opportunity. Page | 137

Product Take-Back

Several societal changes regarding the environment are having a profound impact on reverse logistics. Firms are forced to take their products back when they are banned; this benefits the firms in two ways. They reuse the products and recapture their value. The firm is exposed as an environmentally friendly company. Companies have begun to examine new ways to regain value from products once they have reached the end of their useful lives.

Activity: 6.12 The most significant difference is that reverse logistics concentrates on saving money and increasing value by reusing or reselling materials to recover lost profits and reduce operational costs. Green logistics concentrates on transportation issues, recycling, and re-use. Recycling, remanufacturing, and reusable packaging is the area where reverse logistics and green logistics intersect

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Activity: Puzzle Activity Reverse Encompasses Backward Grocery Authorities Choose Expertise Gaining Gatekeeping Green

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