Who Kills "Logistics"? - ⑬ Maintaining Optimal Inventory is the Goal of Warehouse Management

Well, it's Monday.
Monday is the day I write about logistics, my area of expertise.
Last week, I wrote an article on the theme of "TC-type warehouses and DC-type warehouses".

Today, I would like to write about how "maintaining optimal inventory is the goal of warehouse management."

What is Inventory Management

Especially in DC-type warehouses, "inventory management" is a key point.

According to JIS (Japanese Industrial Standards), "Inventory management is defined as the activity of appropriately managing the quantity of inventory assets (finished goods, work-in-progress, parts, raw materials, etc.), and is a central activity of logistics that pursues customer satisfaction and management efficiency by responding immediately to market demand trends, preventing stockouts or excess inventory, and simultaneously improving cash flow and inventory turnover rate."

In other words, inventory is treated the same as cash in financial terms.
Therefore, the most important thing is that "inventory counts are managed so that there is no discrepancy with the books." To put it extremely, if you continue to close your books without the inventory count being managed correctly, you could potentially be charged with violating the Corporate Tax Act.

On top of that (from the perspective of customer service), it is important to "be able to provide what is needed, when it is needed." In other words, you must pursue a state where inventory is neither excessive nor insufficient, and avoid incurring unnecessary inventory costs. If you hold a large amount of inventory, the products will eventually become obsolete, their selling price is expected to fall, and in some cases, you may have to dispose of them due to discontinuation or quality deterioration. This leads to the loss of the costs incurred in manufacturing or purchasing, the interest on those costs, and the logistics costs used to store them. Conversely, if you are too afraid of such events and compress inventory too much, you will cause stockouts and be unable to meet customer needs, which will lead to lost sales opportunities.

Inventory Analysis Methods

First, you must perform "inventory analysis."
This is done for each item. This is because each item has its own characteristics. Furthermore, even for the same item, its characteristics (such as fluctuations in shipment volume and frequency of inventory replenishment) change depending on the region where it is stored and the client. And demand itself also fluctuates. In other words, there is no one-size-fits-all optimal solution. Unfortunately, there is no choice but to repeat the work of finding the optimal solution every single day.

The following two methods are commonly used for inventory analysis.
Based on these factors, you can analyze which items have fast turnover and require frequent inventory replenishment, and conversely, which items are prone to becoming dead stock.
Average Inventory Days = (Inventory Quantity ÷ Daily Shipment Quantity)
Inventory Turnover = (Shipment Quantity ÷ Inventory Quantity)

The commonly cited "ABC analysis" is a Pareto chart that arranges the horizontal axis by output (shipment count in the case of logistics) in descending order to express the sales contribution of each item. However, if you change this horizontal axis to average inventory days, you can grasp the reality of inventory days for each item, and if you change the horizontal axis to inventory turnover, you can grasp the inventory turnover for each item. Generally, item groups that account for 60-70% of output (shipment count) are classified as A-rank, those that account for 80-90% as B-rank, and the rest as C-rank, and the same way of thinking can be applied to inventory days and inventory turnover.

Maintaining an Optimal Inventory Level

There are the following four factors that determine the optimal inventory level, but 1 and 2 are due to market changes or client-side circumstances, and the methods that can be proactively controlled on the logistics side are 3 and 4, "inventory replenishment."
1. Demand fluctuations
2. Average and variance of shipment volume
3. Inventory replenishment lead time
4. Frequency of inventory replenishment

Specifically, it often comes down to a choice between "replenishing variable quantities at regular intervals" or "replenishing fixed quantities at irregular intervals," and methods like "replenishing fixed quantities at regular intervals" or "replenishing variable quantities at irregular intervals" are rarely adopted. This is because "regular fixed-quantity replenishment" often leads to excess inventory, and "irregular variable-quantity replenishment" often becomes dependent on specific individuals.

"Regular variable-quantity replenishment" is often adopted for A-rank items in ABC analysis or items with large demand fluctuations. By deciding the timing of replenishment and calculating the necessary replenishment quantity before placing an order with the supplier, you can manifest the risks of missed orders, excess inventory, and stockouts.

On the other hand, "irregular fixed-quantity replenishment" is often adopted for C-rank items in ABC analysis and items with stable orders. In other words, it is adopted when you do not want to spend time on replenishment. If you order a fixed quantity, you can pattern not only the ordering procedure but also transportation and warehousing work.

It might leave human hands someday

I apologize for my lack of study, but...
I imagine that WMS (Warehouse Management Systems) equipped with AI have also been released recently. If you use such tools, the AI might take over the detailed calculations like those mentioned above and recommend the optimal replenishment method and timing.

Next week, I would like to write about how coordination with the sales department is important for maintaining optimal inventory.


◇◆◇◆◇◆◇◆◇◆◇◆◇◆
Thank you for reading to the end.

I have listed the articles I have written so far in a sitemap.
Please take a look.

<<A person who thinks scientifically>>