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LeanTech’13
2nd International Scientific Conference on Lean Technologies
Belgrade, Serbia, 5th-6th September 2013
AN APPROACH TO LEAN INVENTORY MANAGEMENT
BY BALANCED STOCK COVER
Nikola Atanasov, Danica Lečić-Cvetković, Zoran Rakićević,
Jasmina Omerbegović-Bijelović, Lena Đorđević
University of Belgrade, Faculty of Organizational Sciences
Jove Ilića 154, 11000 Belgrade, Serbia
atanasovn@fon.bg.ac.rs, danica@fon.bg.ac.rs, zrakicevic@fon.bg.ac.rs,
omeja@fon.bg.ac.rs, lena.djordjevic@fon.bg.ac.rs
ABSTRACT
Stock cover refers to the length of time that available inventory will last if
forecasted consumption occurs. It is represented by the key performance indicator
calculating the number of days of forecasted consumption which the current stock
level can face. The identified problem is that production companies in the fast
changing environment are facing an increasing pressure to reduce working capital
in order to manage planning and replenishment of a growing variety of products and
to deliver a certain level of customer satisfaction. In practice, when calculating the
"Stock Cover" indicator companies opt for one of three ways, among which there
are large deviations in planning frequency and launching the orders for procurement
or/and production, as well as a wide aberration in the volume of customer orders
(hence stock); which directly affects costs and competitiveness of enterprises. Lean
management of inventories assumes keeping a stock in defined corridors, triggering
replenishment at the right time and continuously reducing working capital. The idea
of the authors of this study was: make "Stock Cover" indicator more efficient and
effective in the operational management of production and/or distribution
companies using the "Balanced Stock Cover". The goal of this paper is to recognize
the possibilities to apply "Stock Cover” as a key performance indicator set in a
balanced way to support the decision making process in inventory replenishment.
KEYWORDS: "Stock Cover", key performance indicators, lean inventory
management, planning in supply chain
INTRODUCTION
The rapid development of technology and the shortening of product life cycle
create a business environment where competitiveness is increasingly important for
company's success. Modern customers expect an increasing variety of products and
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permanent improvement of the quality of products and services (delivery, for
example) as well as low prices. Such business conditions require the needs for
constant development of products / services, improvement of the production, supply
and distribution processes (and maintenance of inventories of raw materials and
(semi) products), as well as advancement of management (and planning) - using
new methods and techniques of business management.
The aim of this paper is to present one of the possible ways to improve the
performance of a production/distribution company using a new approach to
inventory management. The authors discuss the development of the inventory
management concept based on key performance indicators (KPI). Specifically, a
"Stock Cover" indicator (StC) is considered as a managerial performance and the
improvement of its application through three manifestations / indicators that are
presented in this paper.
LEAN INVENTORY BASED ON KEY PERFORMANCE INDICATORS
According to Chase et al. (2006) lean concept means an integrated set of
activities designed with the aim to reach a high volume of production and meet
customer requirements at the highest possible level using minimal inventories of
raw materials, semi finished and finished products. According to Demeter &
Matyusz (2011) one of the sources of waste and expenses is overproduction, write-
offs, unnecessary waiting, excessive transportation and inventory.
The main task of inventory management is to coordinate the realization of
common stock policy adopted by different actors in the supply chain; there by the
common goal is balancing the asset flows and minimizing the costs along with
rapidly meeting customer requirements (Giannoccaro & Pontrandolfo, 2002).
Inventories arise in operations (Slack et al., 2010) because the timing of supply and
timing of demand for products are not the same. Inventories often represent the
largest portion of working capital, thus binding capital that could be otherwise used
in a more profitable manner. Excess inventories can lead to the risk i.e. to their
damage, loss and/or obsolescence. On the other hand, too low stocks can lead to the
risk of running out of stock, impossibility to meet the demand and thus miss the
sale. Accordingly, the overall objective of inventory management is to achieve the
planned / projected levels to satisfy customer requirements, keeping inventory costs
within acceptable, pre-set limits. In this context (Roy, 2005), decision-makers must
make two fundamental decisions - concerning the timing of order, and the size of
the order.
Lean manufacturing philosophy considers stock as a form of waste and the
cost that should be permanently reduced. According to Zipkin (1991), Cooper &
Maskell (2008) and Eroglu & Hofer (2011), inventory management in accordance
with the lean philosophy has become a synonym to a good inventory management.
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KPI in inventory management, considered and used in this study, means "the
cover of demand by stock - Stock Cover" (StC) which sets the priorities for the
replenishment of certain products and thus determines the timing of the launch of
production orders and/or purchasing (Omerbegovic-Bijelovic, 2006). Based on StC
it is possible to make a decision on a timely replenishment.
StC as KPI cannot be considered independently of other KPIs by a
production company (or in chains in which it operates), but it is important to realize
the impact of a decision on the overall operation and other KPIs which are used.
According to Lin & Chen (2005), besides using KPI in inventory management,
production companies have defined (among others) a KPI that measures the level of
customer satisfaction - Customer Service Level (CSL), its values, indicating to
those who monitor management quality (Omerbegovic-Bijelovic, 1998) whether the
established concept of inventory management achieves desired results. The basic
concept of determining customer satisfaction and appropriate ways to measure the
satisfaction is given in Meyr (2009), while further research on the application of
CSL indicators, with a selection of customers, is presented in the paper by Lecic-
Cvetkovic et al. (2010). Also, Babarogic et al. (2012) pointed out the possibility to
maximize the level of customer satisfaction at a production company that operates
with a limited production capacity. The value of CSL is in direct correlation with
the available stock (which meets the demand). According to Okulewicz (2009) it is
possible to create a supply system that provides the necessary stock to meet
customer requirements without causing unnecessary costs. In order to achieve a
certain level to meet customer requirements, the same authors emphasize the
importance of appropriate levels of safety stock to prevent possible situations of
missing opportunity to meet orders and miss sales.
BALANCED STOCK COVER
The main role of a KPI is "in conjunction with other KPIs, to be a useful
indicator of meeting business goals" (Thatcher, 2011). Stock cover, expressed by
StC indicator represents the time period in which the available stock can meet the
projected demand (Omerbegovic-Bijelovic, 2006). Another accepted term for this
KPI is "Inventory to sale ratio"; it observes the amount of current stocks compared
with the average historical sales or planned/forecasted monthly demand. StC
indicator allows monitoring the increase or decrease in inventories and ordering of
new stock. In particular, the basic form of the StC indicator is calculated based on
the stocks that are available at the company and that can meet the current demand
for the products:
(1)
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The complex structure of StC indicators, in addition to the currently available
stock, takes into consideration inventory that will be available in a short period of
time (inventory in transit, inventory on the way) - by the time it is necessary to meet
already received customer orders:
(2)
The authors have identified three different approaches to measuring StC:
a) Based on historical sales:
(3)
b) Based on sales plan:
(4)
c) Based on last estimation sales plan:
(5)
As the different perspectives of consideration may give different values of
StC (which becomes a vector StC = (StChs, StCsp, StCle)), the authors of this study
suggest measuring the balance of these three indicators - the components of the
vector StC = (StChs, StCsp, StCle). One of the possible ways is achieved by
measuring the distance of realized values of these three StC indicators from the
corresponding values in the ideal point (IP).
The IP of balance of StC indicators is the intersection of desired values of all
three StC indicators. Taking into account that the company tends to have the
optimal stock (StCopt, without discussing here the way of their determination), the
target value of the indicator is StCopt = StChs = StCsp = StCle. The intersection of
realized values of the three StC indicators represents the realized value of StC
(Realized Point, RP). The difference between the coordinates of IP and RP indicates
the compliance of the indicator StC in RP; it is a new three-dimensional indicator
(BStC) - an indicator of balance of StC in RP with values ScT in IP (Figure 1).
IP (with the three dimensions of the target values of the indicators) and RP
(three realized values of indicators StC) represent an ordered pair (p (p1, p2, p3), q
(q1, q2, q3)). For distance measurement the Euclidean metric is used - whose
formula is based on the Euclidean distance. Euclidean distance between points p
and q is the line that connects pq. According to the Cartesian coordinates, p = (p1,
p2, p3) and q = (q1, q2, q3) are two points in Euclidean space. The point position in
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Euclidean space is the Euclidean vector. The specified distance between p and q is
represented by the following formula:
(6)
In the given case, when the balancing of the three indicators of StC is being
done, two points can be defined: the desired value of the indicator M (in this case:
IP) and the actual value of the N (RP), shown on Figure 1.
(7)
(8)
(9)
Target StChs
Target StCle
Target
StCsp
StCle
StCsp
StChs
IP
Realized StChs
Realized
StCsp
Realized StCle
RP
BStC
Figure 1: Graphic display of balance indicators (BStC)
According to formula (9), the distances of any point of a specific value of StC
indicators (three dimensions) from its IP (i.e. the desired value for each dimension)
are measured. The distance of pairs of StC indicators in points IP and RP is now a
new vector "balance indicator" (BStC):
(10)
Depending on the position of the RP relative to IP and the vector direction, the
BStC can be defined as the "BStC cube of belonging." Possible "BStC cubes of
belonging" (8 of them) are represented by the matrix of belonging (Figure 2).
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SCB-I
BStC-IVBStC-III
BStC-II
BStC-VIBStC-V
BStC-VIII
BStC-VII
BStC-I
StCsp
StChs
StCle
Figure 2: Matrix of cubes of belonging of balance indicator BStC
Table 1: Possible business impact/relevant actions for BStC cubes
BStC cube
StChs
StCsp
StCle
Possible business impact; Relevant action
BStC-I
Anticipated sales "LE", Sales Plan "SP" and Historical Sales
"HS" are high compared to the available stocks; Supply should
be in accordance with the needs to eliminate the potential lack of
supplies (out of stock)!
BStC-II
Sales Plan "SP" is very pessimistic; to avoid potential lack of
supplies, it is necessary to order in accordance with StCle!
BStC-III
Anticipated sales "LE" and sales plan "SP" are optimistic;
Consider whether the planned sales activities can generate
increased yields, otherwise, to avoid unnecessary "piling up"
stock, it is necessary to order in accordance with StChs!
BStC-IV
Anticipated sales "LE" is extremely optimistic; Consider
whether the planned sales activities can generate increased sales!
BStC-V
Anticipated sales "LE" is extremely pessimistic; Consider
whether the planned sales activities can generate more sales than
expected!
BStC-VI
Anticipated sales "LE" and a sales plan "SP" are pessimistic;
Consider whether the planned sales activities can generate
increased yields higher than expected/planned to avoid the
potential out of stock! Order according to StChs!
BStC-VII
Sales plan "SP" is extremely optimistic; to avoid unnecessary
"piling up" of stocks, make orders in accordance with StCle!
BStC-VIII
Anticipated sales “LE", sales plan "SP" and historical sales "HS"
are low compared to available stock; take measures of JIT
supply!
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The position of "BStC cube of belonging" in the Matrix of belonging points
out to possible business implications and actions to be taken in order to improve the
performance of inventory management (Table 1).
CASE STUDY
The concept of lean inventory management, using balance indicators StC
(BStC), is applied to a real practical case at the company whose core business is
Fast Moving Consumer Goods - FMCG in Serbia. The planning horizon is one
month.
By using Excel spreadsheet tables, a system for calculating the StC according
to three different approaches to measuring StC (historical sales, sales plan, and the
last estimation sales plan) as well as the balance indicator BStC for four products
was created (Table 2).
At this company the system for the calculation of indicator StC has the
following purposes:
- Presentation of the summary display of current inventory, historical sales (HS),
the sales plan (SP), anticipated (last estimation) sales (LE);
- Facilitation of the calculation of indicator StC (in IP);
- Facilitation of the comparison of indicators StC in RP (with those in IP) and
enabling simulations of potential volume of new orders, i.e. assessing whether it
is necessary to create a new order and its quantity.
Table 2: The system of the calculation of indicators StC and balance index BStC
Product description
Actual
stock
Stock
in
transit
Next
order
Histor.
sales
Sales
Plan
Last
estim.
Sales
StC
hs
StC
sp
StC
le
BtS
C
Product A basic
1.137
0
1.100
1.645
600
860
TOTAL_Product A
1.137
0
1.100
1.645
600
860
1,4
3,7
2,6
2,5
Product B basic
8.355
2.010
0
2.765
4.500
3.100
Product B promo 1
155
0
0
1.429
0
0
TOTAL_Product B
8.510
2.010
0
4.194
4.500
3.100
2,5
2,3
3,4
2,3
Product C basic
5.117
8.064
0
1.547
0
0
Product C promo 1
30
0
0
799
5.400
3.700
Product C promo 2
263
0
0
939
0
0
Product C promo 3
436
0
0
251
0
0
TOTAL_Product C
5.846
8.064
0
3.536
5.400
3.700
3,9
2,6
3,8
3,5
Product D basic
549
0
2.200
1.423
3.500
4.500
Product D promo 1
2.607
0
0
1.187
0
0
Product D promo 2
45
2.304
0
447
0
1.100
TOTAL_Product D
3.201
2.304
2.200
3.057
3.500
5.600
2,5
2,2
1,4
1,2
TOTAL
18.694
12.378
3.300
12.432
14.000
13.260
2,8
2,5
2,6
1,9
The target value of indicator StC (defined by company management) is 1.5
[month], so that the IP of balance is positioned in M (1.5, 1.5, 1.5). Based on the
position of realized point N (StChsn, StCspn, StClen) and the balance indicator
vector, BStC cubes of belonging can be identified for any of the featured products.
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For product A the obtained value is BStCA = 2.5 (and belonging to the cube of
BStC-VI), the obtained value of product B = 2.3 BStCB (BStC-VIII), for C the
value BStCC = 3.5 (BStC-VIII) and the product D is BStCD = 1.2 (BStC-II). Based
on the above it can be concluded that the balance indicator is the smallest with the
product D, while it is the biggest with the products C, which means that the
inventory and planned orders for the product D are closest to the desired state. The
company has been advised to apply recommended actions (Table 1) for each
product, depending on its BStC cube of belonging, with the aim to improve the
performance of inventory management of these products.
CONCLUSION
As stated earlier, the main task of inventory management is balancing the
inventory in accordance with the policy of the company. Seen from only one
perspective, it can be concluded that it is necessary to reduce inventory if sales in
the previous period has decreased. Or, from another perspective, it can be
concluded that it is necessary to increase the level of inventory if the planned sale
faces optimistic expectations - an increase in demand for a particular product.
Different perspectives can generate unfounded criteria for decision-making in the
inventory management. To avert this situation the authors of this paper have
proposed the concept of inventory management using balance indicator BStC and
the matrix of belonging to one of the eight different BStC cubes of belonging,
pointing to the possible business implications and appropriate actions.
The authors have identified various opportunities for further improvement (in
different directions) of presented concept of inventory management. The first
possibility is to use the formula for the calculation of balance indicator, upgraded
by means of variance or standard deviation, to identify also the direction of the
vector of balance indicator BStC. There is also the possibility that the formula for
the calculation of indicators StC, in all three approaches to measuring, be expanded
to include the planned orders in accordance with the concept of ATP (Available to
Promise), which would facilitate the simulation of the influence of the decisions of
restocking on the other KPIs (e.g., CSL).
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