"'Fast-Forward' - PorthSwtan, Anglesey flickr photo by Kristofer Williams shared undera Creative Commons ( BY-NC-ND ) licenseManaging inventory involves two fundamental questions: how much to order and when toorder. However, questions regarding where inventory should be held and what specific lineitems should be available at specific locations also pose challenges to managers.The current dynamic operating environment has caused organisations to examine theirinventory policies as well as their customer service policies to find the optimal solution thatbalances both service and cost. Many approaches exist to identify and analyse this trade-off.Organisations will choose the approach that serves them best as defined by their markets andcorporate goals. ABC analysisMultiple product lines and inventory control require organisations to focus on more importantinventory items and to utilise more sophisticated and effective approaches to inventory management. Inventory classification is usually a first step toward efficient inventorymanagement. In this regard, ABC analysis is often used in setting up an inventory controlsystem. Based on the Pareto principle (or the „80-20 rule?), the idea is to identify and thenfocus resources on the few critical parts, not the many trivial ones because a relatively smallpercentage of a population might account for a large percentage of the overall impact orvalue.The ABC classification technique assigns inventory items to one of three groups according tothe relative impact or value of the items that make up the group. A items are considered to bethe most important, with B items being of lesser importance, and C items being the leastimportant. It is important to remember here that the criteria used to evaluate an item willdetermine the group to which it is assigned.The cut-offs are not exact, but in general, Class A items represent about 15% of totalinventory items and 70%-80% of total dollar usage. Class B items represent about 30% oftotal inventory items and 15%-25% of total dollar usage. Class C items represent about 55%of total inventory items but only 5% of total dollar usage. Example: ABC analysisRead this book chapter for an example of ABC analysis. (30 minutes)? Heizer, J. & Render, R. 2014. Chapter 12: Inventory Management. In: OperationsManagement, Upper Saddle River, N.J. : Prentice Hall.Approaches and modelsThere are various approaches and models for managing inventory and these are largely due todifferences in the following in relation to inventory decisions:? Dependent versus independent demand? Pull versus pushDemand for a given inventory item is termed „independent? when such demand is unrelatedto the demand for other items (e.g. finished products). Conversely, demand is defined as„dependent? when it is directly related, or derives from, the demand for another inventoryitem or product (e.g. product components). An important point to remember is thatdeveloping inventory policies for items exhibiting independent demand requiresthat forecasts be developed for these items.Inventory management approaches that are usually associated with items having dependentdemand include just-in-time (JIT), materials requirement planning (MRP), and manufacturingresource planning (MRP II). Alternatively, distribution requirements planning (DRP)generally involves the movement of items having independent demand. The economic orderquantity (EOQ) and vendor-managed inventory (VMI) approaches apply to both independentand dependent demand items.The „pull? approach relies on customer orders to move product through a logistics system,while the „push? approach uses inventory replenishment techniques in anticipation of demandto move products. A principal attribute of pull systems is that they can respond quickly tosudden or abrupt changes in demand because they produce to an order and have very little, if no, finished goods inventory. Pull systems usually run on short-term forecasts, allowing themthe flexibility to adapt to swings in demand.JIT is a pull system since organisations place orders for more inventory only when theamount on hand reaches a certain minimum level, thus pulling inventory through the logisticssystem as needed. Having established a master production schedule, MRP develops a time- phased approach to inventory scheduling receipt.MRP and MRP II approaches are push-based because they generate a list of requiredmaterials in order to assemble or manufacture a specific amount of finished products. DRPinvolves the allocation of available inventory to meet market demands. DRP, on the outboundor physical distribution side of logistics, is also a push-based strategy. VMI uses presetreorder points and economic order quantities along with on-hand inventory levels incustomers? warehouses to generate replenishment orders and can be considered a pushapproach. Finally, the EOQ approach is generally a pull approach.3 Inventory management3.3 Inventory models[This page should take about 1 hour to complete] "