Optimal Inventory Management

In this 1 hour lesson, I focus on how to optimally manage inventory such that the overall Return On Invested Capital (ROIC) is maximised using the Inventory Efficiency Frontier. 

ROIC basically depends on two factors. A) The financial value (investment) of the average level of inventory maintained; B) the service level (timely order fulfillment) that is possible with this amount of investement. 

For a higher service level, higher inventory is needed, but ROIC drops massively as a result. On the other hand lower inventories result in drop in service levels, customer dissatisfaction and hence drop in future orders, and a drop ROIC as a result. So there is an optimum point in the middle where the chosen service level and the corresponding level of average inventory gives us the maximum ROIC possible for a given organisation.

The optimal inventory is realised by successfully answering these four questions:

• What to order and how much to order?
• When to order? (what is the trigger point?)
• How do control the ongoing process?

Note that the popular approach to inventory management using EOQ is defective:

• EOQ does not take production or supply capacity into consideration
• EOQ assumes demand to be constant and deterministic (not stochastic)
• EOQ doesn't accout for "when to order" and assumes instant delivery of shipments.

In this video you will learn the concepts of Reorder Point (ROP) and Reorder Quantity (ROQ) that are used to manage the inventory optimally. You will also learn about Replenishment Time Demand (RTD), Safety Stock (SS) and be able to create an Inventory Efficiency Frontier.