Supply Chain & Logistics Analytics - Session 6 Analytics in Inventory Management MOQ, EOQ, Inventory Optimization Part II

Supply Chain & Logistics Analytics – Session 6
Analytics in Inventory Management MOQ, EOQ,

Inventory Optimization Part II
Chapter 11 and 12 from the Recommended Textbook
Session 6 Topics
 Minimum Order Quantity

 Economic Order Quantity
 Stock Optimization
 Safety Stock
 Product Classification
 Application of above concepts to used cases and data

analysis with excel
Week 2 Application of Concepts
Discussions to keep below points in landscape. Cases and
examples can be reflected upon with these aspects as guide
points
 Supply Chain Surplus

 Drivers
 Responsiveness vs Efficiency (Service vs Cost)
 Trade Off
 Total Cost of Ownership
 Types of Analytics
Product Classification
Inventory and Planning Decisions
AI in Service Industry
With the help of artificial intelligence and big data the Swiss logistics giant, Kuehne +
Nagel, improved their shipment planning and inventory management. Their AI solution
enabled the company to find the best option for container shipping, including alternative
routing options to adhere to transportation timeframes and reliability. A side-effect of
implementation improved service levels of the company, because of better insights on
shipment and inventory
Inventory/Forecast Case Discussion
Meesho is India's largest marketplace for longtail/unbranded products and our vision is to
enable 100 million small businesses in India to succeed online. The Meesho marketplace
provides micro, small and medium businesses, and individual entrepreneurs access to
millions of customers, selection from over 100+ categories, pan-India logistics, payment
services, and customer support capabilities to efficiently run their businesses on the
Meesho ecosystem.
“At Meesho, we have a lot of products with short life spans and it is important for us to
react to key metrics associated with product performance and manage our inventory
optimally. By using Amazon Forecast, we were able to predict the demand forecasting of
products at weekly/daily with an increase in forecasting accuracy of 20% in comparison to
our existing solution. Amazon Forecast provides easy to use APIs that helped us to easily
build an automated system in half the time it would have taken for an in-house model. We
have achieved promising results so far with Amazon Forecast on our current inventory and
we plan to continue leveraging it to improve forecasting accuracy on our ever increasing
assortment of products.”
Demand Solutions in 3M
• Multi Division, Multi SKU set up
• Varied customer segments
• Healthcare, Industrial, Safety, Consumer, Automotive
• Diverse Markets – Mature Customers, Smaller customes
• High level of new product introduction and new market penetration
• Marketing and sales depended on each other for market inputs
• Last minute promotions, price offs to counter competition move
• Distributors data sharing was not regular, not standard formats
• Demand solutions implemented by Supply Chain
• Forecasting and inventory management tool
• Required sales and marketing to plug in data
• S&M depended on distributor input
• New generation sales team wanted more automation with distributor plugging in data
directly into the system
GMROI Model
GMROI Model
Comifar Case Study
Exploding size and complexity leads to a moment of truth
With 21 distribution centres and three hubs over the whole of Italy, Comifar
Distribuzione distributes 20K orders per day from over 150K SKUs of
prescription drugs, over-the-counter medications, nutritional supplements,
and much more. With 19% of the market, they are the biggest pharmaceutical
distributor in the country.
For years, Comifar depended on a purchasing planning system developed and

customised over the past two decades. But, in those same twenty years, the
company has grown larger and more complex through growth and
acquisitions, and their planning system was under increasing stress.
The system’s shortcomings led to unnecessarily high stock levels, an increasing

need for the destruction of expired material, and a resulting loss of revenue. A
robust, mature S&OP process was deemed the way forward.
Comifar Case Study
Finding a road map and taking the first steps
• The project began with an assessment – getting to know the people,

the corporate culture and coming to grips with the type and depth
of difficulties involved.
• This evaluation led to a list of recommendations presented to the
board of directors.
• With the board’s input and their recommended timetable, the
resulting steps were prioritised and channelled into a long-term road
map.
• The highest priorities were forecasting, purchase planning, stock
optimisation, and reduced potential for lost sales.
• Next on the list were a revision of the logistics KPIs to ensure the
tracking of proper metrics, the improvement of gross margins, and
the consolidation of Comifar’s ongoing market leadership position.
Comifar Case Study
Delivering the correct stock level to the ideal location

• Comifar’s demand planning process now delivers timely
statistical forecasts utilising an algorithm best suited to the
historical profile.
• It presents AI entries that allow, for example, to identify lost
sales due to the lack of stock from suppliers, gain market share
back as the product becomes available, and reduce out-of-
stock codes by reallocating pharmacy orders based on time of
day.
• To facilitate the ongoing use of AI/ML, Comifar decided to
work with data at a high level of granularity to achieve highly
accurate plans using the billions of records available.
Comifar Case Study
• The distribution planning process defines an ideal level of
safety stock to maintain a high level of customer service.
• It determines the ideal supply economic lots and provides a
medium-term plan for logistics and warehousing so each will
be ready to accommodate and deliver the required safety
stock.
• Planned purchase orders (PO) help maintain stock levels.

• Last-minute POs are also issued to make beneficial speculative
purchases and satisfy stockouts from the previous day.
• In addition, by using dynamic deployment, Comifar helps
reallocate goods among the 21 distribution centres by
identifying potential savings while maintaining stock and
service levels.
Comifar Case Study
It was six months after implementing the S&OP process before

the team had fully integrated all 1300 suppliers into the system.
Shortly after that, Comifar began to see improvements in service

levels, product flows, and the quality and quantity of stock.
An impact on the gross margin followed – as much €1,3MM per

year.
Improvements beyond economic returns are evident.

Comifar Case Study
Comifar now has a more structured planning process, and their
planners have acquired new skills and experience, which is
reflected in their measured performance.
• Forecast accuracy increased 14%

• 53% reduction in lost sales
• 37% cut in intra-warehouse orders.
• 18% stock reduction observed.
• Lines per order are down 21%
• Non-assortment stock is down by nearly half at -47%.
The most profound benefit of all of these improvements is a

marked increase in supply chain visibility, making it easier to
follow the development of the market and allowing Comifar to
consolidate their leadership in the industry.
Total Cost
Different stages exploit economies of scale to lower total cost.
The costs considered include material cost, fixed ordering cost,
and holding cost.
Any stage of the supply chain exploits economies of scale in its

replenishment decisions in the following three typical situations:
1. A fixed cost is incurred each time an order is placed or
produced.
2. The supplier offers price discounts based on the quantity
purchased per lot.
3. The supplier offers short-term price discounts or holds trade
promotions.
Practical Cost of Cycle Stock
Holding Cost
• Cost of Capital
• Obsolescence / Spoilage
• Handling Cost
• Occupancy Cost (Basic storage cost)
• Miscellaneous.. Insurance, Damages, Security overheads….
Ordering Cost
• Buyer Time Cost
• Transport Cost
• Receiving Cost
• Other costs… Insurance, Taxes, damages in transit…
Economic Order Quantity (EOQ)
EOQ for Multiple Products
• In current business world there is high chances of multi
product shipments
• That makes the EOQ calculation complex
• Consolidation from multi suppliers
• Milk Run across suppliers for more frequent supplies
Aggregating replenishment across products, retailers, or suppliers

in a single order allows for a reduction in lot size for individual
products
Because fixed ordering and transportation costs are now spread
across multiple products, retailers, or suppliers.
Lot Size
Costs influenced by Lot Size are
1. Price
2. Holding Cost
3. Ordering Cost
Price : Order below 500 Units is $10, Above 500 is $9 (Cost)

Holding Cost : Cost of carrying a unit of inventory. It can a % of
Cost
Ordering Cost : Fixed ordering cost per lot eg. Set up, Transport
etc. $/Lot
A manager must make the trade-off that minimizes total cost

when making lot-sizing decisions.
MOQ
MOQ and Total Inventory
• A store orders 80 printers from the manufacturer each time they place an
order. The lot or batch size in this case is 80 printers.
• Daily sales is 4 printers
• It takes an average of 20 days before the store sells the entire lot
• The computer store holds an inventory of printers because it purchases a lot
size larger than the store’s daily sales.
Inventory Optimization Case Study
Food and beverage products have a short shelf life, there’s a big upside to getting inventory levels
just right. So when our client, a Fortune 500 food manufacturer, noticed that their days of on-hand
inventory for some SKUs was encroaching upon the shelf life of those products, they knew
inventory levels were too high, and they needed to improve their inventory planning process.
Specifically, regional executives wanted to understand how to calculate reasonable inventory

targets, identify the impact of certain structural and operational parameters on achieving those
inventory levels, and implement and sequence the necessary changes. They also wanted a
framework to support this inventory decision-making process on an ongoing basis.
Crunching the numbers

The first step in the project was to collect, assess, and validate the company’s current inventory
performance. This baseline assessment uncovered key areas where service levels were falling
short due to a variety of operational inefficiencies as well as inventory overstocks and sell-outs.
Chainalytics then leveraged its proven inventory planning methodologies and product
segmentation framework to identify optimal inventory levels across the different product
segments and channels.
Getting hypothetical
To help the company fully understand what was driving its recommended inventory
targets, Chainalytics developed a custom tool with “what if” capabilities which allows
users to change inputs like demand, lead time, and service levels (i.e., fill rates) to see
the potential impact on cost, and working capital.
The what-if tool has an MS Excel front-end and uses the R programming language for
data processing and computation. This combination of open source and commercially
available tools provides a familiar user experience for the planner and is easy to
maintain internally by the company’s IT department. Working with the manufacturer’s
planning team, Chainalytics supported an initial showcase/pilot of the tool to later roll-
out to the rest of the planning group.
Problem solved
This inventory target setting engagement delivered many benefits for the
manufacturer, including:
Product Segmentation: The client company is now able to set custom break-points for
velocity and understand variabilities as well as segment based on unit standard costs.
With full visibility into how SKU demand behaves based on velocity, variability and cost,
the manufacturer can set its desired case fill rate setting in each individual product
segment.
Inventory Target Setting: The most important output of the tool developed by
Chainalytics is the calculation of Target Stock. Intelligence into ideal levels of inventory
to meet demand is broken down into “cycle stock” — which is the required level to
fulfill demand—and a “safety stock”—which buffers against volatility in demand or
supply. Together, these numbers ensure the manufacturer will be able to satisfy
demand without running out of stock or carrying excess inventory.
Problem solved
What-if Reporting: Chainalytics’ solution gives the manufacturer the ability to compare
scenarios by location, segments, SKUs, etc. and to create waterfall/bridge reporting for
sensitivities.
The company can now easily calculate how to achieve desired output by making
changes to multiple inputs. Variances in that output can easily be explained by
identifying which inputs were altered.
Ongoing Analysis: The tool delivered by Chainalytics can be used at regular intervals to
account for changes in the future. This allows the company to recalculate inventory
targets several times throughout the year based on the planning cycles to keep its
operations optimised for changes to real-world scenarios as they occur.
Working with hundreds of distributors across India and China to deliver products to
retailers requires accurate and reliable insights into the drivers of inventory. Our client
is now equipped to plan inventory for efficient distribution without waste.
Indicative Methods
Forecastability Matrix

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Supply Chain & Logistics Analytics – Session 6

Analytics in Inventory Management MOQ, EOQ,

 Minimum Order Quantity

 Application of above concepts to used cases and data

 Supply Chain Surplus

For years, Comifar depended on a purchasing planning system developed and

The system’s shortcomings led to unnecessarily high stock levels, an increasing

• The project began with an assessment – getting to know the people,

Delivering the correct stock level to the ideal location

• Planned purchase orders (PO) help maintain stock levels.

It was six months after implementing the S&OP process before

Shortly after that, Comifar began to see improvements in service

An impact on the gross margin followed – as much €1,3MM per

Improvements beyond economic returns are evident.

• Forecast accuracy increased 14%

The most profound benefit of all of these improvements is a

Any stage of the supply chain exploits economies of scale in its

Aggregating replenishment across products, retailers, or suppliers

Price : Order below 500 Units is $10, Above 500 is $9 (Cost)

A manager must make the trade-off that minimizes total cost

Specifically, regional executives wanted to understand how to calculate reasonable inventory

Crunching the numbers

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