Planning the Inventory Resources in Logistics

Planning is extremely important when it comes to inventory resources. The lack of planning can be costly to the firm either because of the carrying and financing costs of excess inventory or the lost sales from inadequate inventory. The inventory requirements to support production and marketing should be incorporated into the firm’s planning process in an orderly fashion.

·         The production side: Every product is made up of a specified list of components. The planner must realize the different mix of components in each finished product. Each item maintained in inventory will have a cost. This cost may be based on volume purchases, lead time for an order, historical agreements or other factors. Each component can be assigned a value. Once the mix is known and each component has been assigned a value, the planner can calculate the materials cost.

·         The marketing side: The second step in inventory planning involves a forecast of unit requirements during the future period. The marketing department should also provide pricing information so that higher profit items can receive more attention.

Inventory database

An important component of inventory planning involves access to an inventory database. It is a structured framework that contains the information needed to effectively manage all items of inventory, from raw materials to finished goods. This information includes the classification and amount of inventories, demand for the items, cost to the firm for each item, ordering costs, carrying costs and other data.

The task of inventory planning can be highly complex. At the same time it rests on fundamental principles. In doing so we must understand and determine the optimal lot size that has to be ordered. The EOQ (economic order quantity) refers to the optimal order size that will result in the lowest total of order and carrying costs and ordering costs. By calculating the economic order quantity the firm attempts to determine the order size that will minimize the total inventory costs.

An examination of the two curves reveals that the carrying cost curve is linear i.e. more the inventory held in any period, greater will be the cost of holding it. Ordering cost curve on the other hand is different. The ordering costs decrease with an increase in order sizes. The point where the holding cost curve i.e. the carrying cost curve and the ordering cost curve meet, represent the least total cost which is incidentally the economic order quantity or optimum quantity.

The EOQ can be calculated with the help of a mathematical formula. Following assumptions are implied in the calculation: