LEARNING OBJECTIVES

1. LEARNING OBJECTIVES • Highlight the need for and nature of inventory • Explain the techniques of inventory management • Focus on the need for analyzing inventory problem as an investment decision • Discuss the process for managing inventory

2. Nature of Inventory • Stocks of manufactured products and the material that make up the product. • Components: • raw materials • work-in-process • finished goods • stores and spares (supplies)

3. Need for Inventories • Transaction motive • Precautionary motive • Speculative motive

4. Objectives of Inventory Management • To maintain a large size of inventories of raw material and work-in-process for efficient and smooth production and of finished goods for uninterrupted sales operations. • To maintain a minimum investment in inventories to maximize profitability.

5. An effective inventory management should: • ensure a continuous supply of raw materials, to facilitate uninterrupted production • maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes • maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service. • minimize the carrying cost and time, and • control investment in inventories and keep it at an optimum level.

6. Inventory Management Techniques • Economic order quantity (EOQ) • ordering costs: requisitioning, order placing, transportation, receiving, inspecting and storing, administration • carrying costs: warehousing, handling, clerical and staff, insurance, depreciation and obsolescence • ordering and carrying costs trade-off:

7. Carrying costs vary with inventory size. • Ordering costs declines with inventory size.

8. Total Inventory Costs • EOQ (Q*) represents the minimum point in total inventory costs. Total Inventory Costs Total Carrying Costs Costs Total Ordering Costs Q* Order Size (Q)

9. When to Order? Reorder Point -- The quantity to which inventory must fall in order to signal that an order must be placed to replenish an item. Reorder Point (OP) = Lead time X Average Usage • Issues to consider: • Lead Time-- The length of time between the placement of an order for an inventory item and when the item is received in inventory.

10. Inventory Management Techniques • Reorder point under certainty • lead time • average usage Reorder point = Lead time x average usage

11. Safety Stock: Minimum inventory or buffer inventory as cushion against expected increased usage and/or delay in delivery time. • Amount of uncertainty in inventory demand • Amount of uncertainty in the lead time • Cost of running out of inventory • Cost of carrying inventory • What is the proper amount of safety stock? • Depends on the:

12. Cont… • Reorder point under uncertainty • safety stock Reorder point = (Lead time x average usage) + safety stock

13. INVENTORY CONTROL SYSTEMS • ABC Inventory Control System • Just-in-Time (JIT) Systems • Computerized Inventory Control Systems

14. Just-in-Time • A very accurate production and inventory information system • Highly efficient purchasing • Reliable suppliers • Efficient inventory-handling system • Just-in-Time -- An approach to inventory management and control in which inventories are acquired and inserted in production at the exact times they are needed. • Requirements of applying this approach: