Inventory Management

Inventory Management

Inventory Objective: • Meet customer demand and be cost-effective

Why Inventory? • Created by uncertainty • Variations in delivery times • Uncertain production schedules • Large number of defects • Large fluctuations in customer demand • Poor forecasts of customer demand

What is Inventory? • Raw materials • Purchased parts & supplies • Labor • In-process products • Component parts • Working capital • Tools, machinery, and equipment

Why hold inventory? • Supply is not known with certainty • Safety, or buffer, stock is kept to meet excess demand • To meet demand that is seasonal or cyclical • Toy manufacturers • Meet variations in customer demand • Suppliers with JIT need to continually replenish • Take advantage of volume discounts • Wal-Mart

Why hold inventory? (cont) - maintain buffer inventories to avoid work stoppages or delays

Demand • Dependent demand • Component parts or materials used in the process of producing a final product • Tires for a car • Independent demand • Final or finished products • A car

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Inventory Costs • Carrying costs • Ordering costs • Shortage costs

Carrying costs • Costs of holding an item in inventory • Cost of funds tied up in inventory • Storage costs such as rent, heating, lighting, security and transportation • Interest on loans to purchase inventory • Depreciation • Obsolescence • Deterioration • Breakage • Taxes • Pilferage

Ordering costs • Costs associated with replenishing stock of inventory held • Purchase orders • Transportation & shipping • Receiving • Inspection • Handling & storage • Accounting • Auditing

Shortage costs • Occur when customer demand cannot be met due to insufficient inventory • Can result in: • Loss of profit • Customer dissatisfaction • Loss of goodwill • Permanent loss of customers • Loss of future sales • Hard to quantify stock out costs

Continuous Inventory Systems • A continual record of inventory level for every item is maintained • Whenever inventory decreases to a certain point (the reorder point) a new order is placed • The amount ordered, and when it is ordered, is called the Economic Order Quantity • Example: Wal-Mart

Periodic Inventory System • Inventory on hand is counted at fixed intervals • After counting, an order is placed that will restore desired level of stock • Different amounts are ordered, but at regular intervals

ABC Classification System • 3-tiered system • Used when a small percentage of items account for most of the inventory value • ‘A’ items require close inventory control, ‘B’ and ‘C’ items less control

Economic Order Quantity Model(Basic) • Demand is known with certainty and is constant over time • No shortages are allowed • Lead time for the receipt of orders is constant • The order quantity is received all at once

EOQ model • Annual ordering cost = C0D/Q • Annual carrying cost = CCQ/2 • Total annual inv. Cost TC = C0D/Q + CCQ/2 EOQ =QOPT = Ö2COD/CC TCMIN = COD/QOPT + CCQOPT/2

Reorder Point • The inventory level in which an order is placed R = dL d = demand rate per period L = lead time

Safety Stocks • Remaining inventory between the time an order is placed and when new stock is received • If not enough inventory, a stockout can occur • Safety stock is a hedge against running out of inventory

Inventory Management