Inventory Decisions

1. Inventory Decisions

2. What are Inventories? • Stockpiles of raw materials, supplies, components, work in process, and finished goods. • Appear at numerous points throughout a firm’s production & logistics channel • Having inventories on hand can cost between 20 – 40 percent of their value per year

3. Why Hold Inventories? • Improve customer service • Reduce costs • May encourage economies of production by allowing larger, longer, and more level production runs • Fosters economies in purchasing and transportation • Buying today in anticipation of higher prices tomorrow • Variability in time to produce & transport can cause uncertainties that impact on operating costs & customer service levels. Inventories serve as a buffer against this • Unplanned & unanticipated shocks can befall the logistics system (labor strikes, natural disasters, etc)

4. Why Not Hold Inventories? • Wasteful in that they absorb capital that might otherwise be put to better use • Do not contribute to the direct value of the product (do store value however) • Can mask quality problems • Encourages insular attitudes – isolating one logistics channel stage from another

5. Types of Inventories • Pipeline stock • Products in transit between stocking or production points • Speculation stock • Typically products bought in anticipation of seasonal selling or for price speculation • Regular (or cyclical) stock • Inventories necessary to meet the average demand during the time between replenishments • Safety stock • Obsolete (or dead, or shrinkage) stock

6. Cost of Inventories • Procurement Costs • Carrying Costs • Space Costs • Capital Costs • Inventory Service Costs (insurance, taxes, etc.) • Inventory Risk Costs • Out-of-Stock Costs • Lost sale costs • Back order costs

7. Purchasing Activities • Selecting & qualifying suppliers • Rating supplier performance • Negotiating contracts • Comparing price, quality, & service • Sourcing goods & services • Timing purchases • Setting terms of sale • Evaluating the value received • Measuring inbound quality • Predicting price, service, & demand changes • Specifying the form in which goods are to be received

8. Basic Types of Products Purchased • Generics • Low-risk, low value items and services that do not enter the final product • Office supplies, MRO items • Commodities • Low-risk, high value items or services • Basic production items, basic packaging, logistics services

9. Basic Types of Products Purchased • Distinctives • High-risk, low value items & services • Engineered items, parts available only from limited suppliers, items with long lead times • Criticals • High-risk, high value items or services that give the buyer’s product a competitive advantage in the marketplace • Unique items, items critical to the final product

10. Advantages of Electronic Procurement • Lower operating costs • Reduced paperwork • Reduced sourcing time • Improve control over inventory & spending • Improve procurement efficiency • Find new supply sources • Improve communications • Improve personnel use • Lower cycle times • Reduce procurement prices • Improve comparison shopping • Reduce overall prices paid

11. Disadvantages of Electronic Procurement • Security • Lack of face-to-face contact between buyer & seller • Lack of standard protocols • System reliability • Technology problems • Reluctance to invest time & money to learn new technology