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CHAPTER 13

CHAPTER 13. INVENTORY MANAGEMENT. THE CONCEPTS. Crucial for low profit margin, low cost strategy Determining appropriate inventory level by conflicting the related costs and pressures Inventory represents a temporary monetary investment in goods on which the firm must pay interest. THE COSTS.

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CHAPTER 13

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  1. CHAPTER 13 INVENTORY MANAGEMENT

  2. THE CONCEPTS • Crucial for low profit margin, low cost strategy • Determining appropriate inventory level by conflicting the related costs and pressures • Inventory represents a temporary monetary investment in goods on which the firm must pay interest

  3. THE COSTS • Inventory holding/carrying costs : variable costs of keeping items on hand, including interest/opportunity cost, storage & handling cost, taxes, insurance and shrinkage which create pressure for maintaining low inventory • Pressures for high inventory despite the expenses : customer service, ordering cost, setup cost, labor & equipment utilization, transportation cost, payment to suppliers

  4. TYPES OF INVENTORY • Cycle inventory : the portion of total inventory that varies directly with lost size • Safety stock inventory : surplus inventory that company holds to protect against uncertainty in demand, lead time and supply • Anticipation inventory : to absorb uneven rates of demand or supply • Pipeline inventory : inventory moving from point to point in the materials flow system

  5. ECONOMIC ORDER QUANTITY • The lot size that minimizes total annual inventory holding and ordering costs • Assumptions : constant demand rate, no handling constraint, constant lead time

  6. INVENTORY CONTROL SYSTEM • Dependent and Independent demand items Continuous Review (Q) System • Reorder Point System : the predetermined minimum level that an inventory position must reach before a fixed quantity Q of the item is ordered • Inventory Position : the measurement of an item’s ability to satisfy future demand = OH + SR - BO • The need of safety stock when demand and lead time are uncertain

  7. Periodic Review (P) System • fixed interval or periodic reorder system which an item’s inventory position is reviewed periodically rather than continuously • the length of time between review (P) can be based on convenient interval or average TBO of EOQ • the target inventory level (T) must be large enough to make the IP last beyond the next review - the expected demand during protection interval (P + L) plus safety stock

  8. COMPARATIVE ADVANTAGES OF P & Q SYSTEM Advantages of P System : • convenience, standardized operations • simplify multiple orders from the same supplier into a single purchasing order which reduces ordering and transportation cost -- price deduction • IP is known at the time of review Advantages of Q System : • tailoring the review frequency will reduce total cost • fixed lot size may result in quantity discount • lower safety stock results in savings

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