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Inventory Management. 7 August 2001. Introduction. What: Managing Inventory Where: Any business that maintains inventory Why: Inventory is a significant contributor to costs. Functions of Inventory. Separate (decouple) parts of the production process Stock of goods for customers
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Inventory Management 7 August 2001
Introduction • What: Managing Inventory • Where: Any business that maintains inventory • Why: Inventory is a significant contributor to costs
Functions of Inventory • Separate (decouple) parts of the production process • Stock of goods for customers • Take advantage of quantity discounts • Hedge against inflation
Types of Inventory • Raw Material • Work In Process • Maintenance / Repair / Operating • Finished Goods
Inventory Classification • ABC Analysis • A type of Pareto analysis • Focus resources on a few critical inventory items • Annual demand x Cost of item
ABC Analysis • Class A – High dollar volume – 15% of items, 80% of dollar volume • Class B – Medium dollar volume – 30 % of items, 15% to 25% of dollar volume • Class C – Low dollar volume – 55% of items, 5% of dollar volume
Inventory Policies • Purchasing resources much higher for A items • Tighter physical control for A items • Careful forecasting for A items
Record Keeping and Cycle Counting • Cycle count – an audit that compares actual inventory to recorded inventory • Frequency of count depends on class • Eliminate shutdown for a full count • Eliminate annual adjustments • Use trained personnel for dedicated counts
Other Terms • SKU – Stock Keeping Unit (item number) • Shrinkage • Pilferage • Holding Cost • Ordering Cost • Setup Cost (includes Ordering Cost) • Setup Time
Economic Order Quantity Model • Demand is known, constant, independent • Lead time known and constant • Receipt instantaneous and complete • No quantity discount • Variable costs are setup and holding costs • Stockouts can be avoided
Minimizing Costs Annual Cost Total Cost Curve Holding Cost Curve Order (Setup) Cost Curve Order Quantity Optimal Order Quantity (Q*)
Inventory Level AverageInventory (Q*/2) Optimal Order Quantity(Q*) Reorder Point (ROP) Time Lead Time Reorder Point