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Inventory Management

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

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  1. Inventory Management 7 August 2001

  2. Introduction • What: Managing Inventory • Where: Any business that maintains inventory • Why: Inventory is a significant contributor to costs

  3. Functions of Inventory • Separate (decouple) parts of the production process • Stock of goods for customers • Take advantage of quantity discounts • Hedge against inflation

  4. Types of Inventory • Raw Material • Work In Process • Maintenance / Repair / Operating • Finished Goods

  5. Inventory Classification • ABC Analysis • A type of Pareto analysis • Focus resources on a few critical inventory items • Annual demand x Cost of item

  6. 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

  7. Inventory Policies • Purchasing resources much higher for A items • Tighter physical control for A items • Careful forecasting for A items

  8. 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

  9. Other Terms • SKU – Stock Keeping Unit (item number) • Shrinkage • Pilferage • Holding Cost • Ordering Cost • Setup Cost (includes Ordering Cost) • Setup Time

  10. 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

  11. Minimizing Costs Annual Cost Total Cost Curve Holding Cost Curve Order (Setup) Cost Curve Order Quantity Optimal Order Quantity (Q*)

  12. Inventory Level AverageInventory (Q*/2) Optimal Order Quantity(Q*) Reorder Point (ROP) Time Lead Time Reorder Point

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