Inventory Management

Inventory Management Operations Management Dr. Ron Lembke

Two Questions Two main Inventory Questions: • How much to buy? • When is it time to buy? Also: Which products to buy? From whom?

Types of Inventory Raw Materials Subcomponents Work in progress (WIP) Finished products Defectives Returns

Inventory Costs Costs associated with inventory: • Cost of the products • Cost of ordering • Cost of hanging onto it • Cost of having too much / disposal • Cost of not having enough (shortage) • Toothpaste: store’s loss is negligible • Tablet/phone online: lose the whole sale – hundreds $ • How much willing to spend to avoid a stockout?

Shrinkage Costs • How much is stolen? • 2% for discount, dept. stores, hardware, convenience, sporting goods • 3% for toys & hobbies • 1.5% for all else • Where does the missing stuff go? • Employees: 44.5% • Shoplifters: 32.7% • Administrative / paperwork error: 17.5% • Vendor fraud: 5.1%

Inventory Holding Costs Category% of Value Housing (building) cost 4% Material handling, Labor 3% Taxes, Insurance 3% Opportunity/investment 9% Pilferage/scrap/obsolescence 2% Total Holding Cost 21%

Inventory Recordkeeping

ABC Analysis • Divides on-hand inventory into 3 classes • A class, B class, C class • Basis is usually annual $ volume • $ volume = Annual demand x Unit cost • Policies based on ABC analysis • Develop class A suppliers more • Give tighter physical control of A items • Forecast A items more carefully

Classifying Items as ABC % Annual $ Usage A B C % of Inventory Items

ABC Classification Solution

Inventory Recordkeeping Two ways to order inventory: • Keep track of how many delivered, sold • Go out and count it every so often If keeping records, still need to double-check • Annual physical inventory, or • Cycle Counting

Cycle Counting • Physically counting a sample of inventory on a regular basis • Device tells picker to count location 123 • Blind count, enter # into device • Used often with ABC classification • A items counted most often (e.g., quarterly) • B items twice a year, C annually • Advantages • Eliminates annual shut-down for physical inventory • Improves inventory accuracy • Allows causes of errors to be identified • Do both for a while, to prove accuracy

Summary • Costs associated with inventory • Holding, shrinkage, obsolescence, ordering • ABC inventory management • Most attention and effort on highest-sellers • Cycle Counting • More accurate inventory information • Avoids annual shut-down for physical inventory

Inventory Management