3. The Strategic Importance of Inventory
• Planning , coordinating and contolling acqusition, storage, handling and
movement of raw materials, purchased parts, supplies, tools and other
materials that are needed in production process.
4. The Strategic Importance of Inventory
• Any idle goods or materials that are held for future are called inventory.
• Inventory represents a major financial investment for any company when
costs of transportation, warehousing, and capital are considered.
5. The Strategic Importance of Inventory
• Lot –size Inventory
• Work-in- Process (WIP) Inventory
• Finished – goods Inventory
• Fluctuation Inventory (safety stock )
• Anticipation Inventory
6. The Strategic Importance of Inventory
• Prefers high inventory levels to
provide the best possible
customer service .
• Production managers want high
inventories to prevent production
• Financial personnel seek to
minimize inventory investment
and warehousing costs.
Inventory should be
managed to support
Operational goals such as;
- Quick responce
- Manufacturing flexibility
8. Materials Management
Purchasing function is responsible for getting raw materials, component parts, tools
and any other items from suppliers.
Receive purchase requisitions
Review and evaluate requisitions
Select qualified suppliers
Aggregate and place orders
Follow up and expedite
9. Materials Management
• Physical Distribution
Physical Distribution is responsible for selecting transportation carriers,
managing company own fleets and vehicles and movement of materials and
goods. – Plays key role in customer satisfaction -
The term traffic is often used to refer daily operations of managing the
11. Materials Management
• Supplier Management and Partnership
When closed relationships are developed, total supplier number can be
The older practise of having many suppliers bid on each other – lowest
With larger contracts, suppliers benefit from economies on scale and
customer benefit from volume discount.
12. Materials Management
• GTE Directories
Yelow pages publisher
Employee exchange programme, to help paper manufacturers undertsand
GTE business and they can better meet its needs.
Strong relationship with suppliers and increased both parties’ awareness of
the effects of poor quality on productivity.
13. Materials Management
• Florida Power and Light
Three supplier – certification programme ;
basic requirements on quality, cost,delivery, safety
must additionally prove its processes can meet FPL’s special requirements
must prove ability to exceed FLP’s special requirements,employ reliability,
show that quality improvement is a central part of its management system.
14. Materials Management
• Information Technology in Materials Management
Read the symbols on the label, reduces human error and improves data
correctness. The use of bar code streamliness the ordering and inventory
Radio frequency ( RF ) communications
Hardware allow information to be sent workers electronically from a central
16. Inventory Costs
Direct cost for
getting an item.
Purchase cost for
cost for internal
items in inventory.
Storage and other
Cost of the capital,
placing an order
(either an ordering
cost for outside
orders, or a setup
cost for internal
with not having
to meet demand.
17. Inventory Costs
• How to monitor Inventory
• How much should be ordered
• When orders should be placed
Three primary decisions must be made in relation to inventory, each has an
important impact on cost.
18. Inventory Management Systems
• ABC Inventory Analysis
ABC Classification , according to their total annual dollar usage.
A items account for a large dollar value but small percentage of total items.
C items account for a small dollar value but large percentage of total items.
B items are between A and C.
19. Inventory Management Systems
• ABC Inventory Analysis
ABC analysis gives managers useful information.
Class A : Represents a important inventory investment and typically have
limited availability. In many cases they are single – sourced thus need close
control, record keeping, continuous monitoring and maximum attention to
order sizes and frequency of ordering.
This items large costs, small lot size and frequent deliveries from suppliers are
common and result in very short lead times.
20. Inventory Management Systems
• ABC Inventory Analysis
Class C : Large quaintities of this items might be ordered to reduce
transportation costs. Simply be checked periodically without maintaining any
formal records. Easy to get from many suppliers and have short lead times.
Class B: These items are in the middle. Ordered very infrequently and consist
mainly of service parts for older products still in use.
Their availability might be limited thus long lead times can be expected.
21. CONTROL SYSTEMS
Inventory position : amount on hand
plus amount ordered but havent
received yet minus back orders.
Inventory position continuously
Whenever inventory position falls or
below r , an order for Q units is
Values for Q and r are determined in
22. CONTROL SYSTEMS
Inventory position is checked only at
If the inventory position is at or below
the reorder point when checked, an
order is placed to bring the inventory
position up to R.
In such systems usually clerks checking
inventory levels physically .
If the lead time is always shorter than
the time between reviews the reorder
point can be based on inventory level
rather than inventory position.
23. Cycle Counting
• Alternative to closing for inventory is cycle counting, a system for
continuous physical counting of inventory through the year.
• Benefits; errors can be investigated and corrected and loss of productive
time is minimized.
• The ABC classification is usually used to determine the frequency of cycle
counting. Clearly errors are made more critical for A items, since their
values are higher.
24. Measuring Inventory – System
Classify inventory into five categories to measuring performance.
New- Product Inventory
25. Economic Order Quantity (EOQ)
• Developed in the early 1990s.
• The constant-demand rate and lead time
• No stockouts.
26. Economic Order Quantity (EOQ)
• How much to order decision
Keeping small inventories and ordering frequently
Keeping large inventories and ordering infrequently
27. Economic Order Quantity (EOQ)
EOQ model is concerned two basic questions;
How much to order ?
When to place an order ?
EOQ model minimizes the total cost equal to the sum of the inventory
–holding cost and ordering cost.
28. Economic Order Quantity (EOQ)
Inventory pattern for the EOQ Inventory –decision model
• Q to be the size of order
• The average Inventory level is ½ Q
30. Economic Order Quantity (EOQ)
When to order decision
r= reorder point
m= lead time
* r= dm
D/Q = as the number of orders placed in a year.
Where N= number of days of operation for the years.
In general in EOQ ; Total ordering costs equal to the total holding costs with
the small difference.