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  1. 1. What is Inventory? 1
  2. 2. What is Inventory?1. A physical resource that a firm holds in stock with theintent of selling it or transforming it into a morevaluable state2. Purpose of inventory management: •How many units to order •When to order •When to return or replace 2
  3. 3. Reasons We Keep Inventory• Improve customer service• Maintain independence of the supply chain• Bullwhip effect• Seasonal or cyclical demand• Hedge against the future (demand, price volatility…)• Inventory provides independence from vendors• Take advantage of price discounts• Transportation discounts• Protection from shocks (labor strikes, natural disasters, surges in demand, etc.) 3
  4. 4. Reasons We Keep InventoryAdding value through inventory: Quality – Inventory can act as a buffer against poor quality. Speed – Location of inventory can have a significant impact on fulfilling customer demand Flexibility – Location and level of anticipatory inventory directly effect the firm’s flexibility to meet demand Cost – Direct effect: purchasing, delivery, manufacturing Indirect: inventory holding costs, stockouts 4
  5. 5. Reasons Against InventoryNon-value added costsLost opportunity costsComplacencyInventory deteriorates, becomes obsolete, spoils, lost, stolen, etc. 5
  6. 6. Types of Inventory• Raw materials• Purchased parts and supplies• Work-in-process (partially completed) products (WIP)• Items being transported• Tools and equipment 6
  7. 7. Two Forms of DemandDependent A demand based on demand for another itemIndependent A demand that is not based on demand for another itemFor example, The demand for the chairs of a table and the tableitself is based on the demand for the table. The table in thisexample is the item with independent demand and the chairsare the item with the dependent demand. 7
  8. 8. What is Inventory Management?• Inventory management is the process of keeping track of inventory, andhaving the delicate balance of supply and demand firmly mastered.• Inventory management helps to ensure that proper inventory ismaintained at all times.• Inventory costs money. Therefore, a company does not want to have toomuch inventory or too little inventory.• Inventory Management must be designed to meet the dictates of themarketplace and support the companys strategic plan.• Properly executed, inventory management helps ensure the companywill have exactly the amount of inventory needed. 8
  9. 9. Inventory ManagementThe basic building blocks of inventory management are: Sales Forecasting/Demand Management Sales and Operations Planning Production Planning Material Requirements Planning Inventory Reduction 9
  10. 10. Inventory and Quality Management• Customers usually perceive quality service as the availability of goods they want when they want them• Inventory must be sufficient in both quantity and quality to provide high-quality customer service 10
  11. 11. Objectives of Inventory ControlMaximize the level of customer service by avoiding stockoutsPromote efficiency in production and purchasing by minimizingthe cost associated with providing an adequate level of customerservice 11
  12. 12. Inventory CostsCarrying cost cost of holding an item in inventoryOrdering cost cost of replenishing inventoryShortage cost temporary or permanent loss of sales when demand cannot be met 12
  13. 13. Economic Order Quantity (EOQ) Models• EOQ optimal order quantity that will minimize total inventory costs• Basic EOQ model• Production quantity model 13
  14. 14. Assumptions of Basic EOQ ModelDemand is known with certainty and is constant over timeNo shortages are allowedLead time for the receipt of orders is constantOrder quantity is received all at once 14
  15. 15. Inventory Order CycleOrder quantity, Q Demand rate Inventory LevelReorder point, R 0 Lead Lead Time time time Order Order Order Order placed receipt placed receipt 15
  16. 16. EOQ Cost Model Annual cost ($) Total Cost Slope = 0Minimum Carrying Costtotal cost Ordering Cost Optimal order Order Quantity, Q 16
  17. 17. Production Quantity Model• An inventory system in which an order is received gradually, as inventory is simultaneously being depleted• Non-instantaneous receipt model – assumption that not all inventory is received at once 17
  18. 18. Production Quantity ModelInventory level Maximum inventory level Average inventory level 0 Begin End Time order order Order receipt receipt receipt period 18
  19. 19. Safety StockSafety stock - buffer added to on hand inventory during lead timeStockout - an inventory shortageService level - probability that the inventory which is available during lead time will meet demand 19
  20. 20. Classifying Inventory Items ABC ClassificationA Items – very tight control, complete and accurate records, frequent reviewB Items – less tightly controlled, good records, regular reviewC Items – simplest controls possible, minimal records, large inventories, periodic review 20
  21. 21. Planning Supply Chain Inventory Levels Two MethodsAnticipatory – Allocate supply to each warehouse based on a forecast • Determine requirements by forecasting demand for the next production run • Establish current on-hand quantities • Add appropriate safety stock based on stock availability levels and uncertainty in demand levelsResponse-Based (Demand) – Replenish based on the specific need of each warehouse • Replenishment, production, or purchase of stock are made only when it has a need exists downstream • Requires shorter order cycle time, often more frequent, are lower volume orders • Determine stock level requirements to meet only most the immediate planning period (short term) 21
  22. 22. Sales Forecasting/Demand Management • Accurate sales forecasting allows a company to effectively control inventory, production facilities, labor, inventory levels and logistics, and is the base of which most all other operations within the company function. • Sales forecasting allows a company to better negotiate contracts for raw materials, logistics, and vendor supplied assemblies. • An accurate sales forecast provides for a smother running operation with fewer last minute rushes to fulfill customer requirements.Production Planning • Production planning is a complex process that covers a wide range of activities that insures that material, capacity, and human resources are available when needed. It is the foundation upon which the manufacturing/distribution organization operates. • Yogi Berra said it best "if you dont know where you are going, you might not get there" 22
  23. 23. Material Requirements Planning• Material Requirements Planning or MRP involves getting material on hand when neededfor production or sales.• The goal of the MRP or Material Requirements Planning document is to supply information thatwill enable the company to have enough inventory on hand to fulfill demand, only when needed,at a quality level that meets specification, and at the lowest price. Inventory Reduction• Inventory reduction is about eliminating excess inventory, improving inventory turn rates,increasing inventory turnover, and meeting on time delivery.• Excess inventory ties up money and needs to be reduced in order to free up cash forinvestment in revenue-growth activities. 23
  24. 24. Guide to Inventory AccuracyThink of inventory as $$$ sitting on the shelf Creating the Culture for Inventor Accuracy Attitude Process Definition Procedure Documentation Employee Training Monitoring Process for Compliance Setting Standards Tracking Accuracy Count, Count, Count Reevaluate 24
  25. 25. Creating the Culture for Inventor AccuracyAttitude: Maintaining inventory accuracy must be an integral part of the attitude of the organization. No compromising.Process Definition: You will struggle to maintain your inventory if you do not clearly define the processes throughout the organization that affect inventory.Process Documentation: Document the previously defined processes.Employee Training: Set a training schedule to train all employees. Make it clear the documented process is the ONLY way to perform the task.Employee Testing: Formally test the employees on the procedures. This is the only way to know if they know and understand the processes.Monitoring Processes for Compliance: Any observed actions which do not comply with the written procedures must be addressed immediately.Setting Standards: Establish minimum production and accuracy standards wherever practical. Standards should be set high enough, yet be achievable. 25
  26. 26. Creating the Culture for Inventor AccuracyTracking Accuracy: Track accuracy on the individual level, department level and organizational level. Measure as a percent of total transactions performed.Accountability: Hold people accountable to the documented processes and standards.Count, Count, Count: Cycle count to evaluate inventory accuracy and to identify areas requiring additional focus. Cycle counting is often the first step in identifying problems in your processes.Reevaluate: Regularly reevaluate your processes and procedures. Again, cycle counting will help direct you to inefficiencies within your processes. 26
  27. 27. Types of Cycle Counts100% Audit: This can be done either all at once one time a year, or it can be done throughout the year.Forced Cycle Count: Usually done when there is an indication of a problem with the accuracy of a give storage location.Follow Up Cycle Count: This is done directly after a stocker or picker has visited a location. The intent is to verify that the stockers and pickers are working in compliance with the documented processes.Random Cycle Count: Cycle Counts performed at random. Not a very effective method to verify inventory accuracy. 27