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What Is Inventory?
A Physical resource that a firm holds in
“stock” with the intent of selling it or
transforming it into a more valuable state
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Inventory
E.g. Raw Materials; Works-in-Process;
Finished Goods, Maintenance, Repair and
Operating (MRO)
Purchased parts and supplies
Items being transported
Tools and equipment
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Nature of Inventory
Adding Value through
Inventory
Quality - inventory can be a
“buffer” against poor quality;
conversely, low inventory
levels may force high quality
Speed - location of
inventory has gigantic effect
on speed
Flexibility - location, level
of anticipatory inventory
both have effects
Cost - direct: purchasing,
delivery, manufacturing
Functional Roles of
Inventory
Transit
Buffer
Seasonal
Decoupling
Speculative
Lot Sizing or Cycle
Mistakes
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TRANSACTION
Facilitates continous
production &timely
execution of sales
orders
PRECAUTIONARY
Necessitates the holding of
inventories for meeting the
unpredictable changes in
demand & supplies of
materials
SPECULATIVE
Induces to keep
inventories for taking
advantage of price
fluctuations, saving in
re-ordering costs &
quantity, discounts,
etc.
Motives of holding inventories
for a supply chain
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III. RISK & COST of Holding
Inventories
Capital costs
Storage & handling costs
Risk of price decline
Risk of obsolescence
Risk deterioration in quality
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IV. Inventory Management
Activities employed in maintaining the
optimum number or amount of each
inventory item
Discipline primarily focused on
identification. Tracking. the shape and
percentage of stocked goods
It has 3 main areas of concern:
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Acquisition
procedures are established to assist
personnel in procurement of products. Its
main purpose is to ensure that proper
justifications are performed and that
financial guidelines are followed
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Redeployment
responsible for ensuring that assets are
tracked when moved from one location to
another and that budgetary considerations
are adjusted as needed. Should a product
be moved in from its original owner, then
the Inventory System is updated to reflect
the new location and owner
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Termination
• responsible for deleting the asset from the
inventory when it is discontinued, or
replaced. The owner's budget will be
updated to reflect the asset termination
and the asset will no longer be listed when
location reports are generated.
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To identify and track all data processing assets in an
Inventory System Repository.
To define the process by which assets are identified
and maintained in the Inventory System.
To provide Inventory System access to all necessary
personnel (data entry, update and deletion).
To provide a full range of reports that will satisfy
informational requirements.
To document the Inventory Management System
within the Standards and Procedures Manual.
To provide training to personnel responsible for
supporting the Inventory Management System.
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DETERMINATION Of Stock Levels
DETERMINATION of Safety stocks
SELECTING proper system of ordering for inventory
DETERMINATION of Economic Order Quantity (EOQ)
ABC Analysis
VED Analysis
INVENTORY Turnover Ratios
AGING SCHEDULE of Inventories
PREPARATION of Inventory Reports
LEAD Time
PERPETUAL Inventory System
JIT CONTROL System
VI. TOOLS & TECHNIQUES of
Inventory Management
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VII. DETERMINATION Of Stock
Levels
• Determines “stock limits” for the customer
location product that the customer agrees
upon with the supplier
• Minimum and maximum stock levels are
limits to the projected stock agreed upon
between the customer and supplier.
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STOCK LIMITS
Minimum
projected stock must
not fall below this
Level
Maximum
maximum quantity of
stock that is to be on
hand at the customer
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Methods for determining the Minimum stock
level and Maximum stock level:
Static Minimum and Maximum Stock Level
Dynamic Minimum and Maximum Stock Level
&
Dynamic Minimum Stock Level and Static
Maximum Stock Level (Enhanced Safety Stock
Planning)
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VII. DETERMINATION Of Stock
Levels
Normally required by companies to ensure
that they have sufficient quantities of
material in stock. The safety stock is there
to provide coverage for unexpected
customer demand, damage in the
warehouse or required due to quality
issues found in production.
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There are three techniques that are
used to calculate Safety Stocks
Statistical Based Safety Stock
Fixed Safety Stock
Time Period Based Safety Stock
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VIII. Economic Order Quantity
(EOQ)
Level of inventory that minimizes total
inventory holding costs and ordering
costs
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Economic Order Quantity
(EOQ)
• A = Demand for the
year
• Cp = Cost to place
a single order
• Ch = Cost to hold
one unit inventory
for a year
• * = ×
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Economic Order Quantity
(EOQ)
Ex. Pam runs a mail-order business for
gym equipment. Annual demand for
the TricoFlexers is 16,000. The annual
holding cost per unit is $2.50 and the
cost to place an order is $50.
Calculate economic order quantity
(EOQ)
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EOQ Model Assumptions
• The ordering cost & rate of demand is
known with certainty and is constant over
time
• The lead time for the receipt of orders is
constant
• The replenishment is made instantaneously,
the whole batch is delivered at once
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Also known as “ inventory management”
Refers to the systems and strategies businesses
use to ensure that they have adequate supplies
of raw materials for production and finished
goods for shipment to customers, while also
minimizing their inventory carrying costs
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Periodic inventory method
A fixed quantity of an
item is ordered at
regular or periodic
intervals(such as week,
a month, a year,etc.)
based on its
consumption during last
few periods.
uses additional
accounts to track sales,
purchases of inventory
and customer returns.
These accounts hold
aggregated sales data,
which is not posted to
the inventory account
until the period ends.
The period can be
monthly, yearly or any
time frame the firm
chooses.
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Perpetual inventory method
An item is ordered when its inventory reaches at
the reorder level.
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Perpetual inventory method
reorder level=(average daily usage lead time in
days)+ buffer stock
Average
= Total quantity of an item consumed /sold
during last year
daily usage No. of working days
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Barcode Systems / Universal
Product Code (UPC)
system that
supermarkets first
implemented in the
70s requires unique
codes to be put on all
types of inventory and
is usually
accompanied by a bar
code that can be
scanned via infrared
scanning guns.
relatively inexpensive
and have a couple of
advantages over
traditional manual-
entry systems
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Radio Frequency ID (RFID)
• Relatively New technology works by having a
tag that emits information that counts inventory
automatically from a remote location.
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Valuation Of Inventories
INVENTORY VALUATION is the process of
assigning a financial value to on-hand inventory,
based on standard cost, first-in, first-out (FIFO),
last-in, first-out (LIFO), average list price or other
method. The method used is determined by a
requirement to meet legal or other standards
specified by a third party, or by an operational
measure found to be useful in analyzing
inventory positions.
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3 principal ways are used to
evaluate the inventory of a
company
First In First Out (FIFO)
Last In First Out (LIFO)
Weighted Average Cost Method
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First In First Out (FIFO)
Method supply items that come in first, are given
priority of supply and sale. (perishable items)
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Last In First Out (LIFO)
Method used in cases where the financial
accounting requires tax planning, preparation of
cash flow statements and ending inventories
(shortage prevention in times of economic /
commodity downturn
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Weighted Average Cost
Method
beginning inventory and ending inventory.
often referred to as method wherein cost of all
goods that are available for sale are divided by
the total number of goods that were present at
the beginning of the period of accounting.
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References
ONLINE PAPERS:
Inventory Management I. - http://bit.ly/tGItmR
CGE Greenhouse Gas Inventory, Hands-on Training Workshop for the African Region - Building
an Inventory Management System -Pretoria, South Africa, 18-22 September 2006.
- http://bit.ly/tGItmR
Inventory Management Chapter 12 , Operations Management - 5th Edition Roberta Russell &
Bernard W. Taylor, III.
-http://bit.ly/tGItmR
