1. Inventory management involves determining appropriate inventory levels and replenishment policies to balance inventory holding costs, ordering costs, and the need to meet customer demand. 2. Key aspects of inventory management include classifying inventory items, determining economic order quantities, setting reorder points, and using periodic or continuous review systems. 3. The goals of effective inventory management are to provide good customer service while minimizing total inventory costs.

1. Edited By
JQuek

2.  Define the meaning of inventory management
 Be able to list and describe the inventory list
 Compare & contrast holding inventory against
having zero inventory

3.  Inventory- A physical resource that a firm holds
in stock with the intent of selling it or
transforming it into a more valuable state.
 Inventory System- A set of policies and controls
that monitors levels of inventory and determines
what levels should be maintained, when stock
should be replenished, and how large orders
should be

4.  Raw Materials
 Works-in-Process
 Finished Goods
 Maintenance, Repair and Operating (MRO)

5.  The average carrying cost of inventory across all
manufacturing plants.. in the U.S. is 30-35% of its
value.
 What does that mean? Savings from reduced
inventory result in increased profit.

6.  Reducing amounts of raw materials and
purchased parts and sub-assemblies by
having suppliers deliver them directly.
 Reducing the amount of works-in process by
using just-in-time production.
 Reducing the amount of finished goods by
shipping to markets as soon as possible.

7. Raw
Materials
Works
in
Process
Finished
Goods
Finished
Goods
in Field

8.  Improve customer service
 Economies of purchasing
 Economies of production
 Transportation savings
 Hedge against future
 Unplanned shocks (labor strikes, natural
disasters, surges in demand, etc.)
 To maintain independence of supply chain

9.  Remember this?
◦ Quality
◦ Speed
◦ Flexibility
◦ Cost

10.  Quality - inventory can be a “buffer” against poor quality;
conversely, low inventory levels may force high quality
 Speed - location of inventory has large effect on speed
 Flexibility - location, level of anticipatory inventory both
have effects
 Cost - direct: purchasing, delivery, manufacturing
indirect: holding, stock-out.

11.  Transit : En-route goods or materials which are in the
ownership of the firm but in the possession of the
carrier.
 Seasonal : inventory built up to counter predictable
variability in demand
 Decoupling: This is a term used sometimes instead of
safety stock to establish a buffer between product
demand and product supply.
 Speculative : refers to inventory that a business
obtains and holds in anticipation of future demand,
rather than to meet current demand.

12.  Lot Sizing : Inventory that results whenever quantity
price discounts, shipping costs, setup costs, or
similar considerations make it more economical to
purchase or produce in larger lots than are needed
for immediate purposes.
 Mistakes : Incorrect unit count, unit measure,
incorrect part number etc. Inventory is then added
back to the original order.

13.  Need for Finished Goods Inventories
◦ Need to satisfy internal or external customers?
◦ Can someone else in the value chain carry the
inventory?
 Ownership of Inventories
 Specific Contents of Inventories
 Locations of Inventories
 Tracking

14.  The Dilemma: closely monitor and control
inventories to keep them as low as possible while
providing acceptable customer service.
 Average Aggregate Inventory Value
How much of the company’s total assets
are invested in inventory?
Value($) Wks of Supply Turnover
Ford: 6.825 bil. 3.5 14.8
Sears: 4.039 bil. 9.2 5.7
G.M 8.0
Toyota 35.0

15.  Non-value added costs (If you are not going to sell
them off immediately, why keep them?)
 Opportunity cost (If you didn’t keep these items,
what would you have done that might be better off?)
 Complacency (Keeping inventory means you are
lazy and consistently less competitive)
 Inventory deteriorates, becomes obsolete, lost,
stolen, etc.

16.  Procurement costs
(Order processing, Shipping, Handling, Purchasing
costs, Manufacturing cost)
 Carrying costs
(Capital (opportunity) costs, Inventory risk costs
Space costs, Inventory service costs)
 Out-of-stock costs
(Lost sales costs, Back-order costs)

17.  Independent demand items are finished products
or parts that are shipped as end items to
customers. Forecasting plays a critical role. Due to
uncertainty, extra units must be carried in
inventory
 Dependent demand items are raw materials,
component parts, or sub-assemblies that are used
to produce a finished product.

18.  Order Quantity
Economic Order Quantity (EOQ)
is the number of units that a company should add
to inventory with each order to minimize the total
costs of inventory—such as holding costs, order
costs, and shortage costs.
 Order Timing
 Reorder Point (The level in which an inventory
reaches where it signals that a replenishment is
due)

19. 1. Maximize the level of customer service by
avoiding under-stocking.
2. Promote efficiency in production and purchasing
by minimizing the cost of providing an adequate
level of customer service.

20.  When should the company replenish its inventory,
or when should the company place an order or
manufacture a new lot?
 How much should the company order or produce?

21.  EOQ minimizes the sum of holding and setup
costs
Q = √2DCo/Ch
Where:
D = annual demand
Co = ordering/setup costs
Ch = cost of holding one unit of inventory

22.  EOQ = √2DCo / Ch
Where:
D = annual demand = 6,000
Co = ordering/setup costs = $60
Ch = cost of holding one unit of inventory
$3.00 x 24% = 0.72
2 x 6,000 x 60 ═
.72
720,000
.72
1,000═

23.  Quantity to which inventory is allowed to drop
before replenishment order is made
 Need to order EOQ at the Reorder Point:
ROP = D X LT
D = Demand rate per period
LT = lead time in periods

24.  The number of days from when a company buys
the production inputs it needs to when those
items arrive at the manufacturing plant. Order
lead time can have a significant impact on a
company's bottom line. It is a key component of
delivery cycle time, along with the time it takes to
make the product and the time it takes to deliver
the product.

25. level of inventory average
inventory
units
Q
t time
The Sawtooth Model

26.  based on reorder point - When inventory is
depleted to ROP, order replenishment of quantity
EOQ.
 changing lead times
 changing demand
 Uncertainty creeps in:
◦ Plug in safety stock. Safety stock - allows manager to
determine the probability of stock levels - based on
desired customer service levels

27. reorder Qm
point
safety stock
time

28.  an alternative to ROP/Q-system control is
periodic review method
 Q-system - each stock item reordered at
different times - complex, no economies of
scope or common product/transport runs
 P-system - inventory levels for multiple stock
items reviewed at same time - can be reordered
together
 higher carrying costs - not optimum, but more
practical

29.  ABC Classification (Pareto Principle)
 A Items: very tight control, complete and
accurate records, frequent review
 B Items: less tightly controlled, good records,
regular review
 C Items: simplest controls possible, minimal
records, large inventories, periodic review and
reorder
NOTE: The HIGHER the VALUE of the Inventory,
the TIGHTER the control

30. Planning Supply Chain Activities
Anticipatory - allocate supply to each
warehouse based on the forecast
Response-based - replenish inventory
with order sizes based on specific
needs of each warehouse

31.  determine requirements by forecasting demand
for the next production run or purchase
 establish current on-hand quantities
 add appropriate safety stock based on desired
stock availability levels and uncertainty demand
levels
 determine how much new production or purchase
needed (total needed - on-hand)

32.  replenishment, production, or purchases of
stock are made only when it has been signaled
that there is a need for product downstream
 requires shorter order cycle time, often more
frequent, lower volume orders
 determine stock requirements to meet only most
immediate planning period (usually about 3
weeks)