Inventory introduction
Inventory is one of the company's largest assets, so careful management of that asset is an essential business requirement.
Maintaining adequate finished product inventory allows a company to fill customer orders immediately
Maintaining adequate materials
Inventory Asset/liability
Too much inventory ties up capital which could be used for research and development, marketing and sales, stockholder dividends, salary increases, etc.
The more inventory a company holds, the more space is needed, and space costs money.
In addition to sto
Raw materials
Purchased items or extracted materials converted via the manufacturing process into components and products.
There are strategies around the question of how much raw material a company should hold in inventory.
Buy from a supplier and have it delivered to
Work in Process
goods that span from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods.
Due to the range of potential stages of completion, and the fact that materials in W
Finished Goods
These products are available for sale and/or shipment to the customer.
The amount of finished goods inventory that a company decides to maintain is a strategic decision:
Companies can operate a "Make-to-Order" supply chain where the finished goods are not
Maintenance, Repair, and Operating (MRO)
Materials that you need to run the manufacturing operation and the business but do not end up as part of the finished product.
EX: spare parts, oil, coffee for break room
Service inventory
Companies in the service industry do not maintain inventory of services since services are basically produced and consumed immediately upon demand.
Companies can however, maintain inventory of "facilitating goods," which are those items that are used to h
Why hold inventory
To Meet Customer Demand (cycle stock):
To Buffer Against Uncertainty in Demand and/or Supply (safety stock):
To Decouple Supply from Demand (strategic stock):
To Decouple Dependencies in the Supply Chain
Inventory Management
The goal of inventory management is to help a company be more profitable by lowering the cost of goods sold and/or by increasing sales.
In an effort to achieve this stated goal, effective inventory management balances two competing considerations:
Reducin
What is the right amount of inventory?
The answer to that question is, "It depends."
It depends on the supply chain strategy and set-up, the type of product(s), customers' expectations, customer service objectives, product shelf life, etc.
Cycle stock
Inventory that a company builds to satisfy its' immediate demand.
Cycle stock depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received.
The amount of cycle stock that a company holds is dependent on
safety stock
Safety stock, also known as "buffer stock," is inventory that is above and beyond what is actually needed to meet anticipated demand.
A quantity of stock planned to be in inventory to protect against fluctuations in demand or supply.
Companies operating i
strategic stock
Additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time.
A company may decide to carry strategic stock to:
hedge currency fluctuations
take advantage of a price disco
pipeline inventory
Inventory in the transportation network and the distribution system. Inventory that is already out in the market being held by wholesalers, distributors, retailers, and even consumers.
The ownership of this inventory has been transferred to the trading pa
obsolete inventory
Obsolete inventory is stock that is expired, damaged, or no longer needed.
cost related inventory
Direct Costs - directly traceable to unit produced (e.g., materials, labor, etc.)
Indirect Costs - cannot be traced directly to the unit produced (e.g., overhead; MRO items, buildings, equipment, etc.)
Fixed Costs (aka Sunk Costs) - independent of the uni
hidden costs of inventory
Having too much inventory can result in effects like:
Financial resources tied up in inventory.
Underlying problems being hidden rather than being exposed and solved, including quality problems not being immediately identified.
No incentive for process im
inventory investment
Absolute Inventory Value
The value of the inventory at either its cost or its market value. Generally found on the balance sheet.
Inventory Turnover
The number of times that an inventory cycles, or "turns over," during the year.
continuous review system
Inventory levels are continuously reviewed.
As soon as inventory falls below a pre-determined level (i.e., a reorder point), a replenishment order is triggered.
More costly to conduct than a Periodic Review System, but it requires less safety stock becaus
Periodic Review system
Inventory levels are reviewed at a set frequency, e.g., weekly, monthly
At the time of review, if the stock levels are below the pre-determined level (i.e., a reorder point), an order for replenishment is placed, otherwise no action is taken until the nex
When to order
The lowest inventory level at which a new order must be placed to avoid a stockout is known as the Reorder Point (ROP)
The ROP is set at a level that provides enough inventory so demand is covered during the lead time (L) needed to replenish inventory.
How much to order
Fixed-Order Quantity System:
A continuous inventory review system in which the same order quantity is used from order to order.
When the inventory position drops to a predetermined reorder point, a predetermined fixed order quantity is placed
The time bet
Economic order quantity model (EOQ model)
A quantitative decision model based on the trade-off between annual inventory carrying costs and annual order costs. EOQ is a fixed-order quantity model
The EOQ model seeks to determine an optimal order quantity where the sum of the annual order costs and
order costs
incurred each time an order is placed:
order transportation, preparation, receipt processing costs and material handling costs
carrying costs
incurred for holding inventory
cost of capital, taxes, insurance, obsolescence, and storage
Assumptions of EOQ model
order and carrying costs are constant
constant known demand
purchase price is constant and replenishment is instantaneous
HOWEVER, ASSUMPTIONS DO NOT HOLD TRUE, SUPPLY CHAIN MANAGERS MUST MAKE ADJUSTMENTS TO EOQ
Practical considerations of EOQ ( volume economies of scale)
Individual item discounts- If the volume discount is sufficient to offset the added cost from carrying additional inventory, then ordering a larger volume may be desirable.
multiple item price discounts-If you purchase a combination of items from a suppli
EOQ Constraints
Limited Capital: The model may generate an order quantity which the company does not have sufficient available funds to purchase at one time.
Storage Capacity: The model may generate an order quantity which the company does not have sufficient storage cap
Fixed time period system
Inventory levels are checked/reviewed in fixed time periods
ABC System
classifies inventory based on important
A is the highest value
B is moderate value
C is low value
A method to determine which inventories should be counted & managed more closely than others
Bin system
Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. mainly used for small or low value items.
When the inventory in the first bin has been depleted, an order is placed to refill or replace the inventory.
The
Base stock level system
a type of inventory system that issues an order whenever a withdrawal is made from inventory.
used for expensive items
a form of just in time
Single period model
inventory is only ordered for 1 time stocking
Goal is to maximize profits
Ex: christmas tree lots, newstands
Safety stock policy
Long production lead time necessitates de-coupling
Provides maximum flexibility by centrally locating safety stock
Influenced by batch / lot / campaign size
to cover for variability in both demand and supply
Inventory control tools
Linear barcode
2D barcode
Radio frequency identification (RFID)
Barcodes
help businesses track products and stock levels for inventory management
Linear (1D) Bar Codes are "a series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that can be read
Radio frequency identification (RFID)
Successor to the barcode for tracking individual unit of goods.
RFID does not require direct line of sight to read a tag, and the information on the tag is updatable.