This document discusses inventory management. It defines inventory as raw materials, work in progress, and finished goods. It outlines common myths in inventory management. Inventories are kept for reasons like improving customer service and hedging against uncertainties. The roles of inventory in the supply chain are described. Different types of demands and inventory management techniques like ABC analysis and the economic order quantity model are covered. The benefits and drawbacks of holding inventory are summarized. Different inventory counting and valuation methods are also discussed.
2. Outline
• What is inventory
• Myths in inventory management
• Reasons for having inventory
• Rolls of Inventory in SCM
• Types of Demands
• Benefits/Drawbacks
• Methods for inventories
• Inventory Techniques
4. What is Inventory?
Raw Materials
Component parts
Work-in-Process
Finished Products
Planning
Directing
Controlling
5. Myths in Inventory Management
The “SALES” data that we have in our company
records, is all we need for inventory management”
“The more expensive a software system is, the better it will
help us control our inventory“
“We keep all of our sales histories by month, and this data is
all we need to make good forecasts for inventory planning”
6. Reasons for Inventories
o Improve Customer Service
o Economies of purchasing
o Economies of Production
o Transportation Savings
o Hedge against future
o Unplanned shocks(labor strikes, natural
disasters, surges in demand, etc)
o To maintain independence in supply chain
7. Role of Inventory in Supply Chain
Supply Chain
Understocking : Demand exceeds amount available
- Lost margin and future sales
Overstocking : Amount available exceeds demand
- Liquidation, Obsolescence, Holding
Goal
Matching Supply and
Demand
8. Dependent
Types of Demand
• Demand for items
used to produce
final products.
• Demand for
items used by
external
customers.
Independent
9. Benefits of Inventory Management
Improve customer service
Reduce inventory investment
Increase the profitability of business
Increase productivity
Inventory is insurance
10. Drawbacks of Keeping Inventory
• Inventory is expensive
• Items deterioration
• Products obsolescence
13. Pros and Cons
Methods
Pros
Cons
Manual Count Method
Identifying and removing
broken items
Time consuming
Periodic Method
Less upfront costs
Outdated inventory
information
Perpetual Method
The most up to date
information
A lot of data need to be
uploaded
LIFO
Ideal for heavy products
and producer of
homogenous products
Not ideal for products that
have expiration dates
FIFO
Ideal for products that have Not suitable approach
expiration dates and
during the inflation period
products with relatively
short demand cycles
14. Inventory control Techniques
< Always better control (ABC)
classification >
Annual $ Value of Items
A
A: very important
B: important
C: marginally important
B
C
Low
Low
Percentage of Items
High
16. Two Types of Cost
Holding Cost:
–
–
–
–
–
Costs of storage space (E.g. warehouse depreciation)
Security
Insurance
Forgone interest on working capital tied up in inventory
Deterioration, theft, spoilage, or obsolescence
Ordering Cost:
–
–
–
–
Clerical costs of preparing purchase orders
Some spent finding suppliers and expediting orders
Transportation costs
Receiving costs (E.g. unloading and inspection)
17. Development of EOQ Model
• (a.) Develop a COST EQUATION (MODEL)
QUANTITIVELY and QUANTITIVELY
• TC = Holding cost + Setup Cost + DC
D = annual
demand in units
C = cost of an
individual item
• (b.) Minimize the total cost equation (model)
• (c.) Find REORDER QUANTITY
18. Inventory Usage Over Time
Order Quantity
Usage
Rate
[maximum inventory level]
Q
Inventory Control
Average inventory
on hand
Q/2
0
Minimum
Inventory
Lead time
Time
19. Minimizing Cost
Total Cost of Holding and Setup (order)
Annual Cost
Minimum
total cost
Holding Cost
Setup (order) Cost
Optimal Order
Quantity (Q*)
Order Quantity
20. Inventory control Techniques
<The EOQ Model>
Q = Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
D = Annual demand in units for the inventory item
Annual Holding Cost = (Number of orders placed per-year)*(Setup or order cost per
order)
= { Average inventory level } { Holding cost per unit per year }
= {Q/2 } ( H )
21. Inventory control Techniques
< The EOQ Model >
Q = Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
D = Annual demand in units for the inventory item
Annual Setup Cost = (Number of orders placed per-year)*(Setup or order cost per order)
= { Annual demand / Number of units in each order } { Setup or order cost per order }
= { D/Q } ( S )
22. < The EOQ Model >
Q = Number of pieces per order
S = Setup or ordering cost for each order
Q* = Optimal number of pieces per order (EOQ)
H = Holding or carrying cost per unit per year
D = Annual demand in units for the inventory item
Optimal order quantity is found when annual setup cost equals annual holding cost
{Q/2 } ( H ) = = { D/Q } ( S )
Q* = √2DS/H
23. Ahmad Saymil,,“Operations Management:Toyota Production System (TPS), Just-inTime (JIT), and Lean Manufacturing Handout”, http://www.clt.astate.edu/asyamil/
Lowering Inventory /Reduces Waste
Excessive
Reducing
inventory mask
inventory reveals
the problems
problems so they
can be solved.
Unreliable
Unreliable
Vendors
Unreliable
Vendors
Vendors
Work in process inventory level
(hides problems)
Work in process
inventory level
Work in process
Capacity
inventory level
Capacity
Imbalances
Scrap
Capacity
Imbalances
Scrap
Imbalances
Scrap
Classifying inventory according to some measure of importance and allocating control effects accordingly
Demand rate is constant, recurring and known No stock-out are allowed Orders are delivered at once All costs are assumed to be known and constant All orders are placed independently (no joint orders)