Managing

Inventory
Mgt E 524 - Operation and Supply Chain Management
CONTENTS
Inventory or stock refers to the goods
and materials that a business holds for
the ultimate goal of resale, production
or utilization. It is both raw materials
(components) and finished goods
(products).

Inventory management is a
systematic approach to sourcing,
storing, and selling inventory—
both raw materials (components)
and finished goods (products).
 Three –Step Process:

Based on demand
It relates to targeted patterns and Through Systematic
customer service levels production schedules reviews, adjustments,
transfer, and cycle
counting
Buffer Inventory - This is an extra Pipeline (or transit) inventory -
cushion that is kept over an This is inventory that exists due to
extended period to prepare for transportation
unexpected demand surge and time lag.
subsequently prevent potential
stockouts.

Lot-size inventory - This is Decoupling inventory - This is

inventory accumulated as a result inventory that makes every stage
of over purchasing and over of the supply
production to take advantage of chain independent of any
economies of scale. unexpected supply chain
disruptions.
Anticipation inventory - This is
inventory built up in anticipation of
future estimated demand, price
increases, promotional campaigns,
seasonal fluctuations, labor strikes,
or plant shutdowns.
 Supplies are items (including finished goods)
Raw materials are virgin physical needed to get engaged in the production
resources or items that are purchased process, but do not comprise the finished
from external organizations or 05 product.
extracted from natural sources such
as mines to be used for making 01
parts/components or products.

Finished goods are completed

04 items that are ready for sale or
distribution.

Parts and components are 02

major ingredients that will
makeup a finished product and
make it function properly. 03 Work in process (WIP) refers to items that
are still in the manufacturing process and are
waiting to be processed within the supply
chain.
Critical value analysis is frequently used by
military organizations, which “subjectively”
classify inventory items by assigning point
values for three to five categories.

Category Item Features

1. Top priority No stockout—critical items
2. High priority Essential, but limited
stockouts permitted

3. Medium priority Necessary, but occasional

stockouts permitted

4. Low priority Desirable, but stockouts

allowed
ABC inventory analysis classifies inventory
items or SKUs into three categories“A”items,
B” items, and “C” items according to
relative sales volume, cash flows, lead time, or
stockout costs.

Question Classification
1. Annual Usage > P500,000
2. Unit cost (price) > P5,000
A
3. Lead Time > 6 months
4. Shelf Life < 3 months
1. P100,000 ≤ Annual Usage ≤ P500,000
2. P1,000 ≤ Unit cost ≤ P5,000
B
3. 3 months ≤ Lead Time ≤ 6 months
4. 3 months ≤Shelf Life ≤ 6 months
1. Annual Usage < P100,000
2. Unit cost < P1,000
C
3. Lead Time < 3 months
4. Shelf Life > 6 months
Independent demand inventory
refers to an item whose demand is
unrelated to other items and is
therefore not affected by the
demand patterns of the other
items.

Dependent demand inventory

refers to an item whose demand is
a direct result of a need for some
other item and is therefore not
subject to random demands of end
customers.
Economic Order Quantity Model Quantity Discount Model are
(EOQ) is referred to as an optimal price reductions designed to
order quantity that minimizes total induce large orders.
annual inventory cost and answers
the questions of how much and
when to place a replenishment 01 02
order.
Risk Pooling Model refers to a
Quantity and Freight
Discount Model identifies 03 04 strategy of aggregating demand
across different stocking
an optimal order quantity locations by centralizing stocking
when both volume and locations (e.g., warehouses) to
shipping discounts are reduce demand variability and
available. subsequently decrease safety
stocks.
The inventory control and planning for dependent
demand require different approaches.

referred to as a time-phased, priority dependent

inventory control and planning system, which
calculates the material requirements and scheduled
orders to meet changing demand while minimizing
unnecessary inventories.
i.e., what to i.e., how much i.e., when to
order to order order
is referred to as the application of MRP scheduling and
time-phasing logic to the management of distribution
inventories, transportation, and material flows across the
distribution pipelines. The emphasis of DRP is on
scheduling and people rather than ordering and
techniques.

To determine the needs of inventory stocking locations

and ensure that supply sources will meet the demand.
To establish or improve the integration between a firms
distribution function and its manufacturing source of
supply.
To give users visibility up and down the complete
distribution network
is a management philosophy that involves
purchasing or producing exactly what is needed at
the precise time (i.e., just when it is needed and not
long before or long after) to eliminate the waste of
expensive resources.

Such waste represents anything that adds cost and

does not add value, in any workplace setting, to the
purchasing and/or production processes.
Defects - Defects undermine quality, requiring work to be redone and
consequently causing costs overrun.
Delays - Delays make customers wait and irritate them.
Non-value-adding processes - Such processes prolong work completion time.
Idle motion - This lowers labor productivity.
Overproduction - This creates oversupply and makes extra products useless.
Long and redundant transportation - This slows services flow and increases lead time.

Unused inventory - Unused inventory occupies space and delays the discovery of
defects and other complications.
Underutilized talent - This undermines employee morale and productivity.
Missing or unaccounted inventory can be costly
because it increases time looking for items, it delays
or fails to fulfill customer orders, it lengthens
production time, it raises expediting (order and
transportation) costs, and it increases inventory
carrying costs.

To prevent missing or unaccounted inventory, many

companies practice cycle counting, which generally
refers to counting inventory physically on a cyclical
schedule to check the inventory accuracy.
 is the most commonly
used method and compares the variance
gives you a snapshot of amount to the amount
what your inventory consumed during the
accuracy is at that specific count period and is
point in time therefore far more useful
in determining process
problems than on-hand
tracking.
is an inventory management principle whereby the
supplier not only provides its customers
(manufacturers, distributors, or retailers) with
products but also decides which products (items) to
replenish, in what quantities, and
when, based on the agreed ground rules.
Inventory can be a valuable asset that enables a
company to serve its customers in a timely manner
by playing the role of buffer against unpredicted
demand surges, quality failures, and supply chain
disruptions.

On the other hand, inventory isn't a liability in the

accounting sense that it represents something you
owe, but it can fit another definition of the word: a
disadvantage or drawback. Inventory becomes a
problem when you have too much.
Thank you!