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Inventory Control

This document defines inventory and inventory systems. It discusses the different types of inventory including raw materials, works-in-process, and finished goods. It also covers reasons for holding inventory like improving customer service and hedging against uncertainties. The document discusses how to measure and classify inventory using ABC analysis. It introduces concepts like economic order quantity and reorder point that are used to optimize inventory levels.

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Sudip Kumar
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© Attribution Non-Commercial (BY-NC)
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60 views

Inventory Control

This document defines inventory and inventory systems. It discusses the different types of inventory including raw materials, works-in-process, and finished goods. It also covers reasons for holding inventory like improving customer service and hedging against uncertainties. The document discusses how to measure and classify inventory using ABC analysis. It introduces concepts like economic order quantity and reorder point that are used to optimize inventory levels.

Uploaded by

Sudip Kumar
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Inventory Management and

control
Definitions
 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
Inventory
 Def. - A physical resource that a firm holds in
stock with the intent of selling it or
transforming it into a more valuable state.
 Raw Materials
 Works-in-Process
 Finished Goods
 Maintenance, Repair and Operating (MRO)
Zero Inventory?
 Reducing amounts of raw materials and
purchased parts and subassemblies 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.
Inventory Positions in the
Supply Chain

Raw Works
Materials Finished Finished
in
Goods Goods
Process
in Field
Reasons for Inventories
 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
Inventory and Value
 Remember this?
 Quality
 Speed
 Flexibility
 Cost
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
indirect: holding, stockout.
HR systems may promote this-3 year postings
How to Measure Inventory
 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?
 Ford:6.825 billion
 Sears: 4.039 billion
Inventory Costs
 Procurement costs
 Carrying costs
 Out-of-stock costs
Procurement Costs
 Order processing
 Shipping
 Handling
 Purchasing cost: c(x)= $100 + $5x
 Mfg. cost: c(x)=$1,000 + $10x
Carrying Costs
 Capital (opportunity) costs
 Inventory risk costs
 Space costs
 Inventory service costs
Design of Inventory Mgmt.
Systems: Micro Issues
 Order Quantity
Economic Order Quantity
 Order Timing
 Reorder Point
Objectives of Inventory
Control
 1) Maximize the level of customer
service by avoiding understocking.
 2) Promote efficiency in production and
purchasing by minimizing the cost of
providing an adequate level of customer
service.
Balance in Inventory Levels
 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?
 Next: Economic Order Quantity
Models for Inventory Management:
EOQ
 EOQ minimizes the sum of holding and setup
costs
 Q = 2DCo/Ch
D = annual demand
Co = ordering/setup costs
Ch = cost of holding one unit of inventory
Seatide
 EOQ = 2DCo/Ch
D = annual demand = 6,000
Co = ordering/setup costs = $60
Ch = cost of holding one unit of inventory
$3.00 x 24% = .72

720,000
2 x 6,000 x 60
.72 1,000
.72
Marginal Analysis

Holding
Costs

Ordering
Costs

Units
Reorder Point
 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
Types of Inventory Systems
 By Degree of Control required
 often use grouping method, such as ABC
Classifying Inventory Items
 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
Does ABC Classification Make
Sense for an Assembler?
 i.e. – Gateway Computers
Anticipatory Inventory
Control
 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)
Anticipatory Inventory
Control
 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)

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