Inventory

Management
Learning Block 1
Introduction to Inventory Management
Abstract
• Inventory management is an important function in controlling assets in the supply chain. Individuals
working in the supply chain should have at least a basic understanding of the roles, costs, and benefits
of inventories. This certification track is intended to provide students with an understanding of the
basics of inventory management and to enable effective contributions to an organization.
• Inventory is a function in the overall supply chain processes of an organization. Inventory is often
obtained from suppliers in the form of raw materials and other goods and materials through the
procurement department. Inventory also includes work in process and finished products from
manufacturing operations.
• Key elements in this certification track include the importance and use of inventory in the supply chain,
exposure to the different types of inventory, techniques for effectively managing and controlling
inventory levels, the relationship between forecasting and inventory management, and the financial
impacts of inventory investments.
• The goal of this certification track is to prepare students to pass the Inventory Management national
certification examination. The content of the certification track was developed by LINCS in Supply Chain
Management Consortium. SCPro™ Fundamentals Certification examinations are owned and
administered by the Council of Supply Chain Management Professionals (CSCMP).
Course Agenda
1. Introduction to Inventory Management
2. Monitoring and Analyzing Inventory
3. Inventory Control
4. Inventory Management and Forecasting
5. Managing Inventory in the Supply Chain
6. Inventory Performance Measurement and Financial
Implications

3
Learning Block Agenda
• Understand the role and importance of inventory
• Discuss the main reasons for carrying inventory
• Describe the main approaches to managing inventory
• Outline how inventory items can be classified
• Explain the key roles and responsibilities for managing inventory
at distribution centers (DCs)
Description
• A function in the overall supply chain process of an organization
• Inventory is often obtained by suppliers in the form of raw
materials and other goods and materials through the procurement
department
• Inventory also includes work in the process and finished products
from manufacturing operations
Key Elements

The importance and Exposure to the

use of inventory in different types
the supply chain. of inventory.

Techniques for The relationship

effectively managing between forecasting
and controlling and inventory
inventory levels. management.
Learning Block 1: Introductory
Management
• Companies are increasingly looking to provide
improved customer service levels at reduced costs;
the amount, type, and cost of inventory within a
company has direct impacts on both service levels
and the profitability associated with those service
levels.
Unit 1:
Inventory Basics
Unit 1: Inventory Basics
Inventory Inventories may
Includes: be found in:
●
Raw Materials ●
Factories
●
Work in Progress (WIP) ●
Warehouses
●
Finished goods
●
Merchandise
●
Retail Stores
●
Spare parts
●
Other type of
●
Other operating supplies storage facilities
Unit 1: Inventory Basics
• Ideally, an organization
would have sufficient
inventory to satisfy
customer demands for
products without losing
any revenue due to
insufficient stock.
• An organization does not
want to have too much
inventory on hand,
because it costs too much
money to both acquire
and hold inventory.
Unit 1: Inventory Basics
• Inventory management involves striking a balance between three
classes of costs:
• Acquisition costs are incurred during purchase order (PO) preparation
and processing and during receiving and inspecting purchase items
• Carrying costs are incurred in maintaining a stock of goods in storage
• Stockout costs (also called shortage costs) are incurred when an item is
out of stock
Learning Block 1: Introductory Management

Equipment
downtime Loss of Sales
due to the
lack of spare
parts A complete lack
or limited amount
of components
and raw materials
to assemble
products

Insufficient Inventory
Unit 1: Inventory Basics
• Acquisition Costs
• Include the purchase price paid and associated administrative costs.
• Costs associated with placing the PO for those materials or services,
including the labor cost to create, review, and transmit the order.
• The labor costs to receive and pay for ordered items.
Unit 1: Inventory Basics
• Carrying Costs
• There are costs associated with carrying items, such as building like
warehouses, utilities, systems to track inventory, and labor to manage
those inventory tracking systems.
• Purchasing large quantities of product may require a form to utilize funds
from loans or the issuance of stock.
• The cost of using borrowed funds
Unit 1: Inventory Basics
• Stockout Costs
Backorder Costs Lost Costumers
These are incurred when a firm must
place an order with its suppliers for a
if costumers are not willing to
rush shipment to meet customers or wait for a backorder, they may
internal manufacturing needs; rush decide to take their business
shipments typically incur higher elsewhere, leading to reduce
handling and transportation costs revenue for the firm.
Unit 2: The Necessity of Inventory
The Necessity of Inventory
• Firms hold inventory to meet the needs of their customers
• Customers may be external to the firm of employees of other
departments within the firm who requires a certain product,
material, or part.
The Necessity of Inventory
• Firms hold inventories as means of dealing with uncertainty in the
supply chain.
• This uncertainty comes from chronic
• supplier manufacturing delays
• late deliveries
• poor quality
• damaged and incorrect deliveries
• other issues that arise in the supply chain
Appropriate Reasons to Carry Inventory

• A manufacturing company requires

inventory of raw materials and components
to create finished products and meet its
production and other schedules.
• Retailers could not operate without
inventories of finished goods; without
inventory, customers would be looking at
empty shelves.
• Personnel throughout the supply chain
need to manage inventory on a daily basis
• Ex. Retail store managers must know the
exact number of items they carry on display
and in storage to fill costumer orders, place
orders when inventory is low, and control
theft and losses due to error.
Problematic Reasons for Carrying Inventory

• Ordering inventory is
often used to compensate
for supply chain
problems, which leads to
excess inventory.
• Instead of addressing the
root causes of problems,
companies mask them
with high inventories
Problematic Reasons for Carrying Inventory
• Examples of supply chain problems include
 Poor demand planning, poor forecasting, and high forecasting error
 Product theft
 Poor supplier performance (inaccurate lead time, late delivery, poor
quality, etc.)
 Poor production yields that require greater inputs for the desired
output
 Poor or non-existent inventory planning and tracking systems
 Poor inventory counting systems that reduce stock accuracy
 Large-quantity purchases to obtain lower unit prices that are
outweighed by higher carrying costs
 Inattention to obsolete inventory disposition; obsolete stock no longer
has value
Inventory Carrying Locations
• Inventories of raw materials,
components, semi-finished products,
maintenance items, and repair items are
often held at supplier facilities or at the
buying company’s warehouse and other
• facilities.
Inventories of finished or
intermediate (semi-finished or
processed) goods may be found at
locations such as manufacturing
facilities, warehouses, DC’s
(distribution centers), retail
locations or point-of-sale (POS)
locations.
Unit 3: Functional Types of Inventory
Functional Types of Inventory
• Different types of inventory have unique functions or purposes
and may be managed differently depending on where the
inventory is held and its role in the supply chain.

• Cycle Stock
• Seasonal stock
• In-process stock
• Promotional stock
• Safety tock
• Speculative stock (hedge
• Maintenance, Repair, and stock)
Operations (MRO) Inventory
Functional Types of Inventory
• Cycle stock: inventory that is depleted through normal use or sale; firms
hold cycle stock in DC’s and retail stores in anticipation of customer orders
or to respond to normal consumption demands.

• In-process stock: good being manufactured or in between manufacturing

processes (also known as WIP or semi-finished goods)

• Safety stock (buffer stock): Held to protect against uncertainties in the

supply chain. These uncertainties include chronic supplier manufacturing
delays, changes in demand rate (the rate of demand for stock that can vary
over time), and variances in lead-time length.
Functional Types of Inventory
• Seasonal stock: Stock held in advance of the
season when the firm expects to sell it. Industries
that typically require significant seasonal stock
include apparel, sporting goods, and specialty
holiday.

• Promotional stock: Stock held to respond quickly

to marketing promotions or price incentives a firm
plans to offer its customers, including holiday
promotions.
Functional Types of Inventory
• Speculative stock (hedge stock): most commonly associated
with companies involved in manufacturing or assembly. This type
of inventory is held to protect against expected and possible price
increases or constrained availability.
Functional Types of Inventory
• Maintenance, Repair, and
Operations (MRO)
Inventory: Parts and materials
that exist primarily to ensure a
plant or manufacturing facility
and its equipment are safe,
reliable, and optimally
available for production
purposes. Service parts help
ensure that key pieces of
equipment continue to
function effectively.
Unit 4: Managing Inventory
Managing Inventory
• According to Scott (2015), inventory
management is a means of controlling
and managing the flow of products into,
within, and out of an organization.
• Effective inventory management means
using a variety of different inventory
management tools and techniques
(which is covered in Learning Block 2).
• The central goal of inventory
management is to optimize levels of
inventory so there is the right amount
of inventory in place to meet customer
needs, while ensuring the company is
not overinvesting in inventory.
Managing Inventory
• Although the key • Deciding How Much
principles of inventory Inventory to Hold
management are the • Counting Inventory
same across all • Tracking and Controlling
industries, the areas Inventory
that need to be
emphasized vary from
sector to sector.
• Key areas of
responsibility for
inventory management:
• Demand Planning
Managing Inventory
• Demand Planning: A key
element of inventory planning
is to estimate the amount of
inventory required over a set
time period to meet customer
needs.
• Various forecasting, planning
tools, and techniques are used
for demand planning and are
covered in Learning Block 4.
• Accurate demand planning
prevents both oversupply and
undersupply of inventory.
Managing Inventory
• Deciding How Much Inventory to Hold:
Rightsizing the inventory is dependent on
the specific industry. Retailers may want a
one- or two-month supply on hand, while
food businesses will want to have much
less inventory because of their products’
limited shelf life, especially fresh foods, to
minimize loss and spoilage.

• Companies carrying maintenance spares

may carry inventory for months or even
years until demand arises. Several tools,
techniques, and strategies exist for
determining how much inventory to hold,
which is outlined in Learning Block 2.
Managing Inventory
• Counting Inventory: For inventory
control purposes, it is necessary to
compare the on-hand levels with
inventory records by performing a
physical count of all items.

• Inventory counts are usually done

either by counting the entire
inventory at one time, known as a
physical inventory, or by counting
items at varying times on a
prescheduled basis, which is called
cycle counting (counting inventory
is covered in Learning Block 3).
Managing Inventory
• Tracking and Controlling Inventory:
Once a company has acquired inventory,
suitable tracking and control methods
must be implemented.
• Accurate tracking of inventory is essential
to ensuring where inventory is in the
supply chain, how much inventory is
moving in and out of the company, and how
much inventory is being held at any one
point in time.
• Inventory control involves counting and
monitoring inventory items, recording the
stocking and retrieval of items, identifying
and verifying storage locations, recording
changes to inventory, and anticipating
inventory needs (inventory control is
covered in Learning Block 3).
Inventory Management Jobs
Inventory Management/Control
Employee Tasks
• Inventory management personnel classify, label, and maintain
inventory and keep accurate inventory records, including the
location of inventory for easy retrieval

• Management personnel communicate inventory locations and

levels to department managers, and keep records of inventory
for disposal or transfer (implementing a control system can help
reduce breakage, damage, and obsolescence).

• Inventory control personnel may also be responsible for

recording incoming inventory purchases and outgoing inventory
types and quantities in the shipping and receiving department.
Inventory Management/Control
Employee Tasks
• Companies also require physical
inventory counts to help ensure
accuracy of inventory.

• Through stock counts, inventory

control employees must reconcile
inventory records with physical
inventory on-hand; this occurs
either once a year, when stock is
physically counted and compared
to inventory records, or on an
ongoing basis, using cycle counting.
Types od Jobs in Inventory
Management
• Jobs and Key Duties in inventory
management include:
• Inventory Control Analyst: Includes cycle
counting and keeping records
• Inventory Data Analyst: Analyzes data
and scenarios, evaluates options, and
makes recommendations to management
• Inventory Operations Specialist:
Includes product tracking and placement
• Quality assurance: Includes acceptance
and inspection of incoming and outbound
product
• Inventory Supervisor: Includes direct
supervision of inventory control personnel
Inventory Management/Control
Employee Tasks
• Depending on the size of the operation, Inventory control workers typically report to a
supervisor.

• The supervisor typically reports to a warehouse manager or inventory manager, depending

on the size of the organization and its structure. Warehouse managers may in turn report
Inventory
to a distribution director, while inventory Supervisor
managers may report to an inventory director.

Inventory Quality
Inventory Inventory Data
Operations Assurance
Control Analyst Analyst
Specialist Specialist
Learning Block 1 Summary
Practice Questions
1. Inventory can be defined as:
a. Raw materials, work in process, finished goods, merchandise, spare parts and other operating
supplies, which may be found in factories, warehouses, retail stores, or other types of facilities
b. Only the finished goods in a store
c. Only the goods purchased to supply customer needs
d. Only the materials in a distribution center

2. What is one of the greatest challenges in managing inventory?

e. Obtaining an accurate demand plan
f. Carrying enough inventory to cover all emergencies
g. Having a responsive procurement system
h. Balancing service with demand
Practice Questions
3. Firms hold inventory for which reason?
a. To meet the needs of shareholders
b. To meet the needs of customers
c. Firms do not need to hold inventory
d. To reduce investment

4. Cycle stock is held ____________________.

e. To protect against uncertainties in demand
f. In advance of the season during which it will be needed
g. For rapid response to marketing promotions
h. To respond to normal demand or consumption
Practice Questions
5. Inventory management is a means of ____________________. 
a. Managing manufacturing operations
b. Increasing the levels of inventory held throughout a company
c. Controlling the flow of products into, within, and out of an organization
d. Eliminating the purchase of inventory

6. Measuring inventory turnover involves ____________________.

e. Counting and monitoring inventory
f. Measuring the rate at which inventory moves through a facility
g. Determining how much inventory to hold
h. Counting all items at varying times on a prescheduled basis
Practice Questions
7. A key responsibility in inventory management is forecasting the amount of inventory
that will be required over a(n) ____________________.
a. Set period of time to meet customer needs
b. Set period of time to meet some customer needs
c. Set period of time to meet competitor needs
d. Indefinite period of time to meet customer needs

8. The duties of an inventory management employee include ____________________.

e. Maintaining high levels of stock at any cost
f. Purchasing replenishment stock
g. Physical inspection of all goods received
h. Maintaining accurate and acceptable inventory levels
Practice Questions
9. Firms hold safety stock (buffer stock) for what reason?
a. To protect against expected and possible price increases or constrained availability
b. To have in advance of the season during which the stock will be needed
c. To allow for a quick and effective response to a marketing promotion or price deal
d. To protect against uncertainties in the supply chain

10. What types of industries require significant seasonal stock?

e. Automotive and automotive after-market
f. Wholesale and retail food
g. Apparel, sporting goods, and specialty holiday
h. Home improvement and construction