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inventory

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the quantities of goods and materials that are held in stock

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4 categories of inventory

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raw materials work-in-progress (WIP) finished goods maintenance, repair, and operating (MRO) supplies

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raw materials

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purchased items or extracted materials that are converted via the manufacturing process into components and products

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work-in-process

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a good or goods in various stages of completion throughout the plant, spanning from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods

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finished goods

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items on which all manufacturing operations, including final testing, have been completed. These items are available for sale and/or shipment to the customer

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MRO

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(maintenance, repair, and operating) items used in support of general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations

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service inventory

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activities carried out in advance of the customer's arrival

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Why hold inventory?

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1. to meet customer demand (cycle stock) 2. to buffer against uncertainty in demand and/or supply (safety stock) 3. to decouple supply from demand (strategic stock) 4. to decouple dependencies in the supply chain

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Inventory Management

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The function of planning and controlling inventories Goal is to help a company be more profitable by lowering COGs and/or by increasing sales

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What is the right amount of inventory?

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It depends on the supply chain strategy and set up, the types of products, etc

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3 Levels of Internal Inventory

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1. Cycle Stock 2. Safety Stock 3. Strategic Stock

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cycle stock

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inventory that a company builds to satisfy its immediate demand; gradually depletes as customer orders are received

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safety stock

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inventory that is above and beyond what is actually needed to meet anticipated demand

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strategic stock

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additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time

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pipeline inventory

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inventory that is already out in the market held by wholesalers, distributors, retailers, and even consumers; also in-transit

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obsolete inventory

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inventory that is expired, damaged, or no longer needed; will never be used or sold at full value

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inventory costs

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- direct costs - indirect costs - fixed costs - variable costs - order costs - carrying costs

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direct costs

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directly traceable to unit produced

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indirect costs

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cannot be traced directly to the unit produced

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fixed costs

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independent of hte unit volume produced

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variable costs

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dependent on the unit volume

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order costs

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labor costs associated with placing an order for inventory and the cost of receiving the order; incurred each time an order is placed

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carrying costs

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costs for physically having inventory on-site and for maintaining the infrastructure needed to store the inventory and to secure and insure it over time; incurred for holding inventory

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effects of having too much inventory

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financial resources tied up in inventory underlying problems being hidden rather than being exposed and solved no incentive for process improvements

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effects of having too little inventory

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production disruptions longer delivery replenishment lead times reduced responsiveness

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measures of inventory investment

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Absolute inventory Value Inventory Turnover

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Absolute Inventory Value

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the value of the inventory at either its cost or its market value

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inventory turnover

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the # of times that an inventory cycles or "turns over", during the year *the more the better ratio = COGS/Average Inventory @ Cost

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Inventory policy

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establishing target inventory levels for all products and materials 1. When to review? 2. When to order? 3. How much to order?

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2 Models for Determining When to Review

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1. Continuous Review System 2. Periodic Review System

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continuous reiew system

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inventory levels are continuously reviewed; as soon as inventory falls below a pre-determined level, a replenishment order is triggered

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periodic review system

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inventory levels are reviewed at a set frequency; at the time of review, if the stock levels are below the pre-determined level, an order for replenishment is placed, other wise no action is taken until the next cycle

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Reorder Point

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(ROP) the lowest inventory level at which a new order must be placed to avoid a stockout - set at a level that provides enough inventory so demand is covered during the lead time (L) needed to replenish inventory

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Common Inventory Ordering System Categories

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Fixed-Order Quantity System Fixed-Time Period System

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Fixed-Order Quantity System

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a continuous inventory review system in which the same order quantity is used from order to order - when inventory position drops to a predetermined reorder point, a predetermined fixed order quantity is placed

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Fixed-Time Period System

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inventory is checked in fixed time periods against a target inventory level - if inventory is less than target, a quantity necessary to bring inventory back up to the target level is ordered Q = R - IP where Q = order quantity, R = target inventory level, and IP = inventory position

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EOQ

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(Economic Order Quantity) a quantitative decision model based on the trade-off b/t annual inventory carrying costs and annual order costs sq[(2*D*S)/H)] Where D = annual demand, Q = order quantity (units), and S = ordering costs (per order)

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Total Cost

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Purchase Cost + Order Cost + Carrying Cost

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Annual carrying costs

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(Q/2)*H Where Q = order quantity and H = holding costs (per unit)

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annual ordering costs

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(D/Q)*S Where D = annual demand, Q = order quantity (units), and S = ordering costs (per order)

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Practical Considerations of EOQ

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Volume Economies of Scale Constraints

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Volume Economies of Scale

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Individual Item Purchase Price Discounts Multiple-Item Purchase Price Discounts Transportation Freight-Rate Discounts

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Individual Item Purchase Price Discounts

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discounts for ordering purchase price discounts; if volume discount is sufficient to offset the added cost from carrying additional inventory, then order a larger volume may be desirable

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Multiple-Item Purchase Price Discounts

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based on total volume across all the items purchased rather than just an individual item's volume

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Transportation Freight-Rate Discounts

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ordering a larger quantity may mean that you can take advantage of Transportation Freight Rate Discounts which will lower per unit costs

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Constraints

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Limited Capital storage capacity transportation obsolescence production lot size unitization

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Limited Capital

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company doesn't have sufficient available funds to purchase at one time

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storage capacity

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company doesn't have sufficient storage capacity to handle at one time

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transportation

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item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order

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production lot size

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supplier may require the company to order an item in full production lot sizes

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unitization

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supplier may require company to order an item in full pack, case, or pallet configurations

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Other Types of inventory Systems

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- ABC System - Bin System - Base Stock Level System - "Single-Period" Inventory Model

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ABC system

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classifies inventory based on the degree of importance A: Highest Value B: Moderate Value C: Least Valuable

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Bin System

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inventory system that uses either one or two bins to hold quantity of the item being inventoried; mainly used for small or low value items

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Base Stock Level System

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a type of inventory system that issues an order whenever a withdrawal is made from inventory

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single-period model

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a type of inventory system is only ordered for one-time stocking - goal is to maximize profits Ex) Newspaper stands

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barcode systems

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help businesses track products and stock levels for inventory management Types: Linear 1D, 2D, barcode reader

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common metrics for inventory

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units, dollars, weeks of supply, inventory turns

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units

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the # of units available

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dollars

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the amount of dollars tied up in inventory

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weeks of supply

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(avg. on-hand inventory)/(avg weekly usage)

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inventory turns

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(COGS)/(avg. inventory value)

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