Chapter 6. Inventory Management

Raw material, Finished product, Work in progress(WIP), Consumable, S&R items
Categories of inventory
Service, Pipeline, Contingency, Safety stock, Efficient procurement
Types of inventory
Ordering, Inventory level, Stock outs, Finance, Demand, Inventory and global supply chain
The Basics of Inventory Management – There is a wide range of terminology associated with inventory management. Some of the most common terms, concepts and issues regarding global supply chains are detailed in the following paragraphs.
On-hand stock, Net stock, Net inventory
Inventory levels are simply the amount of inventory a company has. Common phrases about inventory levels include:
1. The amount of inventory in storage
2. on-hand stock, minus product back orders that must be delivered
to customers
3. on-hand stock, plus purchase orders, plus pipeline inventory,
minus back orders
Average inventory value, Inventory carrying cost, Lost sales cost, Total policy cost
Financial terms involved in inventory management are as follows:
1. The average value of the inventory investment
over a year
2. The cost of holding the annual inventory investment
3. The revenue lost from not meeting customer demands
4. The inventory carrying cost plus lost sales costs
Annual demand, Forecast annual demand, Lead time, Lead time demand
Every product will have a specific set of demand circumstances. In inventory management, common demand terminology includes the following:
1. The amount of a product demanded in a year
2. The expected amount of a product that will be
demanded in a year
3. The time taken from placing an order to fulfilling the order
4. The amount of a product demanded by customers during the lead time.
Memory, Fixed, Zoning, Random
Systems for storing inventory – Systems are required to enable companies to track product movement through a
storage site. There are four main types of system that a company can use:
A, B, C category
A common approach to establishing optimal inventory levels is based on Pareto’s law(2o% of total items will hold 80 % of the total value). Pareto’s law was further developed into the ABC classification system.
1. These are the most popular and fastest-moving items that a company holds.
2. These are items that a less active and popular than those is the A category.
3. These are considered slow-moving items.
Improve data collection, Reduce lead times, Base
inventories on market, Increase production speed, Avoid
economies of scale, Hedge inventory strategies, Use partnership strategy, Quick Response strategy, Vendor manage inventory
Optimum inventory level strategies
Vendor Manage Inventory(VMI)
Inventory is monitored, managed and planned by the supplier on behalf of the purchasing company. This inventory management is based on consumer demand and on previously agreed minimum and maximum inventory levels.
Stock product at their own facility, Stock products with a distributor
Planning Inventory Storage Locations – There are two strategies
Centralized warehousing, Decentralized warehousing
There are two predominant types of warehousing strategies:
Centralized warehousing
Involves a single warehouse that serves a whole market. It can benefit an organization by lowering overall facility costs and can reduce the amount of safety stock that needs to be held. In addition, inbound transportation costs (the cost of transporting the goods from the manufacturing plant to the warehouse) are decreased.
Decentralized warehousing
Involves the zoning of the market to determine the number of smaller warehouses required to serve those zones. It is chosen by companies who wish to reduce overall lead times, and have inventories closer to their customers. Overall, outbound transportation, or the costs associated with shipping the goods from the various warehouse locations to the customers.
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