SCM – Inventory Management

quantity of goods and materials that are held in stock, often one of the largest assets, used to satisfy customer needs immediately
poor management of inventory can lead to…(3)
(1)dissatisfied customers, (2) lost sales and revenue, (3) higher costs
inventory includes…
finished products, raw materials, work-in-progress (WIP), material supplies used to run the business…
4 main categories of inventory
(1) raw materials, (2) work-in-progress (WIP), (3) finished goods, (4) maintenance, repair, operating (MRO) supplies
raw materials
purchased items or extracted materials that are converted vie the manufacturing process into components and products
a work-in-progress (WIP) type of item
work-in-progress (a.k.a. work-in-process)
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
finished goods
products available for sale and/or shipment to customer, all manufacturing operations have been completed
maintenance, repair, and operating (MRO)
items to support general operations and maintenance
service inventory
activities carried out in advance of the customer’s arrival
facilitating products
items used to help facilitate the service being provided
Ex: car rental service – the car,
restaurant dining services – food, tablewear
4 functions of inventory
(1) to meet customer demands, (2) to buffer against uncertainty in demand and/or supply, (3) to decouple supply from demand, (4) to decouple dependencies in the supply chain
cycle stock [to meet customer demands]
immediately fills orders
safety stock [buffer for uncertainties in demand/supply]
allows a safety net to account for fluctuations in demand/supply
strategic stock [to decouple supply from demand]
additional inventory beyond cycle and safety stock, buying for a better price even if it is more than necessary, used for a specific purpose or future event
[decouple dependencies in the supply chain]
hold separate pieces of inventory and then combine for final product
inventory management
the function of planning and controlling inventories
inventory management’s goal
to help a company be more profitable by lowering the cost of goods sold and/or by increasing sales
inventory management balances (2)
reducing the amount of inventory held in stock AND ensuring there is enough inventory to satisfy customer demand
internal inventory
cycle stock + safety stock + strategic stock = reported stock level
external inventory
inventory in transit
pipeline inventory
inventory in transit
obsolete inventory
stock that is expired, damaged, or no longer needed, will never be used or sold at full value, ties up capital to store, dispose, insure, etc.
types of inventory costs (6)
(1) direct costs, (2) indirect costs, (3) fixed costs, (4) variable costs, (5) order costs, (6) carrying costs
direct costs
directly traceable to unit produced (materials, etc.)
indirect costs
cannot be directly traced to unit produced (overhead, etc.)
fixed costs
independent of the unit volume produced
variable costs
dependent on the unit volume produced vary with output level
order costs
labor costs associated with placing an order for inventory and the cost of receiving the order
carrying costs
costs for physically having inventory on-site and for maintaining the infrastructure needed to store the inventory and to secure and insure over time
inventory investment measures (2)
(1) absolute inventory value, (2) inventory turnover
absolute inventory value
the value of the inventory at either its cost or its market value
inventory turnover
the number of times than an inventory cycles, or “turns over,” during the year (the more turns the better)
inventory turnover ratio
costs of goods sold (COGS)/average inventory @ cost
inventory policy
establishing target inventory levels for all products and materials
what 3 fundamental questions does inventory policy address?
(1) when to review?, (2) when to order?, (3) how much to order?
2 models for determining when to review (inventory levels)
(1) continuous review system, (3) periodic review system
continuous review system
inventory levels are continuously reviewed and as soon as inventory falls below a pre-determined level a replenishment order is triggered
Adv/Disadv. of continuous review system
Adv:easier to know when to replenish, facilitates accurate accounting
Disadv: costly implementation
periodic review system
inventory levels are reviewed at a set frequency
Adv/Disadv. of periodic review system
Adv: reduces time spent analyzing inventory, less expensive than a continuous review system
Disadv: may not provide inventory counts for business w/ high sales, difficult to determine the best review/reordering intervals, inventory accounting less accurate
reorder point (ROP) [when to order]
the lowest inventory level at which a new order must be placed to avoid a stockout [ROP = demand during lead time(dL)]
inventory ordering system categories [how much to order]
(1) fixed-order quantity system, (2) fixed-time period system
fixed-order quantity system
uses same order quantity, the time between varies from order to order
fixed-time period system
inventory is checked in fixed time periods against a target inventory level, amount of inventory ordered will potentially vary from period to period

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