What is Inventory Management?
Inventory: A stock or store of goods.
Manufacturing firms carry supplies of raw materials, purchased parts, finished items, spare parts, tools,.... Department stores carry clothing, furniture, stationery, appliances,... Hospitals stock drugs, surgical supplies, life-monitoring equipment, sheets, pillow cases,... Supermarkets stock fresh and canned foods, packaged and frozen foods, household supplies,...
The Nature and Importance of Inventories Inventories are a vital part of business Necessary for operations Contribute to customer satisfaction
Inventories represent a significant portion of total assets Sale of merchandise (inventory) is a major source of revenues for retail and wholesale businesses
Types of Inventories Raw materials & purchased parts Partially completed goods, called work-inprogress (WIP) Finished-goods inventories (manufacturing firms) or merchandise (retail stores) Replacement parts, tools, & supplies Goods-in-transit to warehouses or customers (pipeline inventory)
Functions of Inventory
1. 2. 3. 4. 5. 6. 7. 8.
To meet anticipated demand: Anticipation stock – average demand To smooth production requirements: Seasonal inventories To decouple operations: Buffer inventories To protect against stock-outs: Safety stock – uncertainty To take advantage of order cycles: Cycle stock - batch To help hedge against price increases To permit operations: Work-in-process, pipeline inventories To take advantage of quantity discounts
Inadequate Control of Inventories Inadequate control of inventories can result in both under- and overstocking of items. Understocking (too few) results in missed deliveries, lost sales, dissatisfied customers, and production bottlenecks (idle workers or machines). Resulting underage cost.
Overstocking (too many) ties up funds that might be more productive elsewhere. Resulting overage cost. Goal: matching supply with demand!
Objective of Inventory Control
To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds
Right goods, right place, right time, right quantity
Two fundamental decisions: When to order (timing) How much to order (size)
Performance Measures 1. Customer satisfaction: the number and quantity of backorders, customer complaints. Type I service level: proportion of times that demand is met. advantage: easy to measure limit: does not reflect how much demand has been satisfied
Type II service level (fill rate): proportion of demand that is satisfied. advantage: a favorable measure of service! disadvantage: requires information on lost sales, which may be unobservable or expensive to track
Performance Measures 2. Inventory turnover
The higher, the better – more efficient use of inventory Desirable number of turns depend on industry and profit margin
Annual cost of goods sold turnover = Average inventory investment
3. Days of inventory on-hand: the expected number of
days of sales that can be supplied from existing inventory.
Effective Inventory Systems?
Effective Inventory Management 1. A system to keep track of inventory 2. A reliable forecast of demand 3. Knowledge of lead times and lead time variability 4. Reasonable estimates of • • •
Holding costs Ordering costs Shortage costs
5. A classification system
1. Inventory Counting Systems
Periodic system: Physical count of items made at periodic intervals (weekly, monthly) - Good: Economics of scale - Bad: Lack of control between reviews, carry extra stock to protect against shortages between reviews
Continuous (perpetual) system: System that keeps track of removals from inventory continuously, thus monitoring current levels of each item. Fixed quantity is ordered when a certain level is reached - Good: keep constant count of inventory, fixed order quantity - Bad: higher record keeping cost, periodic inventory counting is...