Inventory Management
• Inventory is any asset held for future use or sale with objectives of maintaining sufficient amount and variety to meet demands while incurring the lowest possible cost.
• Inventory Management involves planning, coordinating, and controlling the acquisition, storage, handling, movement, distribution, and possible sale of raw materials, component parts and subassemblies, supplies and tools, replacement parts, and other assets that are needed to meet customer wants and needs. Types of Inventory
• Raw materials, component parts, subassemblies, and supplies: inputs to manufacturing and service­ delivery processes.
• Work­in­process (WIP): partially finished products in various stages of completion that are awaiting further processing.
• Finished goods: completed products ready for distribution or sale to customers.
• In­transit inventory: items in in­bound or out­bound logistics links.
• Safety stock: additional amount of inventory that is kept over and above the average amount required to meet just­in­case demand. Inventory Management Decisions & Cos
• Inventory turnover, or the ability to make more sales with less investment in inventory: the higher the better (a measure of inventory productivity)
• Inventory carrying costs, the expenses associated with keeping inventory in hand (obsolescence, storage, moving, etc.)
• Shortage costs or stockout costs, or the costs associated with an item being unavailable to meet demand: the lower the better (to an extent). Inventory Trade­Offs • When inventory level is high (service level or order fill rate is high): stockouts and resulted lost sales are less likely to happen but inventory carrying costs and obsolescence risks are high.
• When inventory level is low (low safety stock): costs of keeping inventory in hand are minimized and inventory turnover is high but there is an increased risk of running out of stock and the customers may not be happy.
• The question is how much do you keep in hand? Monthly Retail Sales and Inventories, United States, 1992­2013
ABC Inventory (Pareto) Analysis
•
“A” items account for a large dollar value but
relatively small percentage of total items (e.g., 10%
to 30 % of items, yet 60% to 80% of total dollar
value).
“C” items account for a small dollar value but a large
percentage of total items (e.g., 50% to 60% of
items, yet about 5% to 15% of total dollar value).
These can be managed by automated systems.
“B” items are between A and C.
•
• ABC Inventory (Pareto) Analysis
ABC Inventory Examples
A
E
B
D C Lean
• Lean thinking refers to approaches that focus on the elimination of waste in all forms, and smooth, efficient flow of materials and information throughout the value chain to obtain faster customer response, higher quality, and lower costs.
• Manufacturing and service operations that apply these principles are often called lean operating systems, initially developed and implemented by the Toyota Motor Corporation. Principles of Lean Operating Systems 1. Eliminate Waste: Eliminate any activities that do not add value in an organization. Includes overproduction, waiting time, transportation, processing, inventory.
2. Increase Speed and Response: Better process designs allow efficient responses to customers’ needs.
3. Improve Quality: Poor quality reduces yields, requiring extra inventory, processing time, and space for scrap and rework. Do it right the first time.
4. Reduce Cost: Simplifyingprocesses and improving efficiency translates to reduced costs. Just­in­Time Systems • Just­in­Time (JIT) production system was introduced at Toyota a half­century ago.
• Traditional factories use a push system, which produces finished goods inventory in advance of customer demand using a forecast of sales.
• The JIT or pull system, products are not produced until the customer demand is more certain or confirmed. Then items are “pulled” from the source or the suppliers “just in time” to make the required parts and products for the customer. The result is lower inventory throughout the system. Just­in­Time Philosophy
• Traditional accounting treats inventory as asset, the more the merrier.
• Just­in­Time (JIT) treats inventory as (necessary) evil and tries to avoid keeping it at all costs. Inventory is nothing but trouble (expensive) in a JIT system.
Damages
Mark downs
Theft or pilferage

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