LEARNING OUTCOMES

1 Explain the importance of inventory, types of

  inventories, and key decisions and costs

2 Describe the major characteristics that impact

  inventory decisions

3 Describe how to conduct an ABC inventory

  analysis

 

 

LEARNING OUTCOMES (continued)

4 Explain how a fixed-order-quantity inventory

  system operates, and how to use the EOQ

  and safety stock models

5 Explain how a fixed-period inventory system

  operates

6 Describe how to apply the single-period

  inventory model

 

Inventory Management

• Planning, coordinating and controlling:

• Acquisition, storage, handling, movement,

  distribution, and possible sale of raw materials

• Component parts and subassemblies

• Supplies and tools

• Replacement parts

• 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

• Work-in-process (WIP) inventory: Partially

  finished products in various stages of

  completion that are awaiting further

  processing

 

Types of Inventory

• Finished goods inventory: Completed

  products ready for distribution or sale to

  customers

• Safety stock inventory: Additional amount

  of inventory that is kept over and above the

  average amount required to meet demand

 

Exhibi

       12.1

     t

Role of Inventory in the Value Chain

 

 

Managing Inventories in Global Supply

Chains

• Requires good technology, processes, and

  information technology (IT) support

• Purchasing must focus on:

• Global sourcing and total system cost

• Ensure quality, delivery performance, and

  technical support

• Seek new suppliers and products and be able to

  evaluate the potential to the company

 

 

 

Managing Inventories in Global Supply

Chains

• Environmentally preferable purchasing

  (EPP): Affirmative selection and acquisition

  of products and services that effectively

  minimize negative environmental impacts

• Over their life cycle of manufacturing,

  transportation, use, and recycling or disposal

 

Inventory Management Decisions

• Right time to order items from a supplier

• Quantity required to order each time a

  supplier order is placed

 

 

Categories of Inventory Costs

 

Inventory Characteristics

 

 

 

Number of Items

• Each item is identified by a unique

  identifier, called a stock-keeping unit (SKU)

• Stock-keeping unit (SKU): Single item or asset

  stored at a particular location

 

 

 

Nature of Demand

 

 

 

Number and Duration of Time Periods

• Firms are concerned with planning

  inventory requirements over an extended

  number of time periods

• Approaches

• Single period

• Multiple time periods

 

 

 

Lead Time

• Time between placement of an order and

  its receipt

• Affected by:

• Transportation carriers

• Buyer order frequency and size

• Supplier production schedules

 

 

 

Stockouts

• Inability to satisfy demand for an item

• Backorder: Occurs when a customer is willing to

  wait for an item

• Lost sale: Occurs when the customer is unwilling

  to wait and purchases the item elsewhere

 

 

 

ABC Inventory Analysis

• Categorizes SKUs into groups according to

  the total annual dollar usage

• A items - Account for a large dollar value but a

  relatively small percentage of total items

  - Example, 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

  - Example, 50% to 60% of items, yet about 5%

     to 15% of total dollar value

• B items - Items between A and C

 

 

Managing Fixed Quantity Inventory

Systems

• Fixed quantity system (FQS): Order quantity

  or lot size is fixed

• Same amount, Q, is ordered every time

  - Order quantity (Q) can be any quantity of

    product

  - Does not have to be economically determined

 

 

 

 

 

Managing Fixed Quantity Inventory

Systems

• Process of triggering an order is based on

  the inventory position

• Inventory position (IP): On-hand quantity (OH)

  plus any orders placed but which have not

  arrived (scheduled receipts, or SR), minus any

  backorders (BO)

  - IP = OH + SR – BO

 

 

 

 

Managing Fixed Quantity Inventory

Systems

• When inventory falls at or below a certain

  value, r, called the reorder point, a new

  order is placed

• Reorder point: Value of the inventory position

  that triggers a new order

 

 

Exhibi

       12.5

     t

Summary of Fixed Quantity

System (FQS)

 

 

 

 

 

Exhibi

       12.6

     t

Fixed Quantity System (FQS)

under Stable Demand

 

 

 

 

Exhibi

       12.7

     t

Fixed Quantity System (FQS) with

Highly Variable Demand

 

 

 

 

 

 

 

Economic Order Quantity (EOQ) Model

• Classic economic model that minimizes the

  total cost

• Which is the sum of the inventory-holding cost

  and the ordering cost

• Developed in the early 1900s

• Key assumptions

• Only a single item (SKU) is considered

• Entire order quantity (Q) arrives in the inventory

  at one time

 

 

 

 

Economic Order Quantity (EOQ) Model

• Key assumptions

• Types of costs that are relevant

  • Order/setup

  • Inventory holding

• No stockouts are allowed

• Demand for the item is deterministic and

  continuous over time

• Lead time is constant

 

 

 

 

 

Economic Order Quantity (EOQ) Model

• Cycle inventory: Results from purchasing or

  producing in larger lots than are needed for

  immediate consumption or sale

• Average cycle inventory = (Maximum inventory +

  Minimum inventory)/2

• Average cycle inventory = Q/2

 

 

 

 

 

 

 

 

 

SUMMARY

• Inventory is an asset held for future use or

  sale

• Inventory characteristics

•

•

•

•

•

Number of items

Nature of demand

Number and duration of time periods

Lead time

Stockouts

 

 

 

 

 

SUMMARY

• Economic order quantity (EOQ) model is a

  classic economic model that minimizes the

  total cost

• which is the sum of the inventory-holding cost

  and the ordering cost

 

 

KEY TERMS

•

•

•

•

•

•

•

•

•

Backorder

Cycle inventory

Dependent demand

Dynamic demand

Economic Order Quantity (EOQ) Model

Environmentally preferable purchasing (EPP)

Finished goods inventory

Fixed period system (FPS)

Fixed quantity system (FQS)

 

 

 

 

KEY TERMS

•

•

•

•

•

  Independent demand

  Inventory

  Inventory Management

  Inventory position (IP)

  Inventory-holding costs or inventory-carrying

  costs

• Lost sale

• Ordering costs or setup costs

• Raw materials, component parts,

  subassemblies, and supplies

 

 

KEY TERMS

•

•

•

•

•

•

•

•

•

Reorder point

Safety stock

Safety stock inventory

Service level

Shortage costs or stockout costs

Static demand

Stock-keeping unit (SKU)

Unit cost

Work-in-process (WIP) inventory

 

 

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