INVENTORY

I. Introduction What is inventory? Types of Inventories: stored resource used to satisfy current or future demand Types of Inventories: Raw Materials/Components In-Process Goods (WIP) Finished Goods Supplies

Introduction Inventory Related Costs: Holding Cost -- cost to carry a unit in inventory for a length of time (annual), includes interest opportunity cost, insurance, taxes, depreciation, obsolescence, deterioration, May be expressed as a percentage of unit price or as a dollar amount per unit

Introduction Inventory Related Costs (continued): Order Cost -- Cost of ordering and receiving inventory, Include determining how much is needed, preparing invoices, shipping costs, inspecting goods upon receipt for quantity and quality, Generally expressed as a fixed dollar amount, regardless of order size Inventory may also influence purchasing cost Inventory is costly

Introduction Inventory Related Costs (continued): Shortage Cost-- result when demand exceeds the inventory on hand, Include the opportunity cost of not making a sales, loss of customer goodwill, late charges, and in the case of internal customers, the cost of lost production or downtime, difficult to measure, thus may have be subjectively estimated

Introduction Why Hold Inventories? Meet anticipated demand Lead time – the time period between place an order until receive the order Average lead time demand is considered as anticipate demand Protect against stock-out Safety stock – more than average lead time demand inventory

Introduction Why Hold Inventories (continued)? De-couple successive operations - separate production from distribution Wine production and inventory Smooth production process Snowmobile production and inventory Buy/Produce in economic lot sizes - take advantage of quantity discounts Hedge against price increases

Introduction JIT Inventory – minimum inventory needed to keep a system running, small lot sizes Advantages lower inventory costs easy to identify problems and potential problems Disadvantages requires accurate timing and cooperation breakdowns stop everything

Introduction A B C Inventory Classification Identify important Annual $ volume of items A B C High Low Few Many Number of Items Inventory Classification Identify important Items and more inventory control on important items Measure of importance: ABC analysis: A = 70-80% of total inventory value, but only 15% of items B = 15-25% of total inventory value, but 30% of items C = 5% of total inventory value, but 55% of items

Introduction Monitor Inventory As important as demand forecast for decision making Universal Product Code - Bar code printed on a label that has information about the item to which it is attached Cycle counting: taking physical counts of items and reconciling with records on a continual rotating basis, regular inventory audits, ABC approach 214800 232087768

Introduction Inventory Systems Objective: minimize annual total inventory cost and maintain satisfied service level. service level: probability of no shortage Total Inventory Cost is not Inventory Cost Annual total inventory cost (TC) = annual product cost + annual inventory cost Annual product cost = annual demand * unit price Annual inventory cost = annual holding cost + annual setup (order) cost + annual shortage cost

Introduction Possible performance measures customer satisfaction number of backorders/lost sales number of customer complaints inventory turnover ratio of annual cost of goods sold to average inventory investment days of inventory expected number of days of sales that can be supplied from existing inventory

Introduction Requirements for Effective Inventory Management : A system to keep track of the inventory on hand and on order A classification system for inventory items A reliable forecast of demand that includes an measure of forecast error Reasonable estimates of inventory holding costs, ordering costs, and shortage costs Knowledge of lead times and lead time variability

Introduction 1. Continuous (Perpetual) Review System: (event-triggered) Monitor the inventory level all the time, order a fixed quantity (Q) when the inventory level drops to the reorder point (ROP) Calculate: Q and ROP Re-Order Point (ROP) – an inventory level when actual inventory drops to it will trigger an activity of re-order.

Introduction 2. Periodic Review System: (time-triggered) Place an order every fixed period T. Each time bring the current inventory to a target level M Calculate: T and M 3. Advantages and Disadvantages?

Introduction Dependent and Independent Demand: Dependent demand: derived demand, lumpy (subassemblies and components) cars Independent demand: from customer side, smooth (end items and finished goods) tires