LEARNING OBJECTIVES Highlight the need for and nature of inventory Explain the techniques of inventory management Focus on the need for analyzing inventory problem as an investment decision Discuss the process for managing inventory

Nature of Inventory Stocks of manufactured products and the material that make up the product. Components: raw materials work-in-process finished goods stores and spares (supplies)

Need for Inventories Transaction motive Precautionary motive Speculative motive

Objectives of Inventory Management To maintain a large size of inventories of raw material and work-in-process for efficient and smooth production and of finished goods for uninterrupted sales operations. To maintain a minimum investment in inventories to maximize profitability.

An effective inventory management should: ensure a continuous supply of raw materials, to facilitate uninterrupted production maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service. minimize the carrying cost and time, and control investment in inventories and keep it at an optimum level.

Inventory Management Techniques Economic order quantity (EOQ) ordering costs: requisitioning, order placing, transportation, receiving, inspecting and storing, administration carrying costs: warehousing, handling, clerical and staff, insurance, depreciation and obsolescence ordering and carrying costs trade-off:

Carrying costs vary with inventory size. Ordering costs declines with inventory size.

EOQ (Q*) represents the minimum point in total inventory costs. Total Carrying Costs Costs Total Ordering Costs Q* Order Size (Q)

Reorder Point (OP) = Lead time X Average Usage When to Order? Issues to consider: Lead Time -- The length of time between the placement of an order for an inventory item and when the item is received in inventory. Reorder Point -- The quantity to which inventory must fall in order to signal that an order must be placed to replenish an item. Reorder Point (OP) = Lead time X Average Usage

Inventory Management Techniques Reorder point under certainty lead time average usage Reorder point = Lead time x average usage

What is the proper amount of safety stock? Safety Stock: Minimum inventory or buffer inventory as cushion against expected increased usage and/or delay in delivery time. What is the proper amount of safety stock? Depends on the: Amount of uncertainty in inventory demand Amount of uncertainty in the lead time Cost of running out of inventory Cost of carrying inventory

Cont… Reorder point under uncertainty safety stock Reorder point = (Lead time x average usage) + safety stock

INVENTORY CONTROL SYSTEMS ABC Inventory Control System Just-in-Time (JIT) Systems Computerized Inventory Control Systems

Requirements of applying this approach: Just-in-Time Just-in-Time -- An approach to inventory management and control in which inventories are acquired and inserted in production at the exact times they are needed. Requirements of applying this approach: A very accurate production and inventory information system Highly efficient purchasing Reliable suppliers Efficient inventory-handling system