Module 7: Inventory Management Prepared By: Ali Siddiqi

Prepared By: Ali Siddiqi What You Will Learn Purpose of inventories Objective of inventory management Types of inventories Requirements for an effective inventory system Inventory control techniques Prepared By: Ali Siddiqi

Purpose of Inventories To smooth production requirements To decouple the components of production-distribution system To provide for anticipated demand To protect against stock outs To hedge against price increases Prepared By: Ali Siddiqi

Objective of Inventory Management To strike a balance between inventory investment and customer satisfaction Prepared By: Ali Siddiqi

Prepared By: Ali Siddiqi Types of Inventories Raw material inventory Inventory that is purchased but is waiting to be processed Work-in-process inventory Inventory that is being processed to become output Maintenance/repair/operating supplies Inventory used to keep machines and processes running productively Finished-goods inventory Waiting for shipment Used as buffer Prepared By: Ali Siddiqi

Requirements for Effective Inventory System Track inventory on hand and on order Reliable forecast of demand Knowledge of lead times and lead time variability Classification system for items Prepared By: Ali Siddiqi

Video: Inventory Management System at Cole’s Hardware Prepared By: Ali Siddiqi

Inventory Control Techniques: ABC Analysis Pareto Principle: 80/20 Rule Critical few and trivial many Annual Dollar (Riyal) Volume: annual demand x cost per unit Divide inventory into 3 categories: Class A: High value, low volume (20% of Inv; 70% ADV) Class B: Moderate value, moderate volume (30% of Inv; 25% ADV) Class C: Low value, high volume (50% of Inv; 5% ADV) Prepared By: Ali Siddiqi

Inventory Control Techniques: ABC Analysis Percent of annual dollar usage 80 – 70 – 60 – 50 – 40 – 30 – 20 – 10 – 0 – | | | | | | | | | | 10 20 30 40 50 60 70 80 90 100 Percent of inventory items A Items B Items C Items Prepared By: Ali Siddiqi

Inventory Control Techniques: Record Accuracy Firm needs to know inventory on hand Allows the firm to focus on items needed Must keep good records of incoming and outgoing inventory Limited access to inventory storage area Bins, shelf space, and parts all must be labeled Prepared By: Ali Siddiqi

Inventory Control Techniques: Cycle Counting Audits Annual audits: Disadvantageous Use of ABC classification A Items: Counted frequently B Items: Once a quarter C Items: Twice a year Prepared By: Ali Siddiqi

Inventory Control Techniques: Service Inventories Inventory in services is highly accessible Shrinkage Unaccounted inventory between receipt and sale Pilferage Small amount of stolen inventory Prevention: Good personnel Tight control of incoming shipment Control over all goods leaving facility Prepared By: Ali Siddiqi

Prepared By: Ali Siddiqi Inventory Models Independent demand Dependent demand Prepared By: Ali Siddiqi

Prepared By: Ali Siddiqi Inventory Costs Holding Costs AKA Carrying Costs Insurance Spoilage Pilferage Warehousing costs Prepared By: Ali Siddiqi

Prepared By: Ali Siddiqi Inventory Costs Ordering Costs Invoices Determining order amount Inspection of good Shortage costs Opportunity costs Loss of customer good will Prepared By: Ali Siddiqi