Chapter 5 Inventory planning and management

 Inventory- stock of items held to meet future demand  Level of inventory- investment is minimum and chances of stock out is also minimum Inventory management

1.Second largest cost in distribution 2.Add as much as 40% in extra cost per year to the value of goods being stored Inventory costs

1.Cycle stock 2.In transit stock 3.Safety stock 4.Speculative stock 5.Dead stock Types of inventory

 Inventory required to meet basic demand under conditions of certainty- transition inventory 1. Cycle stock

 Goods undergoing movement between fixed stock points such as warehouses 2. In transit stock

 Buffer inventory 3. Safety stock

 Inventory in excess of normal requirements  Objective is to increase profitability 4. Speculative stock

 No demand registered for a specified period of time 5. Dead stock

1.Catering to the needs of the customer during sales fluctuations 2.To provide assurance on availability 3.To store in advance 4.Flexible raw material scheduling 5.To suit variations in production scheduling 6.To take advantage of favorable raw material price 7.To manufacture material in economic run sizes Reasons for holding inventory

 Risk or product obsolescence and losses due to depreciation  Technological advances and product innovation hampered  Risk of damage of goods  Long delay between the creation of an item and its use Adverse effects of inventories

1.Procurement costs 2.Inventory carrying costs 3.Out of stock costs 4.Over stock costs Costs associated with inventory

 Cost of order processing  Cost of placing order includes cost of transmitting the order to supplier  Cost of transportation  Cost of material handling 1. Procurement costs include

 Capital costs  Insurance and taxation costs  Obsolescence and deterioration costs  Storage costs 2. Inventory carrying costs- major component of total distribution costs- it includes

 Lost sales cost  Back order cost 3. Out of stock costs

 Static inventory  Dynamic inventory 4. Over stock costs

1.Unit cost 2.Re-order cost 3.Holding cost 4.Shortage cost Overall costs of stock

 FIFO  LIFO  Average cost Most common costing methods

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