Inventory Decisions

What are Inventories? Stockpiles of raw materials, supplies, components, work in process, and finished goods. Appear at numerous points throughout a firm’s production & logistics channel Having inventories on hand can cost between 20 – 40 percent of their value per year

Why Hold Inventories? Improve customer service Reduce costs –May encourage economies of production by allowing larger, longer, and more level production runs –Fosters economies in purchasing and transportation –Buying today in anticipation of higher prices tomorrow –Variability in time to produce & transport can cause uncertainties that impact on operating costs & customer service levels. Inventories serve as a buffer against this –Unplanned & unanticipated shocks can befall the logistics system (labor strikes, natural disasters, etc)

Why Not Hold Inventories? Wasteful in that they absorb capital that might otherwise be put to better use Do not contribute to the direct value of the product (do store value however) Can mask quality problems Encourages insular attitudes – isolating one logistics channel stage from another

Types of Inventories Pipeline stock –Products in transit between stocking or production points Speculation stock –Typically products bought in anticipation of seasonal selling or for price speculation Regular (or cyclical) stock –Inventories necessary to meet the average demand during the time between replenishments Safety stock Obsolete (or dead, or shrinkage) stock

Cost of Inventories Procurement Costs Carrying Costs –Space Costs –Capital Costs –Inventory Service Costs (insurance, taxes, etc.) –Inventory Risk Costs Out-of-Stock Costs –Lost sale costs –Back order costs

Purchasing Activities Selecting & qualifying suppliers Rating supplier performance Negotiating contracts Comparing price, quality, & service Sourcing goods & services Timing purchases Setting terms of sale Evaluating the value received Measuring inbound quality Predicting price, service, & demand changes Specifying the form in which goods are to be received

Basic Types of Products Purchased Generics –Low-risk, low value items and services that do not enter the final product Office supplies, MRO items Commodities –Low-risk, high value items or services Basic production items, basic packaging, logistics services

Basic Types of Products Purchased Distinctives –High-risk, low value items & services Engineered items, parts available only from limited suppliers, items with long lead times Criticals –High-risk, high value items or services that give the buyer’s product a competitive advantage in the marketplace Unique items, items critical to the final product

Advantages of Electronic Procurement Lower operating costs –Reduced paperwork –Reduced sourcing time –Improve control over inventory & spending Improve procurement efficiency –Find new supply sources –Improve communications –Improve personnel use –Lower cycle times Reduce procurement prices –Improve comparison shopping –Reduce overall prices paid

Disadvantages of Electronic Procurement Security Lack of face-to-face contact between buyer & seller Lack of standard protocols System reliability Technology problems Reluctance to invest time & money to learn new technology