6. The Management of Inventory

Inventory Inventory incurs costs, ties up working capital, consumes space and must be managed. Stocks can deteriorate or get stolen. Stocks serve to smooth out timing gaps in the rates of supply and demand. Stockout situations can also incur costs in terms of customer loss and production stoppage

Inventory Basic inventory decisions involve: –how much to order (replenishment quantities) –when to order (timing) –how to control the stock system (security issues, safety levels, etc)

Types of Stock (according to Galloway) Raw Materials WIP Finished Goods ConsumablesSpares Strategic Stocks

Inventory Control Systems We can either: –order fixed quantities of stock at variable times or –order variable quantities at fixed times

Fixed Quantity Systems easy to manage copes well with demand variability Using EOQ, fixed systems initiate replenishment orders when stock falls below a pre-determined (re- order) level. Re-order level is calculated as demand during the lead time, plus the safety stock.

Fixed Time/Order Cycle System Annual requirements for low value, low bulk items can be estimated and ordered in a routine re-order cycle. We need to set a maximum stock level (average demand + safety stock). At the routine re-order time current stock can be subtracted from the maximum to give the order quantity.

Purchasing & Supply Purchasing represents major expenditure (% turnover) of any business and needs to be managed. Purchasing Objectives Purchase Strategy

Just-In-Time (JIT) Systems Essential aspects of JIT: –minimisation of inventory in supply chains. –Lessons from Japanese (compare with EOQ) –the application of Kanban - a "pull" system of production/materials control –an employee participation strategy involving commitment and changed work practices

JIT At Toyota, the production system used tickets/cards to control immediate material flows between a work station and another down- stream. The up-stream station (the server) receives tickets calls for small, fixed quantities from a down-stream user (the client). On sending the supplies, a production "kanban" is generated requesting the previous upstream server to make/supply a replacement quantity. Users "pull" off supplies as required

Supply Chain Management JIT requires improvements elsewhere in the supply chain, not only in one factory: supplier and customer. Supplier also needs to adopt JIT approaches May require dominant customer helping the smaller supplier in a consultancy capacity e.g. to review their management practices and systems. Requires trust – “competitive-cooperative dilemma”