McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 1 Inventory Management

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2 Module Objectives Understand the basic components of an inventory system and how it should be managed to create value for the customer Understand the difference between dependent demand and independent demand, and how each requires a different management system Explain the different uses for inventory and the value of the inventory for each of these managerial uses Identify the key metrics for effectively managing inventory performance Identify the different types of inventory Be able to apply an ABC inventory categorization and understand its use Understand the importance of inventory accuracy and how record accuracy can be maintained

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 3 Inventory – By Sector

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4 Selected Corporate Financial Highlights ( Billions$)

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5 Inventory Performance Metrics Cost –Inventory turnover –Days of supply Delivery Timeliness –Item fill rate –Line-item fill rate –Order fill rate

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6 Customer Service Measure Example

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 7 Types of Inventory Raw material Work-in-process Finished goods Maintenance, repair, and operating supplies (MRO)

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 8 Inventory Costs Ordering costs Holding costs Stockout costs Product price Management system cost

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 9 Functions of Inventory Production smoothing Lot size Customer service safety stock Process decoupling Supply decoupling Economic incentive Pipeline Speculative

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 10 Inventory Mgt Systems Answer 3 Basic Questions How much? Which form, or where? How much effort?

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11 Two Classes of Systems Independent demand items Dependent demand items

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 12 ABC Systems

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 13 Pareto Distribution of Items

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 14 Costing Inventory Policies Total Annual Cost (TAC)* = –Ordering Cost + Holding Cost + Stockout Cost –Ordering Cost = S X N –Holding Cost = H X (SS + q/2) –Stockout Cost = C us X P us X N * Ignoring price and management system costs

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 15 Inventory Replenishment Cycle

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 16 Inventory Record Analysis