Inventory Management Understanding The Basics

2 What is Inventory? l Those stocks or items used to support production, supporting activities (maintenance, repair, and operating supplies), and customer service (finished goods and spare parts). l Any material required to create a saleable product or to run the business.

3 Types of Inventory l Raw Materials/Purchased Parts l Work-in-Process l Finished Goods (to include spare parts) l Maintenance, Repair, and Operating Supplies (MRO)

4 Is Inventory “Good or Bad”? l It depends! l Metrics are required to determine current levels of performance, define goals, and measure improvement over time.

5 Key Metrics l Level of Service - Numerous ways to measure - Business dependent l Inventory Turnover - A measure of resource usage or inventory “velocity”

6 Inventory Turnover Defined l The number of times that an inventory cycles, or “turns over”, during the year. þ Average Inventory $ On-Hand Annual Cost of Sales þ Total Quantity On-Hand Annual Usage

7 The ABCs of Inventory l The ABC principle states that effort and resources should be applied based on the dollar-volume of inventory in question. Class% of Items% of $ Volume A % % B % % C % % D <5% N/A

8 The Economic Order Quantity l A type of fixed-order-quantity model that determines the amount of an item to be purchased or manufactured at one time. l The intent is to minimize the combined costs of acquiring and carrying inventory.

9 The EOQ Calculation ()() ()() cost unit% cost carrying annual cost order avgdemand annual2 x xx Key Variables Order Cost Carrying Cost

10 Carrying Cost Cost of Capital l Carrying Cost = % Storage Space Material Handlers Racks, Shelves, Containers Obsolescence Rework Systems Scrap Management, Reporting, Tracking, Cycle Counting,...

11 DisassemblyRe-assembly Safety Stock l A quantity of stock planned to be in inventory to protect against fluctuations in supply and demand. Quantity Time EOQ S/S Order Leadtime Time S/S Repair Leadtime

12 Inventory Reduction Strategies l Raw Material/Purchased Parts l Work-in-Process l Finished Goods/Spare Parts l MRO l Shift to Suppliers l Reduce Leadtimes l Change Design l Reduce Cycle Times l Improve or Eliminate Processes l Outsource l Reduce Leadtimes l Make-to-Order l Shift to Suppliers

13 Types of Manufacturing Environments l Make-to-Stock l Make-to-Order l Design-to-Order

14 The Balance Sheet Assets Cash A/R Inventory Liabilities A/P Shareholders’ Equity Dell - an example of “negative working capital” l 52 inventory turns per year l Cash-in-hand 8 days before suppliers are paid l (A/R + Inventory) < A/P = Negative Working Capital

15 Questions and Comments Borg Siburg, CPIM Associate Partner The Siburg Company, LLC Phone: Fax: Website: