1. Inventory Management

2. Introduction
Inventory decisions are high–risk and high-impact from the perspective of logistics operations.
Commitment to a particular inventory assortment and subsequent shipment to a market or region in anticipation of future sales determine the logistics activities.
Without proper inventory assortment, marketing may find that sales are lost and customer satisfaction will decline.
Inventory planning is critical to manufacturing .
Raw material shortages can shut down a manufacturing line or modify a production schedules.

3. Just as shortages can disrupt planned marketing and manufacturing operations, overstocked inventories also create problems.
Overstocks increase cost and reduce profitability through added warehousing , working capital requirements, deterioration, insurance, taxes and obsolescence.

4. Types and Characteristics of Inventory
Manufacturing
Wholesaler
Retail

5. 1.Manufacturing
For the manufacturer, inventory risk has a long-term dimension.
The manufacturer’s inventory commitment starts with raw materials and component parts include work-in-process, and ends with finished goods.
In addition, prior to sale, finished goods must often be transferred to warehouses in close proximity to wholesalers and retailers.

6. 2.Wholesaler
Wholesaler risk exposure is narrower but deeper and of longer duration than that of retailers.
The merchant wholesaler purchases large quantities from manufacturers and sells small quantities to retailers.
When the products are seasonal, the wholesaler is also forced to take an inventory position far in advance of selling, thus increasing depth and duration of risk.

7. 3. Retail
For a retailer, inventory management is fundamentally a matter of buying and selling.
The retailer purchases a wide variety of products and assumes a substantial risk in the marketing process.
Retailer inventory risk can be viewed as wide but not deep.
Because of high rents, retailers place prime emphasis on inventory turnover and direct product profitability.

8. Inventory Functionality
The ideal inventory process consist of manufacturing a product to a customers specifications once an order is placed.
This is called a make-to-order operation and is characteristic of customized equipment.
Such a system does not require stockpiles of materials or finished goods in anticipation of future sales

9. 1. Geographical Specilization
One function of inventory is to allow geographical specialization for individual operating units.
Because of the requirements for factors of production such as power, materials, water and labor, the economical location for manufacturing is often a considerable distance from major market.
Example-tires, batteries, transmission and springs are significant components in automobile assembly.

10. 2.Decoupling
A second inventory function, decoupling, provides maximum operating efficiency within a single manufacturing facility by stockpiling work-in process between production operations.
Decoupling processes permit each product to be manufactured and distributed in economical lot sizes that are greater than market demands.

11. 3.Balancing supply and Demands
The third inventory function, balancing, is concerned with elapsed time between consumption and manufacturing.
Balancing inventory reconciles supply avaibility with demand.
The most notable examples of balancing are seasonal production and year-round consumption.
Orange juice is one such product.

12. 4. Buffer Uncertainties.
The safety stock or buffer stock functions concerns short range variation in either demand or replenishment.
Considerable inventory planning is devoted to determining the size of the safety stocks.
In fact, most overstocks are result of improper planning.

13. Planning the Inventory Resources
Determining Order Point (when to order?)
The reorder point determines when a resupply shipment should be initiated.
The reorder point, which is defined by item and distribution center, can be specified in terms of units or days of supply.
This focuses on determining reorder points under conditions of demand and performance – cycle certainty.
The certainty conditions imply that future demands an performance – cycle length are known.

14. The basic reorder point formula is-
R=D*T
Where –
R-reorder point in units
D- average daily demand
T-average performance-cycle length
When buffer stock is necessary for conditions of uncertainty, the reorder point formula is-
R=D*T+SS

15. Where R-Reorder points in units
Where R-Reorder points in units. D-average daily demand T- average performance-cycle length SS-Safety or buffer stock in units.

16. Determining Lot Size (How much?)
The lot sizing concept balances the cost of maintaining inventories against the cost of ordering.
The key to understanding the relationship is to remember that the average inventory is equal to one-half the order quantity.
Therefore, larger the order quantity, the larger the average inventory and consequently, greater the maintenance cost per year.
However, the larger the order quantity, fewer orders required per planning period and , consequently , the lower the ordering cost.

17. Economic order quantity
The economic order quantity (EOQ) is the replenishment order quantity that minimizes the combined cost of inventory maintenance and ordering.
Identification of such a quantity assumes that demand costs are relatively stable throughout the year.
Since EOQ is calculated on an individual product basis.
Formula- EOQ