1. Inventory
Inventory management is built on two frequently made decisions:
When to order
How much to order
Objective of inventory management:
Strike the best balance between inventory investment and customer service

2. Functions of Inventory
To provide a selection of goods for anticipated customer demand and to protect the firm from fluctuations in that demand
To decouple various parts of the production process
To take advantage of quantity discounts for inputs of production
To hedge against inflation and upward price changes, which increase the cost of inputs and labor

3. Types of Inventory Raw material inventory Work-in-process inventory
Materials, usually purchased, that have yet to enter the manufacturing process
Work-in-process inventory
Products or components that are no longer raw materials, but which have yet to become finished products
MROs
Maintenance, Repair, and Operating materials
Finished goods inventory
End items or products ready to be sold

4. Costs associated with managing inventory: Holding costs
The costs of holding or “carrying” inventory over time
Ordering costs
The costs of placing an order and receiving goods
Setup costs
Cost to prepare a machine or process for manufacturing an order, which may correlate significantly with setup time

5. To manage inventory, business leaders must recognize two types of demand for inventory:
Independent demand –The demand for the item is independent of the demand for any other item in inventory.
demand for finished products
Dependent demand –The demand for the item depends on the demand for some other item in the inventory.
demand for components, parts, and raw materials (the inputs of production)

6. Inventory Turnover (or Inventory Turns)
A key metric in inventory management
A number of times that the inventory is “turned” or replaced during a time period, usually a year.
More turns equals better inventory management, which translates to a high rate of throughput and conversion to sales (cash) for the business.
Companies that are managed well, especially those whose leaders have implemented TPS and Lean, typically exhibit high inventory turnover.

7. Fixed Quantity and Fixed Period Inventory Control Models
Fixed quantity (Q) system – An ordering system in which the same amount Q is ordered each time whenever the inventory level falls below the reorder point (ROP).
Requires a perpetual inventory system in which records are updated every time an item is added or withdrawn from inventory.
Fixed period (P) system – A system in which inventory orders are made at regular time intervals (P).
Inventory is ordered at the end of a given period (such as a shift, day, week or month). Then and only then is on-hand inventory counted.
Only the amount necessary to bring total inventory up to a prescribed target level (T) is ordered.
The shorter the period, the higher the inventory turns.
In JIT or TPS/Lean environments, periods can be as short as every shift or even every hour.

8. Service level Measures the performance of the system
The complement of the probability of a stockout
Stockout – when an inventory item runs out
Should not be confused with fill rate
Fill rate – a measure of how effective inventory is at meeting demands
Probabilistic inventory control, which uses the average demand for inventory items to predict the demand at various service levels, accounts for such variations.
Reorder points (ROP) and target inventory levels (T) are adjusted to accommodate the variation in demand and lead time for a stated service level, typically at 95%.
In JIT or TPS/Lean environments, such variation or uncertainty is minimized or even eliminated.

9. Supply Chain Management
Describes the coordination of all supply chain activities, starting with raw materials and ending with a satisfied customer
Includes activities required to manage the flow of materials, information, people, and money from the suppliers’ suppliers to the customers’ customers
The integration of and coordination between a number of traditional business functions, including purchasing, operations, transportation, distribution and logistics, marketing and sales, and information systems and technology
Objective: to coordinate activities within the supply chain to maximize the supply chain’s competitive advantage and its benefits to the end user and consumer.

10. Managing Inventories and Sourcing
Good supply chain management produces lower total system cost (lower inventory, higher quality, higher service levels, increased revenues, and increased profits for the supply chain).
A key issue revolves around how the supply chain will share the benefits of improvements among players or partners in the supply chain.

11. Sourcing Strategies
Many suppliers – may be used for commodity products, where purchasing is typically based on price.
The suppliers compete with each other, which produces cost savings for the buyer.
Few or single supplier – the buyer forms longer-term relationships with fewer suppliers to create value through economies of scale and learning-curve improvements.
Suppliers are more willing to participate in JIT programs and contribute design and technological expertise, but the cost of changing suppliers (and bringing them up to speed) is high.
Vertical integration – integration may be forward, towards the customer, or backward, towards suppliers.
Can improve cost, quality, and inventory, but it requires capital, managerial skills, and demand; also risky in industries experiencing rapid technological change.
Joint ventures – companies formally collaborate with one another.
Skills are enhanced, supply is secured, and costs are reduced, producing benefits for all of the participants.

12. Managing an Integrated Supply Chain
Issues in managing the integrated supply chain:
Local optimization can magnify fluctuations.
The bullwhip effect occurs when orders are relayed through the supply chain, increasing at each step.
Incentives push merchandise into the supply chain for sales that have not occurred.
Large lots reduce shipping costs, but increase inventory holding costs and do not reflect actual sales.

13. Opportunities to address some of these issues:
Accurate “pull” data, shared information
Lot size reduction coupled with reduced ordering costs
Single-stage control of replenishment where there is a single supply chain member responsible for ordering
Vendor Managed Inventory (VMI), a common practice at the downstream supply chain partner
Collaborative planning, forecasting, and replenishment (CPFR) throughout the supply chain
Blanket orders against which actual orders are released
Electronic ordering and funds transfer speed transactions and reduce paperwork
Drop-shipping and special packaging bypasses the seller and reduces costs

14. Supply Chain Risks More reliance on supply chains means more risk
Fewer suppliers increase dependence
Globalization and logistical complexity
Vendor reliability and quality risks
Political and currency risks

15. Risk and Mitigation Tactics
Research and assess possible risks
Innovative planning
Reduce potential disruptions
Prepare responses for negative events
Flexible, secure supply chains
Diversified supplier base

16. Real-World Risk Mitigation Examples
When McDonalds opened in Russia, there was a real risk that local suppliers would fail to deliver the inputs ordered.
One relevant risk reduction tactic is to use multiple suppliers, employ contracts with penalties, pre-plan the supply chain, and keep other subcontractors on retainer.
Every plant involved in McDonalds production in Russia — bakery, meat, chicken, fish, and lettuce — is closely monitored to ensure strong links and thus make on-time delivery more likely.
Darden Restaurants, in an effort to avoid supplier quality failure, engages in careful supplier selection, training, certification, and monitoring.
It has placed extensive controls, including third-party audits, on supplier processes and logistics. This ensures constant monitoring and thus reduction of risk.
Walmart has its own trucking fleet and employs numerous distribution centers throughout the United States.
Using multiple, redundant transportation modes and warehouses, secure packaging, and contracts with penalties is one way to prevent logistics delays and damage to inputs.
When necessary, Walmart finds alternative origins and delivery routes, bypassing problem areas.

17. Real-World Risk Mitigation Examples
Toyota trains its dealers around the world to monitor, select, and contract carefully with its distributors.
The principles of the Toyota Production System help dealers to improve customer service, used-car logistics, and body and paint operations.
Toyota also provides an excellent example of how to deal with the risk of natural disasters, such as earthquakes, fires, and tsunamis.
It maintains at least two suppliers in different geographical regions for each component.
Boeing uses a state-of-the-art internal communication system that transmits engineering, scheduling, and logistics data to Boeing facilities and suppliers worldwide.
The use of redundant databases, secure IT systems, and training of supply chain partners on proper interpretations and uses of information, helps prevent information loss or distortion.
Honda and Nissan have moved manufacturing out of Japan as a means of combating economic risk.
Hedging to combat exchange rate risk, and employing purchasing contracts that address price fluctuations, are other methods used to combat economic risk.
The exchange rate for the Japanese yen makes Japanese-made automobiles more expensive... at least for the time being.

18. To Position Yourself for Profit, You Must Manage Inventory
Managing the inputs of production — and ultimately making sure you have a product on the shelves to sell your customers — is a critical part of managing your business.
To position itself for economic advantage, a company must manage its inventory if it is to meet the anticipated demand for what it produces.
Savvy business leaders must come to terms with inventory management as a critical component of ongoing operations.