1. 5
INVENTORY MANAGEMENT

2. Inventory definition Inventory are the items used to support:
production (raw materials and work-in-process items),
supporting activities (maintenance, repair and operating supplies) and
customer service (finished goods and spare parts)
(APICS dictionary)
Inventory is the stock of any item or resource used in an organization

3. Why inventory occure ?
Variance between the rate of input (rate of supply)
and the rate of output (rate of demand)
Flow Model of Inventory
Rate of output (demand rate)
Rate of input (supply rate)
Cyclic inventory
Noncyclic inventory

4. Types of Inventory Raw materials inventory
Work-in-process (WIP) inventory
Finished products inventory

5. Types of Inventory
Raw materials inventory: The purchased items that are transformed into components or products.
Components inventory: Parts or subassemblies used in building the final product.
Work-in-process (WIP) inventory: Any item that is in some stage of completion in the manufacturing process
Finished goods inventory: Completed products that will be delivered to customers.
Maintenance, repair, and operational (MRO) inventory: Inventories of some items (such as maintenance supplies, spare parts, lubricants, cleaning compounds, and office supplies) are used to support general operations and maintenance
Distribution inventory: Finished goods and spare parts that are at various points in the distribution system.

6. Types of Inventory Division of inventory based on the type of demand
Independent demand inventory – demand for item is independent on demand of others items (the source of demand is usually from an external customer). Items of independent demand are the finished products
Dependent demand inventory – demand for item is dependent directly on demand of another item. Items of dependent demand are the components and raw materials
Stool
Leg x (4)
Seat (1)
Independent demand
Demand forcast stools, independent demand
Calculation – 400 legs, dependent demand
Dependent demand

7. Inventory functions
To decouple or separate various parts of the production process
To provide a stock of goods to meet anticipated customer demand and provide a “selection” of goods
To balance the seasonal fluctuations in demand
To take advantage of quantity discounts
To hedge against inflation and price changes
To protect against delivery variation due to weather, supplier shortages, quality problems. Safety stocks – reduce the risk of shortages

8. Inventory Usage over Time
Stock consumption
Stock replenishement
Time
Quantity
Average stock
CYCLIC STOCK
Safety stock
NON-CYCLIC STOCK
Excess stock

9. Inventory in the manufacturing companyS U P L I E R C T O M
Supply stage
Production stage
Distribution stage
Supplies
PURCHASED STOCKS
raw materials
components
Parts
production
PROCESSED STOCKS (unfinished production)
work in progress
Products
assembly
Distribution
STOCKS FOR SALE
finished products
spare parts

10. Inventory costs INDEPENDENT on the order quantity FIXED COSTS
Purchasing cost/unit, production cost/unit
Costs of stock facilities
Staff costs
VARIABLE COSTS
DEPENDENT on the order quantity
Holding costs
Ordering costs/Setup or production change costs
Shortage costs
Excess costs

11. ORDERING COST/ PURCHASING COST
Inventory costs
ORDERING COST/ PURCHASING COST
SETUP COST
Supplies
Forms
Order processing
Clerical support
Etc.
Clean-up costs
Re-tooling costs
Adjustment costs
Etc.
HOLDING COST
SHORTAGE COST
Stockout Cost
Backorders (customer order for the product must wait until the stock is replenished) backorders service cost, lower service cost
Lost sale (customer order is cancelled) profit lost cost, lower service cost
Warehousing
Obsolescence
Insurance
Interest
Damage
Etc.
EXCESS COST
Inventory Risk Cost
excess is holding in the next periods cost of prolonged holding stock, cost of price reduction
excess is not holding in the next periods (lost sale) liquidation (clearing) stock cost

12. Holding (Carrying) Costs
(calculation)
% of Category Inventory Value
Warehousing %
Obsolescence %
Insurance %
Extra staffing %
Interest %
Damage %
Total holding cost (variable) % of Inventory Value
H = % * price/unit

13. Goal of inventory management
To find a balance between customer service level and cost of shortage
100 %
Level of customer service
Risk of shortage
Availability level
Safety stock level
There is a trade off between carrying stock to satisfy demand (customer service) and the costs resulting from stock out (cost of shortage).
Example: Availability level (customer service level) - 90%
Probability of shortage %
Availability level (customer service level) %
Probability of shortage %
Safety stock must be increased

14. Inventory management decisions
Manufactured stock
Purchased stock
Determine the order quantity
(purchasing batch/lot)
HOW MUCH TO ORDER ?
HOW MUCH TO ORDER?
Determine the production order quantity
(production batch/lot)
WHEN TO ORDER ?
Determine the production order loanched time
Determine the purchased order loanched time
WHEN TO ORDER ?

15. INVENTORY MANAGEMENT SYSTEM
Inventory management system is the set of policies and controls that monitor levels of inventory and determine what stock level should be maintained, when stock should be replenished, and how large orders should be.

16. INVENTORY MANAGEMENT SYSTEMS
INVENTORY MANAGEMENT (CONTROL) SYSTEMS
INDEPENDENT DEMAND INVENTORY CONTROLSYSTEMS
DEPENDENT DEMAND INVENTORY CONTROL SYSTEMS
MATERIAL REQUIREMENTS PLANNING SYSTEM (MRP)
PERIODIC REVIEW SYSTEMS
CONTINUOUS
REVIEW SYSTEMS
FIXED ORDER
PERIOD SYSTEMS
FIXED ORDER
QUANTITY SYSTEMS
Economic Order Quantity Model
Economic Production Quantity Model
Back Order Inventory Model
Quantity Discounts Model

17. Fixed Order Quantity Systems
ASSUMPTIONS
Order quantity is fixed (constant)
Order cycle – variable
Continuous inventory level control
How much to order? (Order Quantity Models)
FIXED ORDER QUANTITY - FOQ
1. Order quantity is arbitrary define (for example Q = 1000 units)
2. Order quantity is define using Economic Order Quantity Model - EOQ
Possible options

18. Economic Order Quantity Model – EOQ
ASSUMPTIONS
Demand is known and constant
Lead time (delivery time) is known and constant
Stock replenishment is immediate
Q - order quantity
S - maximal stock
Sav - average stock
R - reorder point
T - order cycle
Cz - Stock cycle
LT - lead time (delivery time)
WD - number of working days per year

19. Economic Order Quantity calculation
D - annual demand
HC - annual holding cost
H - holding cost per unit per year
SC - total order cost per year
S - cost per order
TC – total cost
Cmin – minimal total cost
Q - order quantity
EOQ/Q*- economic order quantity Q
Annul cost
Total Cost
Holding Cost
Setup Cost Q*
Cmin
Economic Order Quantity
Objective :
Total cost minimalization

20. EOQ Model - example Number of orders per year Annual holding cost
DATA
D = 1200 units/year
S = 100 $/order
H = 6 $/unit./year
WD = 240 working days /year
Number of orders per year
Annual holding cost
Economic Order Quantity
Total order cost per year
Maximal stock
Total inventory cost
Average stock
Order cycle

21. When to order? - Reorder Point model
Reorder Point (R) - Stock level which inform about the necessity of placing an order to replenish inventory
Where:
Q - order quantity
S - maximal stock
SS - safety stock
Sav - average stock
R - reorder point
d - demand rate
LT - lead time (delivery time)

22. Fixed Order Period System
Assumptions
Quantity ordered - varies
Fixed order cycle
Periodic inventory monitoring
T - order cycle (order period)
Q - order quantity
S - desired level of inventory
s - point at what order is placed
SS - safety stock
d - demand rate
LT - lead time (delivery time)
Reorder point
ORDER QUANTITY?

23. FOQ and FOP - comparison
FIXED ORDER-QUANTITY SYSTEM FOQ
Filling your tank with 40 liters when the level reach 1/10 full
FIXED ORDER-PERIOD SYSTEM FOQ
Filling your tank every Saturday