1. INVENTORY

2. I. Introduction What is inventory? Types of Inventories:
stored resource used to satisfy current or future demand
Types of Inventories:
Raw Materials/Components
In-Process Goods (WIP)
Finished Goods
Supplies

3. Introduction Inventory Related Costs:
Holding Cost -- cost to carry a unit in inventory for a length of time (annual), includes interest opportunity cost, insurance, taxes, depreciation, obsolescence, deterioration, May be expressed as a percentage of unit price or as a dollar amount per unit

4. Introduction Inventory Related Costs (continued):
Order Cost -- Cost of ordering and receiving inventory, Include determining how much is needed, preparing invoices, shipping costs, inspecting goods upon receipt for quantity and quality, Generally expressed as a fixed dollar amount, regardless of order size
Inventory may also influence purchasing cost
Inventory is costly

5. Introduction Inventory Related Costs (continued):
Shortage Cost-- result when demand exceeds the inventory on hand, Include the opportunity cost of not making a sales, loss of customer goodwill, late charges, and in the case of internal customers, the cost of lost production or downtime, difficult to measure, thus may have be subjectively estimated

6. Introduction Why Hold Inventories? Meet anticipated demand
Lead time – the time period between place an order until receive the order
Average lead time demand is considered as anticipate demand
Protect against stock-out
Safety stock – more than average lead time demand inventory

7. Introduction Why Hold Inventories (continued)?
De-couple successive operations - separate production from distribution
Wine production and inventory
Smooth production process
Snowmobile production and inventory
Buy/Produce in economic lot sizes - take advantage of quantity discounts
Hedge against price increases

8. Introduction
JIT Inventory – minimum inventory needed to keep a system running, small lot sizes
Advantages
lower inventory costs
easy to identify problems and potential problems
Disadvantages
requires accurate timing and cooperation
breakdowns stop everything

9. Introduction A B C Inventory Classification Identify important
Annual
$ volume
of items A B C
High
Low
Few
Many
Number of Items
Inventory Classification
Identify important
Items and more inventory
control on important items
Measure of importance:
ABC analysis:
A = 70-80% of total inventory value, but only 15% of items
B = 15-25% of total inventory value, but 30% of items
C = 5% of total inventory value, but 55% of items

10. Introduction Monitor Inventory
As important as demand forecast for decision making
Universal Product Code - Bar code printed on a label that has information about the item to which it is attached
Cycle counting: taking physical counts of items and reconciling with records on a continual rotating basis, regular inventory audits, ABC approach

11. Introduction Inventory Systems
Objective: minimize annual total inventory cost and maintain satisfied service level.
service level: probability of no shortage
Total Inventory Cost is not Inventory Cost
Annual total inventory cost (TC) = annual product cost + annual inventory cost
Annual product cost = annual demand * unit price
Annual inventory cost = annual holding cost + annual setup (order) cost + annual shortage cost

12. Introduction Possible performance measures customer satisfaction
number of backorders/lost sales
number of customer complaints
inventory turnover
ratio of annual cost of goods sold to average inventory investment
days of inventory
expected number of days of sales that can be supplied from existing inventory

13. Introduction Requirements for Effective Inventory Management :
A system to keep track of the inventory on hand and on order
A classification system for inventory items
A reliable forecast of demand that includes an measure of forecast error
Reasonable estimates of inventory holding costs, ordering costs, and shortage costs
Knowledge of lead times and lead time variability

14. Introduction
1. Continuous (Perpetual) Review System: (event-triggered)
Monitor the inventory level all the time, order a fixed quantity (Q) when the inventory level drops to the reorder point (ROP)
Calculate: Q and ROP
Re-Order Point (ROP) – an inventory level when actual inventory drops to it will trigger an activity of re-order.

15. Introduction 2. Periodic Review System: (time-triggered)
Place an order every fixed period T. Each time bring the current inventory to a target level M
Calculate: T and M
3. Advantages and Disadvantages?

16. Introduction Dependent and Independent Demand:
Dependent demand: derived demand, lumpy (subassemblies and components)
cars
Independent demand: from customer side, smooth (end items and finished goods)
tires