1. LEARNING OBJECTIVES Highlight the need for and nature of inventory
Explain the techniques of inventory management
Focus on the need for analyzing inventory problem as an investment decision
Discuss the process for managing inventory

2. Nature of Inventory
Stocks of manufactured products and the material that make up the product.
Components:
raw materials
work-in-process
finished goods
stores and spares (supplies)

3. Need for Inventories Transaction motive Precautionary motive
Speculative motive

4. Objectives of Inventory Management
To maintain a large size of inventories of raw material and work-in-process for efficient and smooth production and of finished goods for uninterrupted sales operations.
To maintain a minimum investment in inventories to maximize profitability.

5. An effective inventory management should:
ensure a continuous supply of raw materials, to facilitate uninterrupted production
maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes
maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service.
minimize the carrying cost and time, and
control investment in inventories and keep it at an optimum level.

6. Inventory Management Techniques
Economic order quantity (EOQ)
ordering costs: requisitioning, order placing, transportation, receiving, inspecting and storing, administration
carrying costs: warehousing, handling, clerical and staff, insurance, depreciation and obsolescence
ordering and carrying costs trade-off:

7. Carrying costs vary with inventory size.
Ordering costs declines with inventory size.

8. EOQ (Q*) represents the minimum point in total inventory costs.
Total Carrying Costs
Costs
Total Ordering Costs Q*
Order Size (Q)

9. Reorder Point (OP) = Lead time X Average Usage
When to Order?
Issues to consider:
Lead Time -- The length of time between the placement of an order for an inventory item and when the item is received in inventory.
Reorder Point -- The quantity to which inventory must fall in order to signal that an order must be placed to replenish an item.
Reorder Point (OP) = Lead time X Average Usage

10. Inventory Management Techniques
Reorder point under certainty
lead time
average usage
Reorder point = Lead time x average usage

11. What is the proper amount of safety stock?
Safety Stock: Minimum inventory or buffer inventory as cushion against expected increased usage and/or delay in delivery time.
What is the proper amount of safety stock?
Depends on the:
Amount of uncertainty in inventory demand
Amount of uncertainty in the lead time
Cost of running out of inventory
Cost of carrying inventory

12. Cont… Reorder point under uncertainty safety stock
Reorder point = (Lead time x average usage) + safety stock

13. INVENTORY CONTROL SYSTEMS
ABC Inventory Control System
Just-in-Time (JIT) Systems
Computerized Inventory Control Systems

14. Requirements of applying this approach:
Just-in-Time
Just-in-Time -- An approach to inventory management and control in which inventories are acquired and inserted in production at the exact times they are needed.
Requirements of applying this approach:
A very accurate production and inventory information system
Highly efficient purchasing
Reliable suppliers
Efficient inventory-handling system