1. Operations Management Dr. Ron Lembke
Inventory Management
Operations Management
Dr. Ron Lembke

2. Two Questions Two main Inventory Questions: How much to buy?
When is it time to buy?
Also:
Which products to buy?
From whom?

3. Types of Inventory Raw Materials Subcomponents Work in progress (WIP)
Finished products
Defectives
Returns

4. Inventory Costs Costs associated with inventory: Cost of the products
Cost of ordering
Cost of hanging onto it
Cost of having too much / disposal
Cost of not having enough (shortage)
Toothpaste: store’s loss is negligible
Tablet/phone online: lose the whole sale – hundreds $
How much willing to spend to avoid a stockout?

5. Stockouts

6. Stockouts

7. Shrinkage Costs How much is stolen? Where does the missing stuff go?
2% for discount, dept. stores, hardware, convenience, sporting goods
3% for toys & hobbies
1.5% for all else
Where does the missing stuff go?
Employees: 44.5%
Shoplifters: 32.7%
Administrative / paperwork error: 17.5%
Vendor fraud: 5.1%

8. Inventory Holding Costs
Category % of Value Housing (building) cost 4% Material handling, Labor 3% Taxes, Insurance 3% Opportunity/investment 9% Pilferage/scrap/obsolescence 2% Total Holding Cost 21%

9. Inventory Recordkeeping

10. ABC Analysis Divides on-hand inventory into 3 classes
A class, B class, C class
Basis is usually annual $ volume
$ volume = Annual demand x Unit cost
Policies based on ABC analysis
Develop class A suppliers more
Give tighter physical control of A items
Forecast A items more carefully

11. Classifying Items as ABC
% $Vol
% Items A 80 15 B 30 C 5 55
% Annual $ Usage A B C
% of Inventory Items

12. ABC Classification Solution

13. Inventory Recordkeeping
Two ways to order inventory:
Keep track of how many delivered, sold
Go out and count it every so often
If keeping records, still need to double-check
Annual physical inventory, or
Cycle Counting

14. Cycle Counting
Physically counting a sample of inventory on a regular basis
Device tells picker to count location 123
Blind count, enter # into device
Used often with ABC classification
A items counted most often (e.g., quarterly)
B items twice a year, C annually
Advantages
Eliminates annual shut-down for physical inventory
Improves inventory accuracy
Allows causes of errors to be identified
Do both for a while, to prove accuracy

15. Summary Costs associated with inventory ABC inventory management
Holding, shrinkage, obsolescence, ordering
ABC inventory management
Most attention and effort on highest-sellers
Cycle Counting
More accurate inventory information
Avoids annual shut-down for physical inventory