Chapter 9: Inventory Management

Inventory Turnover

Gives us a sense of how quickly inventory moves

Inventory Policy

Addresses the basic questions of when and how much to order

ABC Classification

All items in the supply chain are not of equal importance; used to classify inventory based on the degree of importance in order to manage it properly

Ordering Cost

All the costs involved in placing an order and preparing it

Holding Costs

All the costs that vary with the amount of inventory held in stock

Fixed-Time Period System

"Periodic Review System;" Inventory levels are checked in fixed time periods and the quantity that is ordered varies; Quantity ordered is the difference between the target inventory (R) and how much inventory is in stock, the inventory position (IP); carries more safety stock/inventory because it isn't checked on a regular basis

Economic Order Quantity (EOQ)

An economically optimal order quantity

Economic Purchase Orders

Buying larger quantities means incurring higher inventory holding cost, but potential for large volume discounts

Inventory as a Liability

1. Costs 2. Old Inventory (not sold) 3. Aging (expiration) 4. Seasonality

Types of Inventory

1. Cycle Stock 2. Safety Stock 3. Anticipation Inventory 4. Pipeline/Transportation Inventory 5. Maintenance, Repair, and Operating Items (MRO)

Three Types of Demand Target Inventory Covers

1. Demand during the length of the lead time L 2. Demand during the length of the review period T 3. Safety stock, SS, to guard against uncertainty

Steps of ABC Inventory Classification

1. Determine annual usage or sales for each item 2. Determine % of total usage or sales for each item 3. Rank items from highest to lowest % 4. Classify items into: A highest value, B moderate value, C least valuable

Inventory as an Asset

1. Finished goods to sell 2. Demand 3. Liquid 4. High variability of demand

Reasons for Carrying Inventory

1. Protect against lead time demand 2. Maintain independence of operations (so that stock outs in one operation don't impact the entire process) 3. Balance supply and demand 4. Buffer uncertainty 5. Economic purchase orders (large volume discounts)

Categories of Inventory

1. Raw Materials 2. Work in Progress 3. Finished Goods

EOQ Model Assumptions

1. Uniform and known usage rate 2. Fixed item cost 3. Fixed ordering cost 4. Constant lead time

Three V Model of Inventory Management

1. Volume (amount of physical inventory a firm owns) 2. Value (unit cost and total dollar value of inventory) 3. Velocity (how quickly raw materials and WIP become finished goods)

Anticipation Inventory

Carried in anticipation of certain events

Seasonal Inventory

Carry extra inventory during a low season in anticipation of higher demands during the high season

Dependent Demand

Demand for component parts of subassemblies, derived from its independent demand

Independent Demand

Demand for the finished product

Square Root Rule

Estimation of impact of changing the number of locations on inventory

Safety Stock

Extra inventory we carry to serve as a cushion

Holding Cost Equation

Holding Cost (%) x Item Cost ($)

Hedge Inventory

Inventories carried in anticipation of price increase or a shortage of products

Cycle Stock

Inventory for immediate use

Maintenance, Repair, and Operating Items

Inventory that includes everything from office supplies and forms, to toilet paper and cleaning supplies

Pipeline Inventory

Inventory that is simply in transit

Service Inventory

Involves all activities carried out in advance of the customer's arrival

Periodic Order Quantity (POQ)

Logic is to balance ordering and holding cost; need to determine the number of periods to order

Week of Supply

Measure of inventory quantity relative to usage

Shortage Cost

Occurs when we run out of stock

Inventory

Quantities of goods in stock that serve many purposes, but also tie up a great deal of funds

Fixed-Order Quantity System

Quantity ordered is constant/fixed (Q); inventory checked on a continual basis; place an order when inventory reaches the reorder point (ROP); carries less inventory; more costly

Working Capital

Raw Materials + WIP + Finished Goods + Receivables - Payables

Types of Anticipation Inventory

Seasonal Inventory & Hedge Inventory

Vendor Managed Inventory (VMI)

Seller is responsible for managing inventory located at customer's facility

Bill of Materials (BOM)

Shows the relationship between independent and demanding demand

Lumpy Demand

Some periods exhibit high demand and other periods have zero demand; demand is discontinuous/nonuniform; use POQ when demand is not uniform

Enterprise Resource Planning (ERP)

System must take into account differences in lead times of products, orders should be placed at different times

Material Requirements Planning (MRP)

System used to compute dependent demand order quantities; considers not only the quantities of each of the component parts needed, but also the lead times needed to produce and receive the items

Reorder Point

The point at which there is enough inventory to ensure that demand is covered during the length of the lead time

EOQ Adjustments

Total cost changes little on either side of the EOQ