Chapter Four - Inventory Management

Two approaches to reviewing inventory

1. Continuous review 2. Periodic review

Costs of inventory

1. Direct cost 2. Indirect costs 3. Fixed costs 4. Variable costs 5. Order costs 6. Carrying costs *7. Hidden costs

Four functions/reasons of inventory

1. To meet customer demands (cycle stock) 2. To buffer against uncertainty in demand and or in supply stock (safety stock) 3. To decouple supply from demand (strategic stock) 4. To decouple dependencies in supply chain

Three INTERNAL stocking levels

1. cycle stock 2. safety stock 3. strategic stock

four categories of inventory

1. raw materials 2. work in process (WIP) 3. Finished Goods 4. Maintenance, Repair, and Operating (MRO) supplies

balance of two competing considerations when keeping a small inventory

1. reduce the amount of inventory held in stock 2. ensure there is enough inventory to satisfy customer demand

Strategic Stock (anticipation stock)

Additional inventory beyond cycle and safety stock. Strategic stock is usually used for a very specific purpose or future events and for a defined period of time.

Pipeline inventory

External inventory It is inventory in the transportation network and distribution system

Cycle Stock

Most active inventory, is the inventory a company keeps to satisfy immediate demand. (Stock company keeps on hand in store)

Do companies in the service industry have inventory

No,, because services are produced and consumed immediately upon demand. They can have a facilitating product inventory.

Safety Stock

Quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. (To create safety stock you can over plan supply vs. demand)

Absolute inventory value

The value of the inventory at either its cost or its market value. Because inventory value can change with time some recognition is taken of the age distribution of inventory.

Direct Costs

are expenditures that are directly traceable to the volume of units produced. Example : labor, materials, and expenses specifically related to the production of a product

Indirect costs

are expenditures that cannot be traced directly to the volume of units produced. Examples : buildings, equipment, administrative expenses.

raw materials

are purchased items or extracted materials that are converted via the manufacturing process into components and products

Order costs

direct labor costs incurred when a purchaser places an order. Meaning overtime an order is placed regardless of the quantity of the order, there is a cost associated with processing the order

Fixed costs

do not vary with the volume of units produced. Examples : rent, property taxes, and salaries of certain people (Not permanently fixed ; can be changed but are fixed for a good amount of time)

Variable costs

expenditures that vary directly with a change of even one unit in the volume produced. Example : sales commissions, direct labor

make to order

finished goods are not produced until a customer order is received and the raw materials may not even be ordered from the supplier in advance.

FIFO

first in first out basis. The oldest inventory is usually sold first.

work in progress inventory

goods in various stages of completion throughout the plant, including all materials from raw material awaiting final inspection and acceptance as finished goods. - companies tend to minimize WIP inventory

Hidden costs of inventory

having too much or too little inventory on hand can sometimes build hidden costs that create a risk for a company.

Inventory includes

includes finished products, all the materials used for production, and all of the other materials and supplies needed to run a business (office and break room supplies, cleaning materials)

Continuous review

inventory levels are continuously reviewed . As soon as inventory stock falls below a predetermined level a replenishment order is triggered. A continuous review is costly

Periodic review

inventory levels are reviewed at a set frequency Since inventory items are reviewed periodically there is a greater risk of inventory dropping well below the reorder point and there is a greater need for safety stock

Obsolete inventory

inventory that has been superseded by new models or otherwise made obsolete. Obsolete inventory will never be used or sold at full value.

finished goods

items on which all manufacturing operations including final testing has been completed. Available to customer as either end items or repair parts

MRO inventory

items used in support of general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations.

LIFO

last in first out basis meaning newest inventory is used/sold first

Inventory

represents the quantities of goods and materials that are held in stock

Inventory policy

statement of a company's goals and approach to the management of its inventories. Inventory policies establish target inventory levels for all products and materials and the methods and systems used to achieve and maintain target goals. Some questions inventory policy asks 1. when to review inventory 2. when to order replenishment inventory 3. how much inventory to order

Inventory Management

the branch of business management concerned with planning and controlling inventories. Small cost reductions from inventory process can increase net income.

Carrying costs

the cost of holding inventory usually defined as a percentage of the dollar value of inventory per unit of time. Carrying costs depend mainly on the capital invested as well as the costs of maintaining the inventory, taxes, and insurance and space occupied. Also called holding costs.

Inventory turnover

the number of times that an inventory cycles or turns over during the year. The more turns the better. Inventory turnover measures the speed with which inventory passes through an organization or supply chain.

Inventory Investment

the value of the change in total inventories held in the economy during a given period. companies measure whether their inventory isn't negatively impacting them

Facilitating Product inventory

those items that are used to help facilitate the service being provided

make to stock

where product is produced prior to receipt of a customer order. A forecast and demand plan is created for finished goods based on anticipated demand.