Inventory and Inventory Classification

Why do we stock inventory?

-Stock out protection -Economies of sale -Production and capacity smoothing -Price speculation

Stock out protection

-To decouple or separate various parts of the production process -To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers

Economies of sale

-To take advantage of quantity discounts -average unit cost of output decreases with volume

Production and capacity smoothing

-maintaining a constant production rate to weather seasonal fluctuation

Record accuracy

-necessary to make precise decisions about ordering, scheduling, and shipping -Incoming and outgoing record keeping must be accurate

Advantages of cycle counting

1. Eliminates shutdowns and interruptions 2. Eliminates annual inventory adjustment 3. Trained personnel audit inventory accuracy 4. Allows causes of errors to be identified and corrected 5. Maintains accurate inventory records

Inventory management issues

1. For which items should inventory be earned? 2. Where should inventory be stored? 3. What is the right inventory level for each product? 4. How can we control inventories? -Financial Control -Physical Control 5. How can we evaluate inventory performance?

How are inventory items classified?

ABC analysis

How is the accuracy of the inventory records maintained?

Cycle counting

What is used with ABC analysis

Cycle counting

ABC analysis

Divides inventory into 3 classes based on annual dollar value used to establish policies that focus on the few critical parts and not the many trivial ones

How is the inventory performance measured?

Inventory Turns

Cycle counting

Items are counted and records updated on a periodic basis

Inventory Turns

The number of times that your inventory cycles turn over per year

Price speculation

To hedge against inflation

Inventory management objective

ability to strike a balance between inventory investment and customer service

Inventory Turns equation

annual cost of sales/Average inventory level annual cost of goods sold/average inventory level

Class A

high annual dollar volume

Pipeline or in-transit stock

inventory that is en route between various fixed facilities in a logistics system such as a plant, warehouse, or store.

Class C

low annual dollar volume

grocery stores

may have 12 or more inventory turns per year or more

typical manufacturing companies

may have 6-8 inventory turns per year

Class B

medium annual dollar volume

Order qualifier

meeting a minimum standard to allow you to compete with other products and businesses

Speculative Stock

refers to inventory that is held for several reasons, including seasonal demand, projected price increases, and potential shortages of a product.

Safety or buffer stock

refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand or lead time

Cycle or base stock

refers to inventory that is needed to satisfy normal demand during the course of an order cycle

Inventory

refers to stocks of goods and materials that are maintained to satisfy normal demand patterns