CHAPTER 4: INVENTORY MANAGEMENT

Single-Period Model

a type of inventory system in which inventory is only ordered for a one-time stocking The objective is to maximize profits. Examples: Christmas tree lots, and Newspaper stands.

Fixed-Order Quantity System:

A continuous inventory review system in which the same order quantity is used from order to order. When the inventory position drops to a predetermined reorder point, a predetermined fixed order quantity is placed The time between orders (i.e., order period) varies from order to order.

WORK IN PROCESS

A good or goods in various stages of completion throughout the plant, spanning from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods.

RAW MATERIALS

Crude or processed material that are converted via the manufacturing process into components and products.

Fixed-Time Period System

Inventory is checked in fixed time periods against a target inventory level. If the inventory is less than target, a quantity necessary to bring inventory back up to the target level is ordered. The amount of inventory ordered will potentially vary from period to period based on the remaining inventory at each time interval checked.

Obsolete Inventory

Inventory items that have met the obsolescence criteria established by the company. Obsolete inventory is stock that is expired, damaged, or no longer needed.

There are four main categories of inventory:

Raw Materials Work-in-Process (WIP) sometimes called Work-in-Progress Finished Goods Maintenance, Repair and Operating (MRO) supplies

Radio Frequency Identification (RFID)

Successor to the barcode for tracking individual unit of goods. RFID does not require direct to read a tag, and the information on the tag is updatable.

Inventory Turnover

The number of times that an inventory cycles, or "turns over," during the year.

Absolute Inventory Value

The value of the inventory at either its cost or its market value.

Safety Stock

"buffer stock," is inventory that is above and beyond what is actually needed to meet anticipated demand. A quantity of stock planned to be in inventory to protect against fluctuation in demand and supply. Companies operating in a make-to-stock environment will generally maintain some amount of safety stock whether based on a management decision, or based on a safety stock determination formula.

The Economic Order Quantity (EOQ) Model

A quantitative decision model based on the trade-off between annual inventory carrying costs and annual order costs. EOQ is a fixed-order quantity model The EOQ model seeks to determine an optimal order quantity INCLUDES: Order costs are costs that are incurred each time an order is placed. Carrying Costs are costs that are incurred for holding inventory in storage.

Service Inventory

Activities carried out in advance of the customer's arrival Companies in the service industry do not maintain inventory of services since services are basically produced and consumed immediately upon demand. Companies can however, maintain inventory of ""facilitation goods," which are those items that are used to help facilitate the service being provided.

Strategic Stock

Additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time. A company may decide to carry strategic stock to: hedge currency fluctuations , take advantage of a price discount, protect against a short-term disruptive event in supply, take advantage of a business opportunity , for life cycle changes: seasonal demand, new product launch, transition protection Also called anticipation stock, build stock, or seasonal stock

ABC System

An ABC system classifies inventory based the degree of importance _: Steps: Determine annual usage or sales for each item. Determine % of total usage or sales that each item represents. Rank items from highest to lowest %. Classify items into groups: A: Highest Value B: Moderate Value C: Least Valuable

Barcodes

Barcode systems help businesses track products and stock levels for inventory management. Linear (1D) Bar Codes are "a series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that can be read by electronic readers. Linear bar codes do have some limitations: they are one-dimensional, can only be read horizontally, and can only hold a maximum of 85 characters. 2D Bar Codes are a graphical image that stores information both horizontally and vertically. 2D Barcodes can store over 7,000 characters, allowing transmission of almost two paragraphs of information.

PIPELINE INVENTORY

Inventory in the transportation network and the distribution system. Inventory that is already out in the market being held by wholesalers, distributors, retailers, and even consumers.

Continuous Review System

Inventory levels are continuously reviewed. As soon as inventory falls below a pre-determined level (i.e., a reorder point), a replenishment order is triggered.

Periodic Review System

Inventory levels are reviewed at a set frequency e.g., weekly, monthly At the time of review, if the stock levels are below the pre-determined level (i.e., a reorder point), an order for replenishment is placed, otherwise no action is taken until the next cycle. Since items are only reviewed periodically, there is a greater risk of inventory dropping well below the reorder point between reviews and, therefore, a greater potential need for safety stock.

Bin System

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. It is mainly used for small or low value items. When the inventory in the first bin has been depleted, an order is placed to refill or replace the inventory. The second bin is set up to hold enough inventory to cover demand during the replenishment lead time so as to last until the replacement order arrives.

Cycle Stock

Inventory that a company builds to satisfy its' immediate demand _. Cycle stock depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received. The amount of cycle stock that a company holds is dependent on actual demand in the immediate time period, supply replenishment lead time and order quantities.

Maintenance, Repair and Operating (MRO) SUPPLIES

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.

Finished Goods

Those items on which all manufacturing operations, including final testing, have been completed. These products are available for sale and or shipment to the customer _.

BASE STOCK LEVEL

a type of inventory system that issues an order whenever a withdrawal is made from inventory. Replenishment order quantity is equal to the quantity withdrawn from inventory. This will maintain the inventory at a base stock level. Used primarily for very expensive items, e.g., airplane engine A form of just-in-time.

3 levles of inventory

strategic stock safety stock cycle stock