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
