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INVENTORY MANAGEMENT

Submitted to Ms. Shefali Malhotra Assistant Professor GGGI (Ambala)

Submitted By: Tufail Khan Subject: Production and Operation Management MBA(2nd sem.)

What Is Inventory?
Stock of items kept to meet future demand Purpose of inventory management
how many units to order when to order

Definitions
Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.

Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

Functions of Inventory
1. To decouple or separate various parts of the production process 2. To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers 3. To take advantage of quantity discounts

4. To hedge against inflation

Types of Inventory
Raw material
Purchased but not processed

Work-in-process
Undergone some change but not completed A function of cycle time for a product

Maintenance/repair/operating (MRO)
Necessary to keep machinery and processes productive

Finished goods
Completed product awaiting shipment

Two Forms of Demand


Dependent
Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item

Independent
Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory

Inventory and Quality Management


Customers usually perceive quality service as availability of goods they want when they want them Inventory must be sufficient to provide highquality customer service in TQM

Inventory Costs
Carrying cost

cost of holding an item in inventory


Ordering cost

cost of replenishing inventory


Shortage cost

temporary or permanent loss of sales when demand cannot be met

Inventory Control Systems


Continuous system (fixed-orderquantity)
constant amount ordered when inventory declines to predetermined level

Periodic system (fixed-time-period)


order placed for variable amount after fixed passage of time

Reasons for Inventories


Improve customer service Economies of purchasing Economies of production Transportation savings Hedge against future Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) To maintain independence of supply chain

Inventory and Value


Remember this?
Quality Speed Flexibility Cost

Nature of Inventory: Adding Value through Inventory


Quality - inventory can be a buffer against poor quality; conversely, low inventory levels may force high quality Speed - location of inventory has gigantic effect on speed Flexibility - location, level of anticipatory inventory both have effects Cost - direct: purchasing, delivery, manufacturing indirect: holding, stockout. HR systems may promote this-3 year postings

Nature of Inventory: Functional Roles of Inventory


Transit Buffer Seasonal Decoupling Speculative Lot Sizing or Cycle Mistakes

Types of Inventory Systems


By Degree of Control required
often use grouping method, such as ABC

Classifying Inventory Items


ABC Classification (Pareto Principle) A Items: very tight control, complete and accurate records, frequent review B Items: less tightly controlled, good records, regular review C Items: simplest controls possible, minimal records, large inventories, periodic review and reorder

Objectives of Inventory Control


1) Maximize the level of customer service by avoiding understocking. 2) Promote efficiency in production and purchasing by minimizing the cost of providing an adequate level of customer service.

Balance in Inventory Levels


When should the company replenish its inventory, or when should the company place an order or manufacture a new lot?
How much should the company order or produce?

How to Measure Inventory


The Dilemma: closely monitor and control inventories to keep them as low as possible while providing acceptable customer service. Average Aggregate Inventory Value: how much of the companys total assets are invested in inventory? Ford:6.825 billion Sears: 4.039 billion

Inventory Measures
Weeks of Supply
Ford: 3.51 weeks Sears: 9.2 weeks

Inventory Turnover (Turns)


Ford: 14.8 turns Sears: 5.7 turns GM: 8 turns Toyota: 35 turns