Inventory

Management

Prepared by:
Sarissunova Meruyert
Shiganbayeva Asel
 What is Inventory?
 Stock of items kept to meet future demand
 Inventory management is the planning and
controlling of inventories in order to meet the
competitive priorities of the organization.
 Purpose of inventory management
 how many units to order
 when to order
 Types of Stock
Raw Works
Materials Finished
in Goods
Process

Raw materials – the materials, parts and components

that have been delivered to an organisation, but are
not yet being used
Work-in-process – materials that have started, but
not yet finished their journey through the
organisation’s operations
Finished goods – goods that have finished the
process and are waiting to be shipped out to customers
 Inventory Classifications

Cycle stock, Safety stock

Pipeline stock
Speculative stock
or base stock inventory that
or buffer stock or in-transit stock
inventory that is inventory that isinventory that is is enheld for several
held in addition route between reasons, including
needed to satisfy
to cycle stock various nodes seasonal demand,
normal demand to guard against(fixed facilities projected
during the course uncertainty in such as plant, price increase,
of an order cycle. demand or lead warehouse or store) and potential
time. shortage of product.
in a logistics system
 Inventory-Related Costs

Inventory Carrying
Stockout Costs
(Holding) Costs
 Inventory Carrying Cost
(ICC)
 A cost associated with holding inventory.
 Are expressed in percentage terms
Example:

Product Value= $100

ICC=18%
Relevant Annual Inventory Expense= ICC*
PV = $18
 Inventory Carrying Cost
(ICC)
 Inventory shrinkage (more items are recorded entering
than leaving warehousing facilities)
 Inventory obsolescence (products lose value through
time);
 Storage costs – costs of occupying space in a
storeroom;
 Insurance and taxes - more taxes are paid and
insurance costs are higher if end-of-the-year
inventories are high. ;
 Opportunity cost of money invested – cost of
taking a position in the wrong materials;
 Cost of employing staff — receiving, storing,
retrieving and moving inventory.
 Stockout Costs
 The costs of not having sufficient inventory.
 Involve an understanding of a customer’s reaction to a
company being out of stock when a customer wants to buy
an item.
 Customers’ reactions:

1. “I’ll be back”
2. “Call me when it is in”
3. The customer buy a substitute
4. The customer goes to a competitor only for this purchase
5. The customer goes to a competitor for this and all future
sales.
 When to Order? (Order
Timing)
 Fixed order quantity system – time interval
fluctuates, order size is constant.
Example: a store always orders 200 cases of soft drinks.
1-st order - January 3, 2-nd order – January 6,
3-rd order – January 11.
 Fixed order interval system – time interval is
constant, order size fluctuates.
Example: a man goes grocery shopping every Sunday.
Although
the time interval – constant at 7 days, the
shopping list
(inventory rewuirments) differs from week to week.
 Reorder (trigger) Point
When demand is certain
Quantity to which inventory is allowed to
drop before replenishment order is made.
Reorder point = Daily Demand x Replenishment Cycle
ROP= DD x RC

Example: Assume that the average daily demand is 50 units

per day for a component. Assume also that the time
required to place and receive an order is 4 days. What
is the reorder point?

Reorder point = 4 x 50 = 200 units

Thus, an order should be placed when inventory drops to 200 units.

 Reorder (trigger) Point
When demand is uncertain
Reorder point=(Daily Demand x Replenishment
Cycle)+Safety Stock
ROP = (DD x RC) + SS

Example: Continuing with the previous

example, suppose the
company decides to hold 50 unit of
safety stock.

Reorder point = (4 x 50) + 50 = 250 units

Thus, an order should be placed when inventory drops to

250 units.
 Graphical Representation
of
Reorder Point System
Order quantity, Q
Demand
rate
Inventory Level

Reorder point, R

0 Lead Lead Time

time time
Order Order Order Order
placed receipt placed receipt
 How Much to Reorder?
Economic Order Quantity
(EOQ)
Optimal order quantity that will minimize
total inventory
costs.

Total Costs
$ Costs

Total Carrying Cost

Total Ordering Cost

EOQ* Order Size (Q)

 Economic Order Quantity
(EOQ) in $
2AB 2(Annual Usage)(Administrative cost)
Qeoq = =
C Annual Carrying Cost

Example: Suppose that $1,000 of a particular item is

used each year,
the order costs are $25 per order submitted,
and inventory
carrying costs are 20%.
EOQ= 2 x 1000 x 25/ 0.20 = 250,000 = $500 order
size
 Economic Order Quantity
(EOQ)
2DB
in units
2(Annual Demand)(Administrative cost)
Qeoq = =
IC Inv.$ Value x Annual Carrying Cost

Example: Suppose that $1,000 of a particular item is used each

year, the
product has a cost of $5 per unit, the order costs are
$25 per order
submitted, and inventory carrying costs are 20%.
Annual Demand in units = $1,000/$5 = 200 units
EOQ= 2 x 200 x 25/ 0.20 x 5 = 10,000 = 100 units
 Inventory Flow Diagram
Graphically depicts the demand for and
replenishment of inventory. EOQ=120 units
18 A D Safet Stock = 60 units
0
Average Demand per
H day=30
120
Replenishment Cycle
=2 days

60

SAFETY STOCK
s
Unit

1 5 7 8 10
Time, days
 Safety Stock
 Can prevent 2 problems:
- an increased rate of demand;
- longer-than-normal replenishment
 Contemporary Approaches
to Managing Inventory
ABC ANALYSIS
 Inventories are not of equal value to a  Based on the 80/20 rule –
firm and should not be managed in the 80% of sales come from 20%
same way.
of products.

Determinants of ABC status:

 The fastest-selling items

 Item profitability
 Sales volume in $  Item importance

 Sales volume in units

! Note: 4 classification to ABC Analysis – D, dogs or dead inventory (inventory with no demand)
 ABC Analysis
 Class A
 5 – 15 % of units
 70 – 80 % of value

 Class B
 30 % of units
 15 % of value

 Class C
50 – 60 % of units
 5 – 10 % of value
 Just-in-Time (JIT)
Approach
• With just in time (JIT) inventory, The
exact amount of items arrive at the
moment they are needed, Not a
minute before OR not a minute after
JIT considerations:
• Views inventory as a waste
• Improved product quality from suppliers
• Low (no) safety costs
 Vendor-Managed Inventory
(VMI)
 The size and time of replenishment orders are the
responsibility of the manufacturer.

Benefits for distributors:

 Reduced inventories;
VMI drawback:
 Fewer stockouts;  Inadequate
 Higher revenues.

Benefits for manufacturer:

data sharing
 Improved demand forecasting between the
relevant
parties.
 Inventory Tracking

 Bar codes are substituted by RFID chips;

 Radio-frequency identification (RFID) chips –
able to transmit data through packaging.
 Early adopter of RFID is Wal-Mart.

RFID drawbacks: RFID benefits:

 Cost of tags;  Increase in sales;

 Cost of equipment  Reduction in

to read the tags. stockouts.
Factors Affecting Inventory
Management
1. Complementary Products
- Inventories that can be used together.
e.g. : razor blades and razors.
- Intensify pressures on retailers concerned
with inventory maintenance.
- “So many complementary items exist for
cooking meat and fish that you’ll never be
able to display them in the same section (of
the store)”.
 Factors Affecting Inventory
Management
2. Dead Inventory
- No demand products inventory carrying
costs increase, inventory turnover decrease,
space in storeroom is taken up
structured process to manage it:
- Switch from make to order fro make to stock;
- Full prepayment by the customer;
- Drastic price reductions or bunching with more
attractive merchandise.
- Donate to charity
- Throw away (last resort solution)
Factors Affecting Inventory
Management
3. Deals
- Manufacturer may offer retailers a
deal that involves a combination of
desirable and less-desirable items.
- Carload sale and truckload sale –
retailer has purchased an entire
railcar load of a product and wishes
to pass the quantity savings on to its
customers
 Factors Affecting Inventory
Management
4. Defining Stock-Keeping Units (SKUs, line items)
- A type of individual item for which separate
records are maintained.
- The inventory manager must designate the
quantity – or minimum lot size – with which the
inventory records will deal.
- The definition of an SKU may vary depending on
a party’s position in the SC.
e.g. retailer records as cans
warehouse records as pallet loads
Factors Affecting Inventory
Management
5. Substitute Products
- Products that are able to fill the same
need or want as another product
- Two-way substitutions: brand A is
substitution for brand B brand B
is substitution for brand A.
- One-way substitution: a bolt 7/16 inch
in diameter could be used in place of
bolt ½ inch in diameter, but the
reverse may not hold.
 Factors Affecting Inventory
Management
6. Informal Arrangements Outside the
Distribution Channel
- All dealers of a specific brand of automobile
in a particular area to have easy access to
data about the new car inventories in that
area. If one dealer has a ready buyer for a
specific model of auto that it does not have
in stock , the dealer can check the inventory
list to see if any other area dealers have the
desired car in stock.
Factors Affecting Inventory
Management
7. Repair and Replacement Parts
- These items can be essential to
customer service and satisfaction, yet
it can be extremely difficult to
forecast the demand for repair and
replacement parts,
- Challenge involving the number of
warehousing facilities that should be
used for repair.
End of Chapter 9