Inventory Management

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
Inventory
 Def. - Inventory is the set of items that an
organization holds for later use by the
organization. A physical resource that a firm
holds in stock with the intent of selling it or
transforming it into a more valuable state.
 Raw Materials
 Works-in-Process
 Finished Goods
 Maintenance, Repair and Operating (MRO)
Expensive Stuff
 The average carrying cost of inventory
across all mfg.. in the U.S. is 30-35% of
its value.
 What does that mean?
 Savings from reduced inventory result
in increased profit.
Zero Inventory?
 Reducing amounts of raw materials and
purchased parts and subassemblies by
having suppliers deliver them directly.

 Reducing the amount of works-in process

by using just-in-time production.

 Reducing the amount of finished goods by

shipping to markets as soon as possible.
 Inventory Positions in the
Supply Chain

Raw Works
Materials Finished Finished
in
Goods Goods
Process
in Field
Basic types of inventory:
 independent demand,
 dependent demand, and
 supplies.
 Independent demand items are those items that
are sold to customers.

 Dependent demand items are those items whose

demand is determined by other items. Say for e.g.
The items used in the production of the car (the
independent demand item) are the dependent
demand items.

 Supplies are items such as copier paper, cleaning

materials, and pens that are not used directly in the
production of independent demand items
Why hold Inventory ?
 Each team is invited to discuss for 10
minutes about what they figure out to
be the reasons that the organizations
maintain inventory. At the and, they
have to present a list of their supposed
reasons.
 Meet variations in customer demand:
 Meet unexpected demand
 Smooth seasonal or cyclical demand

 Pricing related:
 Temporary price discounts
 Hedge against price increases
 Take advantage of quantity discounts
 Process & supply surprises
 Internal – upsets in parts of or our own processes
Unplanned shocks (labor strikes, natural disasters)
 External – delays in incoming goods
Inventory and Value
 Remember this?
 Quality
 Speed
 Flexibility
 Cost
Nature of Inventory: Adding
Value through Inventory
 Quality - 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, stock out.
The cost of Inventory :
 Holding costs – favors low inventory levels
& frequent replenishments.

 Setup costs – Obtaining necessary material,

specific equipment setup, moving out
previous stock of material,
 Ordering costs; and


Shortage costs .
THANK YOU