Lec1 - Introduction

IU I S E
Inventory Control and

Management
Son Dao
Email: dvtson@gmail.com
1
IU ISE506IU: INVENTORY CONTROL & MANAGEMENT I S E
Course Description
Grading:
• Mid-term Exam 30%
• Homework 10%
• Project 20%
• Final Exam 40%
2
Course Outline
• Introduction to inventory
• Models with known and constant/time varying demand
• Continuous review inventory control with stochastic

demand
• Periodic review models with stochastic demand
• Single period (Newsboy) models
• Models with stochastic leadtimes
3
Course Outline (cont.)

• Coordinated ordering
• Review of material requirements planning
• Perishable inventories
• Multiple items and multiple locations
• Supply chain management and multiechelon inventory
• Review …
4
Learning Objectives
• Understand the importance of inventory and its position

within logistics and supply chain systems
• Understand basic concepts and key aspects of inventory
• Understand fundamental inventory control models

(deterministic vs stochastic, single item vs multiple items,
etc.)
5
Definitions
Inventory
• Stock of physical goods held at a specific location at a specific time
• It exists because demand and supply cannot be matched for physical

and economic reasons.
Stock Keeping Units (SKU’s)
• Each distinct item in the inventory at a location
Serviceability
• Probability of stock out
6
Types of Inventory
• Transaction Stocks
• Organization Stocks
• Excess Stocks
7
Transaction Stocks
• Stock to support the transformation, movement, and sales
operations of the firm
• Active work-in-process (WIP) stocks constitute a large

part of transaction stock
• Pipeline or transportation inventories are inventory in

transit
• Transaction stock cannot be easily reduced
8
Organization Stocks
• Safety Stock is an organization stock to buffer against

uncertainty
• Anticipation Inventory or leveling inventory is used

whenever it is cheaper to hold stock than to alter short-
term production capacity
9
Excess Stocks
• Has no purpose. It is an indication of poor

planning/execution of system operation
10
General 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
11
Functions of Inventories
• To decouple or separate various parts of the production
process
• To decouple the firm from fluctuations in demand and

provide a stock of goods that will provide a selection for
customers
• To take advantage of quantity discounts
• To hedge against inflation
12
Levels of Inventory
• Inventory may occur at various levels or echelons within

the company. An echelon, level, or stage is a stock point
that is under control of the company.
• Raw material, work in process, high level components,

and finished products belong to different echelons
13
Reasons for Carrying

Inventories
1. To provide service
• finished good inventory to meet demand and keep

customers happy
• work-in-progress inventory to increase flexibility by

decoupling production stages and keep machines
running
• raw material inventory keeps production moving
• protection against uncertainty
14
Reasons for Carrying

Inventories
2. To save money
• buying in large quantities allows spreading of fixed costs

such as ordering costs and obtaining quantity discounts.
• stocking of seasonal items allow production smoothing or

work-load balancing.
15
Introduction to Inventory Control
• Supply Chain Management: control of the material flow

from supplier to customers is a crucial problem
• Total investment in inventories is ENORMOUS
• Huge potential for improvement to cut cost, to gain

competitive advantage
⇒ Importance of Inventory Management
16
Introduction to Inventory Control

• Balancing conflicting goals of Finance, Production and
Marketing
• Finance: keep stocks low to free up investment capital
• Purchasing: order large batches to get volume discounts
• Production: long production runs to avoid time-consuming
setups and have a large raw material inventory to avoid
production stoppages
• Marketing: have high stock of finished goods to avoid stockouts
⇒ Inventory Models seek to find the best balance
between these goals.
17
Inventory Cost Components
• Holding or Carrying Cost
• Setup Cost or Ordering Cost
• Stockout Cost
18
Inventory Planning and Control
• Tradeoff among three major system objectives: customer

service, inventory investment, and production efficiency.
• Costs associated with these objectives always exist,

regardless of whether or not they can be measured
accurately
19
ABC Analysis
• Inventory distribution by value
• Not all customers and not all SKU’s are equally important.
• Usually, 20% of the SKU’s will account for 80% of the value of the
inventory
• Usually, the ABC system picks 15% to 20% of the items, representing
80% of the dollar value to be A items.
• About the next 30% to 40% of the items form a B category, account
for 15% of the total value
• The rest are C items, account for about 5% of the total value
20
Example
Total Annual
Annual Usage Annual Usage
Item Unit Cost Percentage
(Units) (Cost)
Usage
A 10 7000 70,000 3.2
B 86 400 34,400 1.6
C 130 1300 169,000 7.7
D 92 60 5,520 0.3
E 32 13000 416,000 19.0
G 102 10000 1,020,000 46.5
H 13 7000 91,000 4.2
I 9 5000 45,000 2.1
M 630 250 157,500 7.2
P 180 850 153,000 7.0
Q 4 2,000 8,000 0.4
S 22 1,000 22,000 1.0
2147,860 2,191,420 100.0

Example (cont.)
Total Annual
Annual Usage Annual Usage
Item Unit Cost Percentage
(Units) (Cost)
Usage
G 102 10000 1,020,000 46.5
E 32 13000 416,000 19.0
C 130 1300 169,000 7.7
M 630 250 157,500 7.2
P 180 850 153,000 7.0
H 13 7000 91,000 4.2
A 10 7000 70,000 3.2
I 9 5000 45,000 2.1
B 86 400 34,400 1.6
S 22 1,000 22,000 1.0
Q 4 2,000 8,000 0.4
D 92 60 5,520 0.3
2247,860 2,191,420 100.0

Example (cont.)
100
90
Cumulative Percentage Usage
80
70
60
50
40
30
20
10
0
-- G E C M P H A I B S Q D
23
Controls for A Items

• Frequent, perhaps monthly, cycle counting with tight
tolerances on accuracy
• Daily updating of records
• Frequent review of demand requirements, order

quantities, and safety stock; usually resulting in relatively
small order quantities
• Close follow-up and expediting to reduce lead time
24
Controls for B Items
• Similar to controls for A items with most control

activities taking place less frequently
25
Controls for C Items

• Basic rule is to have them simple records or no records;
perhaps use a periodic review of physical inventory
• Large order quantity and safety stock
• Store in area readily available to production workers or

order fillers
• Count items infrequently with scale accuracy acceptable
26
Inventory Accuracy and

Cycle Counting
• Inventory accuracy refers to how well the inventory
records agree with physical count.
• Tolerance refers to the acceptable errors of inventory

records.
• Cycle Counting is a physical inventory- taking technique

in which inventory is counted on a frequent basis rather
than once or twice a year.
27
Inventory System
• Objective is to keep the total cost associated with the

system to a minimum
28
Important Issues
• Inventory Transaction
• Inventory Accuracy
• Physical Control
• Cycle Counting
• Inventory Valuations
29
Independent vs. Dependent Demand
• Independent demand - the demand for item is

independent of the demand for any other item in
inventory
• Dependent demand - the demand for item is dependent

upon the demand for some other item in the inventory
30
Service Level
• Quality
• Lead Time
• Fill Rates
• On-time Delivery Performance
• Responsiveness to Demand
• Technical Support
• Product Warranty and Service Parts
• Payment Terms
• Ordering Practices
• Freight Enhancements
31
General Framework for

Inventory Models
Demand
• certainty
• risk, probability distribution of demand
• uncertainty, nothing known
Lead time: The period between the order time and the delivery time
• Certainty
• risk, probability distribution of demand
• uncertainty
Inside or Outside Procurement
• purchased from outside; pure inventory problem
• integrated with production smoothing if inside
32
General Framework for

Inventory Models
Static and Dynamic Problems
• Static: one period problem, examples are newsboy problem
• Dynamic: decisions over time
Behavior of Demand through Time for Various Items
• Stationary Demand: EOQ models
• Time-dependent Demand: WW model, Silver/Meal Heuristic
• Dependent Demand: MRP
Costs
• Price or Variable Production Costs: quantity discounts
• Ordering or Setup Costs
• Holding or Inventory Carrying Costs
• Stockout/Shortage costs
33

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IU I S E

Inventory Control and

• Models with known and constant/time varying demand

• Continuous review inventory control with stochastic

• Periodic review models with stochastic demand

• Single period (Newsboy) models

• Models with stochastic leadtimes

Course Outline (cont.)

• Review of material requirements planning

• Multiple items and multiple locations

• Supply chain management and multiechelon inventory

• Understand the importance of inventory and its position

• Understand basic concepts and key aspects of inventory

• Understand fundamental inventory control models

• Stock of physical goods held at a specific location at a specific time

• It exists because demand and supply cannot be matched for physical

Stock Keeping Units (SKU’s)

• Each distinct item in the inventory at a location

• Probability of stock out

• Active work-in-process (WIP) stocks constitute a large

• Pipeline or transportation inventories are inventory in

• Transaction stock cannot be easily reduced

• Safety Stock is an organization stock to buffer against

• Anticipation Inventory or leveling inventory is used

• Has no purpose. It is an indication of poor

General Types of Inventory

• To decouple the firm from fluctuations in demand and

• To take advantage of quantity discounts

• To hedge against inflation

• Inventory may occur at various levels or echelons within

• Raw material, work in process, high level components,

Reasons for Carrying

• finished good inventory to meet demand and keep

• work-in-progress inventory to increase flexibility by

• raw material inventory keeps production moving

• protection against uncertainty

Reasons for Carrying

• buying in large quantities allows spreading of fixed costs

• stocking of seasonal items allow production smoothing or

Introduction to Inventory Control

• Supply Chain Management: control of the material flow

• Total investment in inventories is ENORMOUS

• Huge potential for improvement to cut cost, to gain

⇒ Importance of Inventory Management

Introduction to Inventory Control

Inventory Cost Components

• Holding or Carrying Cost

• Setup Cost or Ordering Cost

Inventory Planning and Control

• Tradeoff among three major system objectives: customer

• Costs associated with these objectives always exist,

2147,860 2,191,420 100.0

2247,860 2,191,420 100.0

Controls for A Items

• Daily updating of records

• Frequent review of demand requirements, order

• Close follow-up and expediting to reduce lead time

Controls for B Items

• Similar to controls for A items with most control

Controls for C Items

• Large order quantity and safety stock

• Store in area readily available to production workers or

• Count items infrequently with scale accuracy acceptable