▪ To provide with a basic understanding of the nature of inventory as both tangible

and intangible item existing within the company’s records.

▪ Field of operations research, interest in problems of optimal stock
management at a scientific level goes back to the start of the 20th
century.
▪ It was known that methods of solving problems of this type were
developed first before the necessary commercial electronic data
processing for their ready application were available.
▪ It increases dramatically with the increasing interest rates of the 70s
by releasing the surplus operating capital tied up in excessive
inventories and to use the resulting liquidity to finance new
investments.
▪ INVENTORY is one of the most interesting, intriguing and
misunderstood business phenomena.
▪ GAAP Perspective, it is a current asset converted to revenue. It
represents “tangible personal property which is held for sale in the
ordinary course of business; are in process of production for such
sale; to be currently consumed in the production.” (work-in process,
raw materials or finished goods)
▪ Supply Chain Management Efficiency Perspective, it is a liability to
efficient supply chain management that is to keep inventory at a
minimum. (just in time, lean inventory, collaborative planning,
forecasting and replenishment (CPFR))
▪ Risk Management Perspective, inventory is associated with the
concept of safety stocks and increasingly a means of managing risks.
Investing in inventory as a means of hedging against currency and
price fluctuations. Many firms opt to invest in inventory as a means of
locking in price and currency valuations to prevent from being
susceptible to the risk of inventory costs going above budgetary and
capital constraints.
▪ Balanced perspective, inventory is an asset, but an asset that firms
don’t want too much of. Maintaining adequate inventories to ensure
smooth production and merchandising flows while simultaneously
minimizing inventory investment to ensure firm financial
performance. (optimal)
▪ Managing customer and vendor relationships is a critical aspect of
managing supply chains.
▪ It reveals that the heart of supply chain relationship is inventory
movement and storage. (purchase, transfer, or management of
inventory)
▪ Inventory plays a critical role in supply chains because it is a salient
focus of supply chains.
▪ Inventory facilitates the balancing of demand and supply. It is trying
to balance between fulfilling the demands of customers and
maintaining adequate supply of materials and goods.
▪ A balance between fulfilling customers’ demand and maintaining
supply is often achieved through inventory.
▪ Example, a growing trend is the implementation of sales and
operations planning (S&OP) processes. The purpose is to bring the
demand management functions of the firm (sales forecasting,
marketing) together with the operations functions of the firm
(manufacturing, supply chain) and level strategic plans.
▪ Another example is the POS (point of sale) data for perpetual
inventory management. As items are depleted from inventory, both
retailer and vendor collaborates to determine when reordering to
replenish the depleted inventory.
▪ Inventory can be a vital part of managing supply chains because it
gives a firm’s inventory is often used as a litmus test for the “health”
of its supply chain management processes and decision-making.
▪ Example: consider the firm that has excessive amounts of inventory
in the form of safety stock. Such high safety stock is indeed a
problem in and of itself because of the costs of having working
capital tied up in assets that aren’t being converted to sales.
▪ Inventory is an important supply chain measurement tool because it
is likely one of the first signs that some root cause/s is causing supply
chain inefficiencies.
▪ Measures such as inventory turns, days of inventory, and
cash-to-cash cycle have become popular, as they are all
indicators of how well a firm’s supply chain is being
managed.
▪ These measures tells us how quickly is moving through the
supply chain, how the firm can handle the fulfilment of
customer demands, how the firm’s liquidity is impacted by
its investment in inventory and even signal how effectively
supplier relationships are being managed.
▪ Inventory brings with a number of costs. These includes:
▪ Dollars
▪ Space
▪ Labor to receive, check quality, put away, retrieve, select, pack, ship
and account for
▪ Deterioration, damage and obsolescence
▪ Theft
▪ Inventory costs fall into ordering costs (actual value of the goods
such as salaries of purchasing the product, costs of expediting the
inventory) and holding costs.
▪ PREDICTABILITY. In order to engage in capacity planning and
production scheduling, you need to control how much RM, parts and
subassemblies you process at a given time. Inventory buffers what
you need from what you process.
▪ FLUCTUATIONS IN DEMAND. A supply of inventory on hand is
protection. If you can see how customers are acting in the supply
chain, surprises in fluctuations in demand are held to a minimum.
▪ UNRELIABILITY OF SUPPLY. Inventory protects you from
unreliable suppliers or when an item is scarce and its difficult to
ensure a steady supply.
▪ WHENEVER POSSIBLE. Unreliable suppliers should be
rehabilitated through discussions or they should be replaced.
▪ PRICE PROTECTION. Buying quantities of inventory at appropriate
times helps avoid the impact of cost inflation.
▪ QUANTITY DISCOUNTS. Often bulk discounts are available if you
buy in large rather than in small quantities.
▪ LOWER ORDERING COSTS. If you buy a larger quantity of an item
less frequently, the ordering costs are less than buying smaller
quantities over and over again.
▪ Inventory basically falls into the overall categories of raw
materials, finished goods, and work-in-process. Remember:
▪ RAW MATERIALS. Used to produce partial products or completed
goods.
▪ FINISHED PRODUCT. This is product ready for current customer
sales. It can be used to buffer manufacturing from predictable or
unpredictable market demand.
▪ RM is converted into partial product, subassemblies, and finished
product. It is kept at minimum and occurs from work delays, long
movement times between operations, and queuing bottlenecks.
▪ Other categories of inventory should be considered from a functional
standpoint:
▪ Consumables. RMs like light-bulbs, hand-towels, computer and photocopying
paper, brochures, tape, envelopes, cleaning materials, lubricants, fertilizer, paint,
packaging materials.
▪ Service, repair, replacement and spare items (S&R items). These are after market
items used to keep things going. As long as machine or device of some type is
being used and will need service and repair in the future, it will never be
obsolete.
▪ Buffer / Safety Inventory. This type of inventory can serve various
purposes such as:
▪ Compensating for demand and supply uncertainties.
▪ Holding it to “decouple” and separate different parts of your
operation so that they can function independently from one
another.
▪ Anticipation Stock. This inventory produced in anticipation of an
upcoming season such as fancy chocolates made up in advance of
mother’s day or v-day.
▪ Transit Inventory. This inventory en route from one place to another.
Items moving within the distribution channel toward you and also
outside of your facility.
▪ Stock keepers who don’t understand how and when an item’s paper
life first created within a system become even more confused if there
is no hard copy audit trail they can follow.
▪ How could:
▪ An order be placed?
▪ An order be accepted?
▪ Confirmation of the order given?
▪ Shipping instructions be given?
▪ Notice of shipping arrangements be given?
▪ A paper life be created for an item in advance of it entering the
facility?
▪ Through EDI, all of these events can occur in a paperless
environment.
▪ EDI is where routine business transactions are sent over standard
communication lines (such as telephone lines) between computers
within a company or between your computer and that of a vendor.
▪ For EDI to work, all of the system participants must agree to strict
rules regarding message content, format and structure.
▪ Example: EDI within a company is at the time of order entry,
information about that order is electronically transmitted to shipping
or operations for order selection and shipping, to accounting for
billing purposes, to sales for order verification and so on.
▪ Best practices are the things that successful companies do
very well.
▪ Best practices are the most efficient (takes the least amount
and effort) and effective (delivers the best result) way of
accomplishing something.
▪ Through experience and research and quantification, to
produce better results than whatever was previously done.