MANAGING INVENTORIES

Inventory – it is any asset held for future use or sale

Inventory Management – involves planning, coordinating and controlling the acquisition, storage,
handling, movement, distribution, and possible sale of raw materials, component parts and
subassemblies, supplies and tools, replacement parts, and other assets that are needed to meet
customer wants and needs.

- Explain the importance of inventory and types of inventories

Types of inventories:

1. Raw materials, component parts, subassemblies, and supplies

2. Work-in-process
3. Finished goods inventory
4. Safety stock inventory
- What are the major characteristics that impact inventory decisions

Inventory Characteristics:

1. Number of items held by the company

2. Nature of demand :
a. Independent demand – unrelated to the demand of other inventory items and need to be
forecasted
b. Dependent demand – if their demand is directly related to the demand of other inventory
items and can be calculated without needing to be forecasted
3. Number and duration of time periods: goods sold within a short selling season are uneconomical
to store them for the next year
4. Lead Time – the time between placement of order and its receipt.
5. Stockouts – the inability to satisfy the demand for an item (A backorder occurs when the
customer is willing to wait for the item; a lost sale occur when a customer is unwilling to wait
and purchases the item elsewhere.
Two basic decisions on inventory management:
1. When to order items from a supplier (or when to initiate production runs if the firm makes its
own items)
2. How much to order or produce each time a supplier or production order is placed

Four major categories of inventory costs:

1. Ordering or set-up costs – these costs are incurred as a result of the work involved in placing
orders with suppliers or configuring tools, equipment, and machines within a factory to produce
them. They do not depend on the number of items purchased or manufactured, but rather on
the number of orders that are placed.
2. Inventory-holding costs – or inventory-carrying costs are the expenses associated with carrying
inventory. Costs of maintaining storage facilities, such as electricity, taxes, insurance, and labor
and equipment necessary to handle, move, and retrieve an inventory item (or inventory units)
3. Shortage costs – or stockout costs are costs associated with an inventory item not available
when needed to meet demand.
4. Unit cost of the SKUs (SKU – stock keeping unit)
(A stock keeping unit (SKU) is a product and service identification code for a store or product,
often portrayed as a machine-readable bar code that helps track the item for inventory. A stock
keeping unit (SKU) does not need to be assigned to physical products in inventory.)
(RFID chips – RADIO FREQUENCY IDENTIFICATION chips embedded in packaging or products
allow scanners to track SKUs as they move throughout the store.
- Describe how to conduct an ABC inventory analysis
ABC Inventory consists of categorizing inventory items or SKUs into three groups according to their total
annual peso usage:

1. “A” items account for a large peso value but a relatively small percentage of total items
2. “C” items account for a small peso value but a large percentage of total items
3. “B” items are between A and C

ABC analysis provides managers useful information to identify the best methods to control each
category of inventory. (Which category requires close control?)

- How does a fixed order quantity inventory system operates, and how to use the EOQ and
safety stock models?

Fixed Quantity System (FQS) – the order quantity or lot size is fixed; that is, the same amount, Q, is
ordered every time.

What is an Inventory Position?

The EOQ Model

Economic Order Quantity Model – it is a classic economic model developed in the early 1900s that
minimizes the total cost, which is the sum of the inventory-holding cost and the ordering cost.

How do you compute for the following?

- Average cycle inventory = (Maximum Inventory + Minimum Inventory) / 2 = Q/2

- Annual inventory holding cost
- Annual ordering cost
- Total annual cost
- Order quantity

Fixed Period system (FPS) or periodic review system – is one in which the inventory position is checked
only at fixed intervals or time, rather than on a continuous basis.

What is a single period inventory model?