Dr.

Basma Ezzat
➢ Amazon.com started as a “virtual” retailer – no
inventory, no warehouses, no overhead; just
computers taking orders to be filled by others.

➢ Growth has forced Amazon.com to become a world

leader in warehousing and inventory management
1.Each order is assigned by computer to the closest distribution
center that has the product(s)
2.A “flow meister” at each distribution center assigns work
crews
3.Lights indicate products that are to be picked and the light is
reset
4.Items are placed in crates on a conveyor, bar code scanners
scan each item 15 times to virtually eliminate errors
5. Crates arrive at central point where items are boxed and
labeled with new bar code
6. Gift wrapping is done by hand at 30 packages per hour
7. Completed boxes are packed, taped, weighed and labeled
before leaving warehouse in a truck
8. Order arrives at customer within 1 - 2 days
➢ Inventory
✓ A stock or store of goods
➢ Independent demand items
✓ Items that are ready to be sold or used
➢ Inventory is an expensive and important asset to many
companies
➢ Lower inventory levels can reduce costs
➢ Low inventory levels may result in stockouts and
dissatisfied customers
➢ Most companies try to balance high and low inventory
levels with cost minimization as a goal
➢ Inventory is any stored resource used to satisfy a current or
future need
➢ Common examples are raw materials, work-in-process, and
finished goods
➢ Inventory may account for 50% of the total invested capital
of an organization and 70% of the cost of goods sold
Capital
Energy Costs
Costs

Labor Costs

Inventory
Costs
➢ All organizations have some type of inventory control system
➢ Inventory planning helps determine what goods and/or services
need to be produced
➢ Inventory planning helps determine whether the organization
produces the goods or services or whether they are purchased from
another organization
➢ Inventory planning also involves demand forecasting
➢ Inventories are a vital part of business:
a. necessary for operations
b. contribute to customer satisfaction

A “typical” firm has roughly 30% of its current assets

and as much as 90% of its working capital invested in
inventory
➢ Inventories serve a number of functions such as:
1. To meet anticipated customer demand
2. To smooth production requirements
3. To decouple operations
4. To protect against stockouts
5. To take advantage of order cycles
6. To hedge against price increases
7. To permit operations
8. To take advantage of quantity discounts
➢ Raw materials and purchased parts
✓ Purchased but not processed
➢ Work-in-process (WIP)
✓ Undergone some change but not completed
✓ A function of cycle time for a product
➢ Finished goods inventories
✓ Completed product awaiting shipment
➢ Maintenance and repairs (MRO) inventory
✓ Necessary to keep machinery and processes productive
➢ Goods-in-transit to warehouses or customers (pipeline inventory)
➢ Tools and supplies
 Cycle time

95% 5%

Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
➢ Inventory management has two main concerns:
1. Level of customer service
❑ Having the right goods available in the right quantity in the right place at the right time
2. Costs of ordering and carrying inventories
❑ To achieve satisfactory levels of customer service while keeping inventory costs within
reasonable bounds
1. Measures of performance
2. Customer satisfaction
❖ Number and quantity of backorders
❖ Customer complaints
3. Inventory turnover
➢ Requires:
1. A system keep track of inventory
2. A reliable forecast of demand
3. Knowledge of lead time and lead time variability
4. Reasonable estimates of
❑ holding costs
❑ ordering costs
❑ shortage costs

5. A classification system for inventory items

➢ Purchase cost
✓ The amount paid to buy the inventory
➢ Holding (carrying) costs
✓ Cost to carry an item in inventory for a length of time
➢ Ordering costs
✓ Costs of ordering and receiving inventory
➢ Setup costs
✓ The costs involved in preparing equipment for a job
✓ Analogous to ordering costs
➢ Shortage costs
✓ Costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit