Inventory Management

Course Objective
• After the course, students will be able to
address problems of materials
management and inventory planning and
be able to improve that system.

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 Detail Objectives
• Classify important material items for
planning and control.
• How to forecast the demand of materials
• When to re-order, how much to order, how
much safety stock should be kept in the
warehouse to meet a certain level of
customer satisfaction
• How to plan/control materials
• Discuss practical issues and solutions

Introduction about
Material Management and
Inventory Planning

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 Roles of Materials Management
• The basic function of materials
management is coordination. It must
balance the resources of the company and
demand.
• Materials management is involved in two
major areas:
– Manufacturing planning and control
– Physical supply/distribution

Issues
You want to have production cost as low as
practical, not as low as possible. You want to
have low inventory investment but as low as
practical, not as low as possible. The question
you need to answer is what are you going to buy
tomorrow to put into the stockroom and when do
you really need to buy it? Control of future
materials purchases is where you’re going to
save money.

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 Materials Management System

1. Production control & purchasing functions

Materials Management System

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 Inventory Management System

Inventory
Supplier(s) material Material Production
Control
purchasing handling

Information

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A Water Tank Analogy for Inventory

Inventory Level
Supply Rate

Inventory Level

Demand Rate

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 Purpose of Inventories
• To protect against uncertainties
• To allow economic production and
purchase
• To cover anticipated changes in demand
or supply
• To provide for transit

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Inventory Classification:
By Location in Process
• Inputs inventory: Raw materials
• Work-in-Process (WIP) inventory
• Outputs inventory: Finished goods

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 Brain storming and share your
experience
• Describe materials management and
inventory planning activities in your
company. Each person gives at least one
idea about that?

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Pareto Analysis
(ABC Analysis)

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 ABC Analysis
• Based on “Pareto” concept (80/20 rule)
• Classification of items as A, B, or C

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Exercise
• Open excel file to do exercise of ABC
analysis

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 Example: Annual Usage of Items by Dollar Value

Percentage
of Total
Annual Usage Dollar Dollar
Item in Units Unit Cost Usage Usage
1 5,000 $ 1.50 $ 7,500 2.9%
2 1,500 8.00 12,000 4.7%
3 10,000 10.50 105,000 41.2%
4 6,000 2.00 12,000 4.7%
5 7,500 0.50 3,750 1.5%
6 6,000 13.60 81,600 32.0%
7 5,000 0.75 3,750 1.5%
8 4,500 1.25 5,625 2.2%
9 7,000 2.50 17,500 6.9%
10 3,000 2.00 6,000 2.4%
Total $ 254,725 100.0%

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Pareto Chart
45.0% 120.0%

40.0%
100.0%
Cumulative % Usage

35.0%
A B C
Percent Usage

30.0% 80.0%

25.0%
60.0%
20.0%

15.0% 40.0%
10.0%
20.0%
5.0%

0.0% 0.0%
3 6 9 2 4 1 10 8 5 7

Item No.

Percentage of Total Dollar Usage Cumulative Percentage

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 Practice
The manager of a restaurant is concerned about the smaller
numbers of customers patronizing his eatery. The number of
complaints have been rising, and he would like some means of
finding out what issues to address and of presenting the findings in
a way his employees can understand them. The manager surveyed
his customers over several weeks and collected the following data.
What are the main problems needed to improve?
--------------------------------------------
Complaint Frequency
--------------------------------------------
Discourteous server 12
Slow service 42
Cold dinner 5
Cramped tables 20
Smoky air 10
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