The Importance

of Inventory
Management

Dr. Islam Ali

Resource
Planning for
Manufacturing

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Structure of the MRP System
Master Production
BOM
Schedule
(Bill-of-Material) MRP by period report

Lead Times
MRP by date report
(Item Master File)
MRP
Programs Planned orders report
Inventory Data

Purchase requirements

Purchasing data
Exception reports

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Tentative Contents
• Introduction
• ABC Analysis
• Traditional replenishment systems (EOQ – EPQ)
• Time varying demand models
• Probabilistic demand models
• Managing Class-A items
• (s, Q)
• (S, S)
• (R, s ,S)
• Managing Class C items
• Style goods and perishable items
• Multiple items and multiple locations
• Multi-echelon inventory
• MRP and extensions

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U.S. Logistics Costs ($ Billion)

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Inventory-to-sales
ratios (seasonally
adjusted) for U.S.
retailers,
manufacturers, and
wholesalers

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 Inventories have shifted downstream, closer to
the customer
• There are several factors that may be
causing this shift.

• In recent years, firms have sourced their

products from all over the globe in an
effort to find cost efficiencies. Global
sourcing initiatives will invariably increase
lead times leading to higher inventory
levels for wholesalers and retailers.

• In addition to global sourcing initiatives,

product variety offered to customers
continues to increase.

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Why Aggregate Inventory Investment Fluctuates:
The Business Cycle

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The Relationship to Finance
• Inventories have an important impact on the usual aggregate
scorecards of management performance—namely, on the balance
sheet and the income statement.
• Funds freed by a reduction in inventories normally would be used to
acquire other types of assets or to reduce liabilities.
• Such actions directly influence the ratio of current assets to current
liabilities, which is the most commonly used measure of liquidity.
• Income statements represent the flow of revenues and expenses for a
given period (e.g., 1 year). Specifically,
Operating profit = Revenue − Operating expenses

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Inventory Turnover
• A primary aggregate performance measure for inventory management
is inventory turnover, or stockturns.

• Turnover can be a very useful measure, especially when comparing

divisions of a firm or firms in an industry.

• We define inventory turnover as

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Relationship to Marketing
• Marketing managers prefer a wide variety of products because they are
listening to customers and trying to respond to their needs and desires.
• High inventories are desirable because demand can be met without delay.
• Furthermore, sales and marketing managers may make pricing decisions,
such as steep promotional discounts, that increase unit sales, but send a
shock through the factory and supply chain.
• These fundamental conflicts can be mitigated by a process orientation as
discussed earlier.
• Even with a process orientation, however, conflicts are bound to arise. This
again highlights the need for senior managers to be involved in setting policy
for supply chain management, inventory management, and production
planning and scheduling.

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Functional Areas vs. Business Processes
• Some firms have reorganized, or reengineered, to eliminate functional
areas and replace them with business processes.

• A common reengineering approach is to replace the operations,

logistics, and marketing functions with teams that are process focused.

• For instance, one team may be devoted to generating demand, while

another focuses on fulfilling demand.

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The Diversity of Stock-Keeping Units
• Some large manufacturing companies and military organizations stock
over 500,000 distinct items in inventory.
• Large distributors and retailers, such as department stores, carry about
100,000 goods for sale.
• A typical medium-sized manufacturing concern keeps in inventory
approximately 10,000 types of raw materials, parts, and finished
goods.

• Items produced and held in inventory can differ in many ways….

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Inventory Decisions
• Decision making in production, inventory, and supply chain
management is therefore basically a problem of coping with large
numbers and with a diversity of factors external and internal to the
organization. Given that a specific item is to be stocked at a particular
location, three basic issues must be resolved:
1. How often the inventory status should be determined
2. When a replenishment order should be placed
3. How large the replenishment order should be

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Functional Classifications of Inventories
• We recommend six broad decision categories for controlling aggregate
inventories:
• cycle stock,
• congestion stock,
• safety (or buffer) stock,
• anticipation inventories,
• pipeline inventories, and
• decoupling stock.

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The A–B–C Classification as a Basis for Designing
Individual Item Decision Models

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Thanks…
Questions
islam.ali@ejust.edu.eg

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