MANAGING INVENTORIES IN SUPPLY CHAINS -
CHAPTER 12
INVENTORY MANAGEMENT
Inventory is any asset held for future use or sale .
• Managers are faced with the dual challenges of
− maintaining sufficient inventories to meet demand
− while at the same time incurring the lowest
possible cost.
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, equipment or maintenance,
• repair items and replacement parts.
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UNDERSTANDING INVENTORY
Every function in an organization views inventory
objectives differently.
• Marketing and operations prefer high inventory
levels to provide the best possible customer service
and process efficiency.
• Financial personnel prefer small inventories to
minimize inventory investment.
To strike the proper balance in meeting strategic
objectives, top management needs to understand the role
that inventory plays in a company’s
• financial performance,
• operational efficiency,
• and customer satisfaction.
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KEY DEFINITIONS AND CONCEPTS
Different types of inventories are maintained throughout the
value chain to support operations and meet customer demands.
• Raw materials, component parts, subassemblies, and
supplies
− Inputs to manufacturing and service -delivery processes.
• Work-in-process (WIP) inventory
− Partially finished products in various stages of
completion that are awaiting further processing.
• Finished-goods inventory
− Completed products ready for distribution or sale to
customers.
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ROLE OF INVENTORY IN THE VALUE CHAIN
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MANAGING INVENTORIES IN GLOBAL SUPPLY CHAINS
Managing inventories in global supply chains requires good
technology, processes, and information technology (IT) support.
The Purchasing or procurement function is responsible for
acquiring raw materials, component parts, tools, and other items
from outside suppliers .
• In the past, purchasing focused primarily on low -price
acquisition.
• Today, purchasing must:
− focus on global sourcing and total system cost,
− ensure quality, delivery performance, and technical
support,
− seek new suppliers and products and evaluate their
potential to the company.
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INVENTORY MANAGEMENT DECISIONS AND COSTS
Inventory management is about making trade -offs among the
costs associated with two fundamental decisions:
• When to order items from a supplier or when to initiate
production runs.
• How much to order from a supplier or produce each time.
Inventory costs can be classified into four major categories:
1. Ordering or setup costs incurred when placing orders with
suppliers
2. Inventory-holding costs associated with carrying
inventory
3. Shortage or stockout costs associated with inventory
being unavailable to meet demand
4. Unit cost of the purchased goods or the internal cost of
producing them
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INVENTORY CHARACTERISTICS: NATURE
OF DEMAND
Demand can be classified as:
• Independent demand
− demand for an SKU that is unrelated to the
demand for other SKUs and needs to be
forecasted.
• Dependent demand
− directly related to the demand of other SKUs
and can be calculated without needing to be
forecasted
• Static demand remains stable over time.
• Dynamic demand varies over time.
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INDEPENDENT VS. DEPENDENT DEMAND
Independent Demand (Demand for the final end-product or
demand not related to other items)
Finished
product
Dependent
Demand
(Derived demand
items for
E(1 component parts,
) subassemblies,
raw materials, etc)
Component parts
INVENTORY MODELS
Fixed-order quantity model
▪ Used when we want to maintain an item “in-stock,” and when we
restock, a certain number of units must be ordered
Fixed–time period model
▪ Item is ordered at certain intervals of time
12-4 MANAGING FIXED -QUANTIT Y INVENTORY
SYSTEMS
A fixed-quantity system (FQS) features a fixed order quantity or
lot size.
• The same quantity, Q, is ordered every time, and it does
not have to be economically determined.
• FQS is used extensively in the retail industry.
FQS is managed through the continuous monitoring of the
inventory position.
• Inventory position (IP) is defined as the on -hand quantity
(OH) plus any orders placed that have not arrived
(scheduled receipts, SR), minus any backorders (BO).
𝐼𝑃 = 𝑂𝐻 + 𝑆𝑅 − 𝐵𝑂
• The reorder point is the value of the IP that triggers a new
order.
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SUMMARY OF FIXED -QUANTIT Y INVENTORY SYSTEMS
(FQS)
Ordering decision rule A new order is triggered whenever the inventory position
for the item drops to or past the reorder point. The size
of each order is Q units.
Key characteristics The order quantity Q is always fixed.
The time between orders (TBO) is constant when the
demand rate is stable.
The TBO can vary when demand is variable.
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ANNUAL PRODUCT COSTS, BASED ON
SIZE OF THE ORDER
OPERATION OF FQS UNDER STABLE
DEMAND
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OPERATION OF FQS UNDER HIGHLY
VARIABLE DEMAND
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BASIC FIXED–ORDER QUANTIT Y MODEL
CYCLE INVENTORY PATTERN FOR THE EOQ MODEL
Cycle inventory (also called order or lot size inventory) is
inventory that results from purchasing or producing in larger
lots than are needed for immediate consumption or sale .
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FIXED-TIME PERIOD INVENTORY MODEL
FIXED–ORDER QUANTIT Y AND FIXED–
TIME PERIOD DIFFERENCES
Q-Model: Fixed-Order P-Model: Fixed-Time
Feature
Quantity Model Period Model
Q-constant (the same amount q-variable (varies each time
Order quantity
ordered each time) order is placed)
When to place R-when the inventory position T-when the review period
order drops to the reorder level arrives
Each time a withdrawal or Counted only at review
Recordkeeping
addition is made period
Less than fixed-time period Larger than fixed-order
Size of inventory
model quantity model
Efficient, because multiple
Higher due to perpetual
Time to maintain items can be ordered at the
recordkeeping
same time
Higher-priced, critical, or Typically used with lower-
Type of items
important items cost items
