Inventory Management

Inventory Management 7 August 2001

Introduction • What: Managing Inventory • Where: Any business that maintains inventory • Why: Inventory is a significant contributor to costs

Functions of Inventory • Separate (decouple) parts of the production process • Stock of goods for customers • Take advantage of quantity discounts • Hedge against inflation

Types of Inventory • Raw Material • Work In Process • Maintenance / Repair / Operating • Finished Goods

Inventory Classification • ABC Analysis • A type of Pareto analysis • Focus resources on a few critical inventory items • Annual demand x Cost of item

ABC Analysis • Class A – High dollar volume – 15% of items, 80% of dollar volume • Class B – Medium dollar volume – 30 % of items, 15% to 25% of dollar volume • Class C – Low dollar volume – 55% of items, 5% of dollar volume

Inventory Policies • Purchasing resources much higher for A items • Tighter physical control for A items • Careful forecasting for A items

Record Keeping and Cycle Counting • Cycle count – an audit that compares actual inventory to recorded inventory • Frequency of count depends on class • Eliminate shutdown for a full count • Eliminate annual adjustments • Use trained personnel for dedicated counts

Other Terms • SKU – Stock Keeping Unit (item number) • Shrinkage • Pilferage • Holding Cost • Ordering Cost • Setup Cost (includes Ordering Cost) • Setup Time

Economic Order Quantity Model • Demand is known, constant, independent • Lead time known and constant • Receipt instantaneous and complete • No quantity discount • Variable costs are setup and holding costs • Stockouts can be avoided

Minimizing Costs Annual Cost Total Cost Curve Holding Cost Curve Order (Setup) Cost Curve Order Quantity Optimal Order Quantity (Q*)

Inventory Level AverageInventory (Q*/2) Optimal Order Quantity(Q*) Reorder Point (ROP) Time Lead Time Reorder Point

Inventory Management