Mongcal, Joshua Blaw G. Prof.

Rafael Ireneo, MBA,CSSBB

IA-409 PRODMAN
Assignment #1 – FINALS [Chapter 12: Inventory Management]

1. Primary reasons for holding inventory are:

 To ensure that customer service targets can always be met without compromising
cash flow or running out of stock
 To prevent fluctuations in demand & supply from affecting sales and production
 To delay the effect of price increases and thereby improve margins and/or sales
 To lower procurement costs and also make efficient use of logistical facilities
 To meet anticipated customer demands
 To smooth production requirement
 To take advantage of quantity discount
 To take advantage on order cycle

2. Requirements for Effective Inventory Management

 A system to keep track of the inventory on hand and on order.
 A reliable forecast of demand, including forecast error.
 Knowledge of lead times and variability.
 Estimates of holding, ordering and shortage costs.
 Classification system for inventory.

3. Costs Associated with Inventory include:

 Ordering/Set-up costs
 Cost of procurement and inbound logistics costs form a part of Ordering
Cost.
 Ordering Cost is dependent and varies based on two factors - The cost of
ordering excess and the Cost of ordering too less.
 Carrying cost
 Involves various types of costs, namely Inventory Storage costs & Cost of
Capital
 Inventory carrying involves Inventory storage and management either
using in house facilities or external warehouses owned and managed by
third party vendors.
 Inventory Storage costs
o Typically include cost of building rental and facility maintenance
and related costs. Cost of material handling equipment, IT
hardware and applications, including cost of purchase, depreciation
or rental or lease as the case may be.
 Cost of Capital
o Includes the costs of investments, interest on working capital, taxes
on inventory paid, insurance costs and other costs associate with
legal liabilities.
  The inventory storage costs as well as cost of capital is dependent upon and
varies with the decision of the management to manage inventory in house
or through outsourced vendors and third party service providers.

 Stock-out costs
 They include sales that are lost, both short and long term, when a desired
item is not available; the costs associated with back ordering the missing
item; or expenses related to stopping the production line because a
component part has not arrived.
 These charges are probably the most difficult to compute, but arguably the
most important because they represent the costs incurred by customers
when an inventory policy falters.
 Failing to understand these expenses can lead management to maintain
higher inventory levels than customer requirements may justify.

4. Benefits and risks associated with the use of RFID tags

PROS
 Does not require line of sight for scanning; can speed up the scanning process
and reduce the labor associated with repositioning boxes for scanning.
i. Also, scanners can read multiple tags at the same time, so an entire
pallet-load of items can be scanned simultaneously.
 Reduces labor costs; processes that used to require multiple employees to
complete can be handled automatically with a few scans.
 Improves visibility of inventory by providing real-time updates and faster
scanning; can also improve the tracking of returns or recalled items by
providing real-time updates as the goods re-enter the facility.
 For companies that use returnable containers or pallets, RFID provides a way
to tract those items across the supply chain, optimize asset inventory and
reduce loss or theft.
 Can hold larger amounts and different types of data, and that data can be read
even in remote locations without a connection to the back-end database –
than that of traditional linear barcodes.
 Durability also increases with RFID tags.

CONS
 The biggest hurdle to deployment in most applications is the cost of RFID
tags. Barcode labels are substantially cheaper.
 RFID tags may also suffer from interference problems.
o If the tag environment contains a lot of metal, liquids or other
sources of radio interference, you could require multiple types of
more expensive tags.
 The cost of upgrading equipment and facilities to use RFID is another
potential drawback.
  RFID tags can provide much more traceability data than barcodes, but
managing all of that data can be a challenge.
 There are also still incompatible standards across different industries, tag
types, and in different countries.

5. It may be inappropriate to compare the inventory turnover ratios of companies in

different industries because the production process, requirements and the length of
production run varies across different industries. The shorter the production time,
the less will be the need for inventory.
- In addition, the material delivery lead times may vary between different
industries. The higher the variability of lead time and the longer the lead time,
the greater would be the need for inventory. As supplier reliability increases,
the need for inventory decreases. The industries with higher forecast
accuracies have less of a need for inventories.

6. Major assumptions under EOQ model

- The cost of the ordering remains constant.

- The demand rate for the year is known and evenly spread throughout the year.
- The lead time is not fluctuating (lead time is the latency time it takes a process to
initiate and complete).
- No cash or settlement discounts are available, and the purchase price is constant
for every item.
- The optimal plan is calculated for only one product.
- There is no delay in the replenishment of the stock, and the order is delivered in
the quantity that was demanded, i.e. in whole batch.

7. As the carrying cost increases, holding inventory becomes more expensive. Therefore,
in order to avoid higher inventory carrying costs, the company will order more
frequently in smaller quantities because ordering smaller quantities will lead to
carrying fewer inventories.

8. Safety stock (also called buffer stock) is a term used by logisticians to describe a level
of extra stock that is maintained to mitigate risk of stock-outs (shortfall in raw material
or packaging) due to uncertainties in supply and demand

Main Purposes of safety stock:

- Low Risk Tolerance

- Defensive Posture
- Guard Against Volatility
- Income
9. Service level can be defined in at least two different ways
 As the probability that demand will be met with available stock on hand, and
 The percentage of annual demand satisfied from inventory.

Service level is related to the amount of safety held in such a way that increasing the
service level requires increasing the amount of safety stock, thus portraying a direct
relationship between the two.

10. Long setup times require holding more inventory than with short setup times. Hence,
there is strong emphasis on reducing setup times. A decrease in setup time decreases
the cost per order, encourages more frequent and smaller orders, and thus decreases
the EOQ. This leads to reduction in the average amount of inventory or Inventory total
cost making it beneficial to the organization.