OPERATI ONS MANAGEMENT

CHAPTER 1 2A
Inventory Management
Inventory
Inventory: a stock or store of goods
Types of Inventories
1. Raw Materials or Purchased Parts
2. Work in Progress: Partially completed goods
3. Finished-goods Inventories
(manufacturing firms) or merchandise (retail stores)
4. Replacement parts, tools, and supplies
5. Goods-in-transit to warehouses or customers


Key Inventory Terms
Reorder point: a level of inventory in stock at which
a new order is placed
Lead time: time interval between reordering and
receiving the order
Holding (carrying) costs: costs of holding an item in
inventory, i.e., interest, insurance, utility charge, etc.
Key Inventory Terms
Ordering costs: costs of ordering and receiving
inventory (costs of replenishing inventory), i.e.,
shipping cost, preparing invoices, inspecting goods
upon arrival for quality and quantity, etc.
Shortage costs: costs when demand exceeds supply
(temporary or permanent loss of sales when demand
cannot be met)
The Inventory Cycle
Profile of Inventory Level Over Time
Quantity
on hand
Q
Receive
order
Place
order
Receive
order
Place
order
Receive
order
Lead time
Reorder
point
Usage rate
Time
R
The Inventory Cycle
An order quantity, Q, is received and is used up over
time at a constant rate. When the inventory level
decreases to the reorder point, R, a new order is
placed; a period of time, refereed to as the lead time,
is required for delivery. The inventory level reaches
zero so there will be no shortages.
Functions of Inventory
To meet anticipated demand
To smooth production requirements
To decouple operations
To protect against stock-outs
Functions of Inventory
To take advantage of order cycles
To help hedge against price increases
To permit operations
To take advantage of quantity discounts
If a consumer purchases a large amount of products from a company,
the company will offer lower price to retain future business from the
consumer
Objective of Inventory Control
To achieve satisfactory levels of customer service
while keeping inventory costs within reasonable
bounds
Level of customer service
Costs of ordering and carrying inventory
Effective Inventory Management
A system to keep track of inventory
A reliable forecast of demand
Knowledge of lead times
Reasonable estimates of
Holding costs
Ordering costs
Shortage costs
A classification system
Thank you
THATS THE END OF
LECTURE 3A