Inventory

Overview

To hold or not to hold

Types of inventory

Pareto principal

ABC analysis

Cycle counting

To hold or not to hold that is the

question.

To hold:

Customer service

Ordering or setup

Not to hold:

Inventory
holding cost

Interest or
opportunity cost

Storage and
handling cost

Taxes, insurance,
shrinkage

costs

Labor and
equipment
utilization

Transportation cost

Hide production
problems

Types of inventory

Raw material

WIP inventory Work In Process

MRO inventory Maintenance,

Repair, Operating supplies

Finished goods inventory

Located in Tucson, Arizona

Produce furniture for:
Healthcare industry
Hospitals
Government

http://www.caseworksfurniture.com/healthcare/hcfactory.htm

Pareto Principle

80/20 rule

Based on the work of an economist & avid

horticulturalist, V. Pareto in late 19th century
Italy.

80% of the land was owned by 20% of the people.

80% of the peas were produced by 20% of the pods

Applied to business by quality guru Dr. Juran

Pareto principle applied:

Applied to Meetings: 80% of decisions come

from 20% of meeting time.
Applied to product defects: 20% of the
quality problems cause 80% of the defects.
Applied to Salespeople: Roughly 20% of a
sales force will develop 80% of the annual
results
Applied to Business Units: Roughly 20% of a
company's business units will produce 80%
of the annual revenue.
Applied to time-management

Moral of the Pareto

principle
Find

the significant 20%

Manage

that 20%

Pareto principal + Inventory =

ABC Analysis

critical few and the trivial many

Create a Pareto chart for the inventory
dollars per year of each item dollarvolume
Generally the top 80% of dollars are from
approximately 20% of the items.
Categorize all items into

Class A items top ~20% items by dollarvolume

Class B items
Class C items

ABC Analysis
100

Percentage of dollar value

90
80
70
60
50
40
30
20
10
0
10

20

30

40

50

60

70

Percentage of items

80

90 100

ABC Analysis
100

Percentage of dollar value

90
80
70
60
50
40
30
20
10
0
10

20

30

40

50

60

70

Percentage of items

80

90 100

ABC Analysis
100

Percentage of dollar value

90
80
70
60
50
40
30
20
10
0
10

20

30

40

50

60

70

Percentage of items

80

90 100

ABC Analysis
100

Percentage of dollar value

90
80
70
60
50
40
30
20
10
0
10

20

30

40

50

60

70

Percentage of items

80

90 100

ABC Analysis
100

Class C

Class B

Percentage of dollar value

90
Class A
80
70
60
50
40
30
20
10
0
10

20

30

40

50

60

70

Percentage of items

80

90 100

ABC Analysis

Policies based on ABC analysis

Develop

Class A suppliers more

Implement

tighter physical control

of Class A items

Forecast

Class A items more

carefully
Model

inventory for Class A items

Cycle counting

Physically counting a sample of total

inventory on a regular basis

Used often with ABC classification

Class A items counted most often (e.g., daily)

Class B items counted less frequently (e.g.

weekly)

Class C items counted least often (e.g.

monthly)

Advantages of Cycle
Counting

Eliminates shutdown and interruption of

production necessary for annual physical
inventories
Eliminates annual inventory adjustments
Provides trained personnel to audit the
accuracy of inventory
Allows the cause of errors to be
identified and remedial action to be
taken
Maintains accurate inventory records

Inventory Costs

Holding costs - associated with holding or

carrying inventory over time

Ordering costs - associated with costs of placing

order and receiving goods; retail & distribution

Setup costs - cost to prepare a machine or

process for manufacturing an order; production

Holding Costs

Storage
Obsolescence
Insurance
Extra staffing
Interest
Pilferage
Damage
Warehousing
Etc.

Ordering Costs

Supplies

Forms

Order processing

Clerical support

Transportation/shipping

Etc.

Setup Costs

Machine setup costs

Clean-up costs

Re-tooling costs

Adjustment costs

Etc.