Chapter 17

Inventory Control and

Management

Femme Fatale:
Aquino, Eleazar, Punsalan, Salamat
 Outline

• Definition
• Purpose – Reasons to Hold / Reasons not to
Hold
• Types of Inventories
• Inventory Management System
– Functions of Inventory Management
– Prioritization
• Inventory Management Approach
– Inventory Models
– Multi-Period Inventory Models
 Outline

• Basic Fixed-Order Quantity Models

• Basic Fixed- Time Period Models
• Inventory Costs
• Inventory Costs
• Independent vs. Dependent Demand
• Inventory Hides Problems
 Definition

Inventory is the stock of any item or resource used and held

to meet future demand

An inventory system

• policies and controls for monitoring levels of inventory

• Information system that records transactions and enables
analysis of stock requirements and levels/quantities, costs
etc
 Two Fundamental Inventory
Decisions

• How much to order of each

material when orders are placed
with either outside suppliers or
production departments within
organizations
• When to place the orders
 Types of inventories

Inputs Outputs
• Raw Materials PROCE • Finished Goods
• Purchased parts
• Maintenance and Repair SS • Scrap and Waste

Materials
(in warehouses, or “in
transit”)

In Process
• Partially Completed
Products and
Subassemblies

(often on the factory floor)

 Types of Inventories

Work in
process

Vendors Raw Work in FinishedCustomer

Materials process goods
Work in
process
Water Tank Analogy for Inventory
Stock : Input (Flow in), Storage (Holding) and
Flow out (Usage)

Inventory Level
Supply Rate

Buffers Demand Rate

from Supply Rate
Inventory Level

Demand Rate
 Purposes of Inventory
Reasons to Hold

To meet anticipated customer

demand
To provide a safeguard for variation
in raw material delivery time
To take advantage of economic
purchase-order size
 Purposes of Inventory
Reasons to Hold

Pricing related:
– Temporary price discounts
– Hedge against price increases
– Take advantage of quantity discounts

Process & Supply surprises

Internal – to avoid production disruptions
External – delays in incoming goods
 Purposes of Inventory
Reasons NOT to Hold

Financial cost in carrying excess

inventories
Risk of damage to goods
Takes up valuable factory space
Inventory covers up ‘problems’
 Costs Associated with
Goods for Sale

1. Purchasing costs include transportation costs.

2. Ordering costs include receiving and

inspecting the items in the orders.

3. Carrying costs include the opportunity cost

of the investment tied up in inventory and
the costs associated with storage.
 Costs Associated with
Goods for Sale

• 4. Stockout costs occur when an organization

• runs out of a particular item for which
• there is a customer demand.
5. Quality costs of a product or service is its lack
of conformance with a prespecified standard.
 What is Effective Inventory
Management?

• Inventory management ?

• Inventory Control?
 Inventory Management Systems

• Functions of Inventory Management

– Track inventory
– How much to order
– When to order
• Prioritization
• Inventory Management Approach
– EOQ
– Continuous / Periodic
 EOQ Inventory Order Cycle
Demand
Order qty, Q
rate
Inventory
Level

ave = Q/2

0 Lead Lead Time

time time
As Q increases, average Order Order Order Order
inventory level increases,
but number of orders placed Placed Received Placed Received
decreases
 Inventory Models

Single-Period Inventory Model

– One time purchasing decision (Example: vendor selling t-
shirts at a football game)
– Seeks to balance the costs of inventory overstock and under
stock
Multi-Period Inventory Models
Fixed-Order Quantity Models
• Event triggered (Example: running out of stock)

Fixed-Time Period Models

• Time triggered (Example: Monthly sales call by sales
representative)
 Independent and Dependent
Demand Inventory

• Independent demand
– items demanded by external customers
(Kitchen Tables)
• Dependent demand
– items used to produce final products (table top,
legs, hardware, paint, etc.)
– Demand determined once we know the type
and number of final products
Independent vs. Dependent
Demand
Independent Demand (not related to
other items or final end-product)

Dependent Demand
(derived from component
parts, sub-assemblies,
raw materials, etc.)
Inventory Hides Problems

Bad
Design
Lengthy Poor
Setups Quality
Machine
Inefficient Unreliable
Breakdown
Layout Supplier
 To Expose Problems:
Reduce Inventory Levels

Bad
Design
Lengthy Poor
Setups Quality
Machine
Inefficient Unreliable
Breakdown
Layout Supplier
 Remove Sources of Problems
and Repeat the Process

Poor
Quality

Lengthy
Setups

Bad
Machine
Design Inefficient Unreliable
Breakdown
Layout Supplier
 Best Practices
Inventory Management

Best Practice Metric

1. Consolidate warehouses within primary •Carrying costs
markets where facilities are within a 15- •Enterprise-level materials
mile radius. management overhead

2. Fine-tune existing systems to facilitate •Inventory carrying cost

just-in-time inventory management. •Inventory fill rates
•Supply chain cost

3. Standardize similar or redundant

inventory items whenever possible to •Inventory reduction rate
benefit from economies of scale and •Contract compliance rate
reduce costs per purchase order. •Purchase order cost
 Best Practices
Inventory Management

Best Practice Metric

4. Convert to consignment or 3PL
inventory managed by the vendor •Supply delivery time
whenever possible to reduce inventory •Supply processing time
carrying costs and activities associated
with inventory
5. Order control.inventory in low units
and receive
of measure whenever possible for •General stores inventory
immediate delivery to departments in order •Turnover rate
to eliminate the need to store bulk
quantities of supplies.
6. Implement a cycle-counting program in
•Inventory turnover rate
concert with a scheduled annual physical
•Backorder fill rate
inventory to ensure that all inventory items
•Inventory adjustment ratio
are counted a minimum of four times a
year.
 References
• http://webcache.googleusercontent.com/search?q=cache:YZ8S-
vSniaUJ:www.mccombs.utexas.edu/faculty/James.Fitzsimmons/latest/PowerPointLectures/Goods16.p
pt+inventory+control+ppt&cd=8&hl=tl&ct=clnk&gl=ph
• http://www.referenceforbusiness.com/encyclopedia/Int-Jun/Inventory-Control-Systems.html
• www.rpi.edu/~albenr/presentations/19_Inventory.ppt
• Jon Schreibfeder, The First Steps to Achieving Effective Inventory Control
• Jacobs, Chase, Aquilano, Operation and Supply Management
GAME TIME!