Macrh

30th ,

INVENTORY MANAGEMENT
2020

S U P P LY C H A I N M A N A G E M E N T

Submitted by: Abdelgadir Rahel M.

Submiited to: Dr. Zeny Lontoc
 INTRODUCTION
 Inventory - is a stock or store of goods wherein firms stock hundreds or
even thousands of items in inventory, ranging from small things such as
pencils, paper clips, screws, nuts, and bolts to large items such as
machines, trucks, construction equipment, and airplanes. Naturally, many
of the items a firm carries in inventory relate to the kind of business it
engages in.
For example: manufacturing firms carry supplies of raw
materials, purchased parts, partially finished items, and finished goods, as
well as spare parts for machines, tools, and other supplies. Department stores
carry clothing, furniture, carpeting, stationery, cosmetics, gifts, cards, and
toys. Some also stock sporting goods, paints, and tools. Hospitals stock
drugs, surgical supplies, life-monitoring equipment, sheets and pillow cases,
and more. Supermarkets stock fresh and canned foods, packaged and frozen
foods, household supplies, magazines, baked goods, dairy products, produce,
and other items.
 The motive for inventory
 There are three motives for holding inventory, similar to cash.

 Transaction motive: Economies of scale is achieved when the

number of set-ups are reduced or the number of transactions are
minimized.

 Precautionary motive: hedge against uncertainty, including

demand uncertainty, supply uncertainty

 Speculative motive: hedge against price increases in materials

or labor
NATURE AND IMPORTANCE OF INVENTORIES

A typical manufacturing firms carries different types of inventories, including the

following:

•Raw materials and purchased parts

•Partially completed goods called work-in-process (WIP)

•Finished-goods inventories (manufacturing firms) or merchandise (retail stores)

•Replacement parts, tools and supplies

•Goods-in-transit to warehouse or customers

 FUNCTIONS OF INVENTORY
Inventories serve a number of functions. Among the most important are the
following.

1. To meet anticipated customer demand: These inventories are referred to as

anticipation stocks because they are held to satisfy planned or expected demand

2. To smooth production requirements: Firms that experience seasonal patterns in

demand often build up inventories during off-season periods to meet overly high
requirements during certain seasonal periods

3. To decouple operations: Manufacturing firms have used inventories as buffers

between successive operations to maintain continuity of production that would
otherwise be disrupted by events such as breakdowns of equipment and accidents
that cause a portion of the operation to shutdown temporarily

4. To reduce the risk of stockouts: Delayed deliveries and unexpected increases in

demand increase the risk of shortages. The risk of shortages can be reduced by
holding safety stocks, which are stocks in excess of anticipated demand
 5. To take advantage of order cycles: To minimize purchasing and inventory
costs,
a firm often buys in quantities that exceed immediate requirements.

6. To hedge against price increases: The ability to store extra goods also allows a
firm to take advantage of price discounts for large orders.

7. To permit operations

8. To take advantage of quantity discounts: Suppliers may give discounts on

large orders.
 GENERAL OBJECTIVE OF
INVENTORY MANAGEMENT

• To achieve satisfactory levels of

customer service while keeping
inventory costs within reasonable
bounds
 CLASSIFICATION SYSTEM OF
INVENTORY MANAGEMENT
 A-B-C Approach - The A-B-C approach classifies
inventory items according to some measures of
importance, usually annual dollar (i.e., dollar value
per unit multiplies by annual usage rate), and then
allocates control efforts accordingly. Typically,
three classes of items are used:
 A (very important), B (moderately important), C
(least important), with three classes of items.

 A items generally account for about 15% to

20% of the number of items in inventory but
about 60% to 70% of the dollar usage. At the
other end of the scale, C items might account
for about 60% of the number of items but only
10% of the dollar usage an inventory.
 BASIC ECONOMIC ORDER QUANTITY (EOQ) MODEL)

 The basic EOQ model is the simplest of the three

models. It is used to identify the order size that will
minimize the sum of the annual costs of holding
inventory and ordering inventory.
 The optimal order quantity reflects a trade-off between
carrying costs and ordering cost; as order size is varied,
one type of cost will increases while the other
decreases.
 Annual carrying cost is computed by multiplying the
average amount of inventory on hand by the cost to
carry one unit for one year, vent through any given unit
would not be held for a year.
Carrying costs increase or decrease in direct proportion to changes
in the order quantity (Q)
Annual ordering cost is a function of the number of
orders per year and the ordering cost per order.
 Because the number of orders per year decreases as the order
quantity increases annual ordering cost is inversely related to
order size. Ordering costs are inversely and nonlinearly related to
order size.
The total annual cost associated with carrying cost and ordering
inventory when Q units are ordered each time is,
 EOQ WITH NONINSTANTANEOUS REPLENISHMENT

The basic EOQ model assumes that each order is

delivered at a single point in time (instantaneous
replenishment).

In some instances, however, such as when a firm is

both a producers and user or when deliveries are spread
over time, inventories tend to build up gradually instead
of instantaneously.

 When the company makes the product itself, there

are no ordering costs as such.
Nonetheless, with every run there are set up costs- the
costs are required to prepare the equipment for the job,
such as cleaning, adjusting and changing tools and
fixtures.
 QUANTITY DISCOUNTS
Quantity discounts are price reductions for a large orders offered to
customers to induce them to buy in large quantities.

The buyer’s goal with quantity discounts is to select the order

quantity that will minimize total cost, where total cost is the sum of
carrying cost, ordering cost and purchasing cost.
 WHEN TO REORDER WITH EOQ
ORDERING

Reorder point (ROP) – when the quantity on hand of an item

drops to this amount , the item is reordered.

• If demand and lead time are both constant, the ROP is:
 OPERATIONS STRATEGY
Inventories often represent a substantial investment. More
important, improving inventory processes can offer significant
benefits in terms of cost reduction and customer satisfaction. Among
the areas that have potential are the following:
 Record keeping: It is important to have inventory records that
are accurate and up-to-date, so that inventory decisions are based
on correct information.
 Variation reduction: Lead time variations and forecast errors
are two key factors that impact inventory management, and
variation reduction in these areas can yield significant
improvement in inventory management.
Lean operation: Lean systems are demand driven, which means
that goods are pulled through the system to match demand instead of
being pushed through without a direct link to demand. Moreover,
lean systems feature smaller lot sizes than more traditional systems,
based in part on the belief that holding costs are higher than those
assigned by traditional systems, and partly as a deliberate effort to
reduce ordering and setup costs by simplifying and standardizing
necessary activities.

Supply chain management: Working more closely with suppliers

to coordinate shipments, reduce lead times, and reduce supply chain
inventories can reduce the size and frequency of stockouts while
lowering inventory carrying costs.
 CONCLUSION
Inventory management is a core operations management
activity. Effective inventory management is often the mark
of a well-run organization. Inventory levels must be
planned carefully in order to balance the cost of holding
inventory and the cost of providing reasonable levels of
customer service. Successful inventory management
requires a system to keep track of inventory transactions,
accurate information about demand and lead times,
realistic estimates of certain inventory-related costs, and a
priority system for classifying the items in inventory and
allocating control efforts.