Definition of Inventory

Inventory
The stock of any item or resource used in an organization, includes raw materials, finished goods, and work-in-process.

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Types of Inventory
Raw Materials
Vendor-supplied items that have not had any labor added by the firm receiving the items.

Finished Goods
Completed products that are still in the possession of the firm that manufactured them.

Work-in-Process (WIP)
Items that have been partially processed but are still incomplete.
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Managerial Issues
Inventory is no longer viewed as an asset

Product life cycles are becoming shorter increasing the likelihood of product obsolescence.
Inventory concealing other problems. The high costs of inventory storage.
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The Functions of Inventory

To decouple or separate various parts of the production process To provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To hedge against inflation and upward price changes
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Reason for Maintaining Inventory

To protect against uncertainty:
Shortages of raw materials. Work-in-process variations. Changes in demand for finished products.

To support a strategic plan

As a cyclic demand buffer for a level-output strategy.

To take advantage of economies of scale

Large quantity purchases reduce the average total unit costs related to fixed ordering, setup costs, and transportation costs.
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The Material Flow Cycle

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The Material Flow Cycle

Input Other Wait Time Move Time Queue Time Setup Time Run Time Output

Cycle Time

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1 Run time: Job is at machine and being worked on 2 Setup time: Job is at the work station, and the work station is being "setup." 3 Queue time: Job is where it should be, but is not being processed because other work precedes it. 4 Move time: The time a job spends in transit 5 Wait time: When one process is finished, but the job is waiting to be moved to the next work area. 6 Other: "Just-in-case" inventory.
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ABC Analysis
What is ABC Analysis ? Inventory aplication of what is known as the Pareto Principle. Pareto principle states Critical few and trivial many The objective is to separate the important from the unimportant

Divides on-hand inventory into 3 classes

A class, B class, C class

Basis is usually annual $ volume

$ volume = Annual demand x Unit cost

Policies based on ABC analysis

Develop class A suppliers more Give tighter physical control of A items Forecast A items more carefully
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Classifying Items as ABC

% Annual $ Usage
100 80 60 40

Class A B C

% $ Vol 80 15 5

% Items 15 30 55

A B
0 50
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20
0

C
100
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% of Inventory Items
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Inventory Classifications
Inventory
1984-1994 T/Maker Co.

Process stage

Number & Value

Demand Type

Other

Raw Material WIP Finished Goods

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A Items B Items C Items

Independent Dependent

Maintenance Operating

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Cycle Counting
Physically counting a sample of total inventory on a regular basis Used often with ABC classification
A items counted most often (e.g., daily)

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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
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Periodic vs. Continous Inv. System

PERIODIC A method of inventory valuation for financial reporting purposes where a physical count of the inventory is performed at specific intervals. This accounting method for inventory valuation only keeps track of the inventory at the beginning of a period, the purchases made and the sales during the same period and is recorded under the asset section of the balance sheet. CONTINOUS A Method where information on inventory quantity and availability is updated on a continuous basis as a function of doing business. Generally this is accomplished by connecting the inventory system with order entry and in retail the point of sale system. In this case, book inventory would be exactly the same as, or almost the same, as the real inventory.

Disadvantages of Inventory
Higher costs
Item cost (if purchased) Ordering (or setup) cost
Costs of forms, clerks wages etc.

Holding (or carrying) cost

Building lease, insurance, taxes etc.

Difficult to control Hides production problems

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