Inventory Management

• Why inventory is held

  Compensate for the difference between supply and demand (timing and building demand)
• Reasons for holding inventory

  • Economies of scale
  • Uncertainties
  • Speculation
  • Smoothing
  • Logistics
• Economies of scale: it probably costs less to order or produce in large quantities than in small batches
• Uncertainties

  • Demand uncertainty
  • Lead time uncertainty
  • Supply uncertainty
• Speculation: inventories may be held in anticipation of a rise in their value or cost, usually raw materials
• Smoothing: inventories provide a means of smoothing out an irregular demand pattern
• Logistics: system constraints that may require holding inventories
• Aim: hold just right amount of stock – not too much or too little
• Too much stock

  • Cost of storing stock
  • Capital cost
  • Reduced working capital available for alternative investment
• Things spoil after time and don’t exist anymore
• Reordering frequently in small amounts can cost more
• How much Inventory is needed?

  balance costs of too much stock against costs of too little stock, to achieve minimum cost overall
• Too little stock

  • Disappointed customers
  • Lost sales
• Too little stock

  • Higher costs: making emergency orders
  • Reordering more frequently