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• Inventory


  A stock or store of goods
• Independent-demand items


  Items that are ready to be sold or used
• Dependent-demand items


  Components of finished products
• Inventories are a vital part of business, not only are they necessary for operations, but they also contribute to customer satisfaction
• Inventory decisions in service organizations can be especially critical
• Different kinds of inventories


  • Raw materials and purchased parts
  • Partially completed goods, called work-in-process (WIP)
  • Finished-goods inventories (manufacturing firms) or merchandise (retail stores)
  • Tools and supplies
  • Maintenance and repairs (MRO) inventory
  • Goods-in-transit to warehouses, distributors, or customers (pipeline inventory)
• Both manufacturing and service organizations must take into consideration the space requirements of inventory
• In some cases, space limitations may pose restrictions on inventory storage capability, thereby adding another dimension to inventory decisions
• Anticipation stocks


  Inventories held to satisfy expected (i.e., average) demand
• Seasonal inventories


  Inventories built up during preseason periods to meet overly high requirements during seasonal periods
• Decoupling operations


  Using 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
• Safety stocks


  Stocks more than expected demand to compensate for variability in demand and lead time
• Order cycles


  Periodic orders to minimize purchasing and inventory costs by buying in quantities that exceed immediate requirements
• Hedging against price increases


  Purchasing larger-than-normal amounts to beat an anticipated substantial price increase
• Pipeline inventories


  Intermediate stocking of goods-including raw materials, semi-finished items, and finished goods at production sites, as well as goods stored in warehouses
• Quantity discounts


  Discounts suppliers may give on large orders
• Inventory turnover


  Ratio of annual cost of goods sold to average inventory investment, indicates how many times a year the inventory is sold
• The higher the inventory turnover ratio, the better, because that implies more efficient use of inventories
• The desirable number of inventory turns depends on the industry and what the profit margins are
• The higher the profit margins, the lower the acceptable number of inventories turns, and vice versa
• A product that takes a long time to manufacture, or a long time to sell, will have a low turnover rate
• Supermarkets (low profit margins) have a high turnover rate
• There should be a balance between inventory investment and maintaining good customer service
• Requirements for Effective Inventory Management

  • A system to keep track of the inventory on hand and on order
  • A reliable forecast of demand that includes an indication of possible forecast error
  • Knowledge of lead times and lead time variability
  • Reasonable estimates of inventory holding costs, ordering costs, and shortage costs
  • A classification system for inventory items
• Periodic inventory counting system

  A physical count of items in inventory is made at periodic, fixed intervals (e.g., weekly, monthly) in order to decide how much to order of each item
• Perpetual inventory system


  Keeps track of removals from inventory on a continuous basis, so the system can provide information on the current level of inventory for each item
• Today, most have switched to computerized checkout systems using a laser scanning device that reads a universal product code (UPC), or bar code, printed on an item tag or on packaging
• Point-of-sale (POS) systems electronically record actual sales
• UPC scanners represent major benefits to supermarkets
• inventory models


  independent and dependent
• Inventory


  A stock or store of goods
• Inventory


  • Firms typically stock hundreds or even thousands of items
  • Items range from small things like pencils to large items like machines and airplanes
  • The items a firm carries relate to the kind of business it engages in
• Independent demand items


  Items that are ready to be sold or used
• Dependent demand items


  Components of finished products
• Inventories are a vital part of business, not only necessary for operations but also contribute to customer satisfaction
• A typical firm probably has about 30 percent of its current assets and perhaps as much as 90 percent of its working capital invested in inventory
• The ratio of inventories to sales in the manufacturing, wholesale, and retail sectors is one measure used to gauge the health of the U.S. economy
• Inventory decisions in service organizations can be especially critical, as being out of stock on some items could imperil the well-being of a patient
• Different kinds of inventories

  • Raw materials and purchased parts
  • Partially completed goods (work-in-process)
  • Finished-goods inventories (manufacturing firms) or merchandise (retail stores)
  • Tools and supplies
  • Maintenance and repairs (MRO) inventory
  • Goods-in-transit to warehouses, distributors, or customers (pipeline inventory)
• Inventory functions


  • To meet anticipated customer demand
  • To smooth production requirements
  • To decouple operations
  • To reduce the risk of stock outs
  • To take advantage of order cycles
  • To hedge against price increases
  • To permit operations
  • To take advantage of quantity discounts