Chapte 7 (Inventory)

• Inventory decisions are both high risk and high impact
• Inventory Planning 


  is critical to procurement and manufacturing
• Overstocks


  Increase cost and reduce profitability as a result of added warehousing space, working capital, etc.
• Management of inventory resources 


  Requires understanding of functionality, principles, cost, impact, and dynamics.
• Inventory management


  involved risk which varies depending upon the firm's position in the distribution channel.
• Typical Dimensions of Inventory Risk

  Time duration, depth, and breadth of commitment.
• Inventory


  A current asset that should provide return on the capital invested
• Four functions of inventory

  • Geographical specialization
  • Decoupling
  • Balancing supply and demand
  • Buffering uncertainty
• Inventory policy


  Drives inventory performance
• Two indicators of inventory performance

  • Service level
  • Average inventory
• Inventory policy


  Guidelines regarding what to purchase or manufacture
• Service level


  A performance target specified by management
• Terms of performance

  • Cycle time
  • Case fill rate
  • Line fill rate
  • Order fill rate
• Performance cycle


  The elapsed time
• Case fill rate


  The percent of cases or units ordered
• Line fill rate


  The percent of order lines filled completely
• Order fill rate


  The percent of customer orders
• Inventory management


  A major element of supply chain logistics
• Inventory typically stocked

  • Materials
  • Components
  • Work-in-process
  • Finished product
• Average inventory


  The materials, components, work-in-process, and finished product typically stocked
• Order quantity


  The amount ordered in replenishment
• Transit inventory


  The amount typically
• Obsolete inventory


  Stock that is out-of-date
• Speculative inventory


  Inventory bought prior to need as a hedge
• Safety stock


  Inventory maintained in a logistical system
• Economic Order Quantity (EOQ) model


  Provides a specific quantity balancing of inventory carrying and ordering cost to minimize the combined cost
• Inventory carrying cost


  Expense associated with maintaining inventory
• Capital assessments


  Range from the prime interest rate to a percent
• Local taxing authorities in many areas assess taxes on inventory held in warehouses
• Insurance cost


  Expense based upon estimated risk or loss over time
• Obsolescence cost


  Cost resulting from deterioration of product during storage
• Storage cost


  Facility expense related to product holding rather than product handling
• Inventory planning


  Determining when and how much to order
• In the ECQ formulation, no consideration was given to the impact of transportation cost upon order quantity
• Quantity discount


  An EOQ extension similar to volume transportation rates
• Variety of other special situations that may justify adjustments to the basic EOQ

  • Production lot size
  • Multiple-item purchase
  • Limited capital
  • Dedicated tracking
  • Unitization
• Demand uncertainty


  Variation in sales during inventory replenishment
• Performance cycle uncertainty


  Inventory replenishment time variation
• Operations cannot consume consistent delivery
• Safety stock with combined uncertainty


  Typical situation confronting the inventory planner