BA 181: Inventory Management

• Inventory Management

  The process of ordering, storing and using a company's inventory, including the management of raw materials, components, finished products, warehousing and processing
• Inventory Management

  • practice of tracking and controlling the inventory orders, its usage and storage along with management of finished goods that are ready for sale
• Just-in-time (JIT)


  A highly coordinated processing system in which goods move through the system, and services are performed, just as they are needed
• Materials Requirement Planning (MRP)


  An inventory control method in which manufacturers order inventory after considering the sales forecast, integrating data from various areas of the business where inventory exists
• Types of Inventories

  • Raw materials & purchased parts
  • Partially completed goods (work in progress)
  • Finished-goods inventories (manufacturing firms) or merchandise (retail stores)
• Importance of Inventory Control

  • Achieving satisfactory levels of customer service while keeping inventory costs within reasonable bounds
  • Balancing level of customer service and costs of ordering and carrying inventory
• Inventory Cost Factors


  • Ordering Cost Factors
  • Carrying Cost Factors
• ABC Analysis(Always Better Control)


  An inventory management technique where inventory items are classified into three categories: A (high-priced, closely controlled), B (moderately priced, moderate control), and C (low-priced, minimum control)
• Material Requirements Planning (MRP)


  An inventory control method in which manufacturers order inventory after considering the sales forecast, integrating data from various areas of the business where inventory exists
• Economic Order Quantity (EOQ)


  A technique that focuses on deciding how much quantity of inventory the company should order at any point in time and when they should place the order, to save on ordering and carrying costs
• Safety Stocks


  The minimum level of inventory an organization maintains to avoid stock-outs, placing a new order before the existing inventory is depleted
• VED Analysis


  A technique for controlling spare parts inventory, classifying items as Vital, Essential, or Desirable to determine appropriate inventory levels
• Fast, Slow & Non-Moving (FSN) Method


  A method that classifies inventory into three categories - fast-moving, slow-moving, and non-moving - to control obsolescence and determine ordering
• Economic Order Quantity (EOQ)


  A formula to identify the ideal order quantity that minimizes total costs related to production, demand, and inventory storage
• Improper inventory management can lead to increased storage cost, working capital crunch, wastage of labor resources, increase in idle time, disruption of the supply chain, reduction in sales, and unsatisfied customers
• Economic order quantity (EOQ)


  Formula for the ideal order quantity a company needs to purchase for its inventory with a set of variables like total costs of production, demand rate, and other factors
• EOQ


  • Minimizes related costs
  • Identifies the greatest number of product units to order to minimize buying
  • Takes the number of units in the delivery and storing of inventory unit costs
  • Helps free up tied cash in inventory for most companies
• EOQ is one of the oldest and most commonly known inventory control techniques
• EOQ dates from 1915
• Assumptions of EOQ

  • Demand is known and constant
  • Lead time is known and constant
  • Receipt of inventory is instantaneous
  • Purchase cost per unit is constant throughout the year
  • The only variable costs are the placing an order, ordering cost, and holding or storing inventory over time, holding or carrying cost, and these are constant throughout the year
  • Orders are placed so that stock outs or shortages are avoided completely
• Q

  Number of pieces to order
• EOQ

  Optimal number of pieces to order
• D

  Annual demand in units for the inventory item
• Co

  Ordering cost of each order
• Ch

  Holding or carrying cost per unit per year
• Solving EOQ

  1. Annual holding cost = Q Ch/2

  2. Annual ordering cost = D Co/Q

  3. Total cost = Annual holding cost + Annual ordering cost
• Reorder Point (ROP)


  When the quantity on hand of an item drops to this amount, the item is reordered
• Lead time (L)


  Time between placing an order and its receipt
• Safety Stock


  Stock that is held in excess of expected demand due to variable demand rate and/or lead time
• Service Level

  Probability that demand will not exceed supply during lead time
• Quantity Discount


  Reduction in price offered by seller on orders of large quantities
• Quantity Discount Model


  1. Total cost = Material cost + Ordering cost + Holding cost

  2. Total cost = (D*C) + (D*Co/Q) + (Q*Ch/2)
• Ordering Cost Factors

  Bill paying, Inventory Inquiries, Salaries and Wages of the purchasing department employees
• Carrying Cost Factors

  Taxes, Theft, Spoilage, Insurance
• Inventory Planning and Control

  Planning on what inventory to stock and how to acquire it, Forecast parts/product demand, controlling inventory levels, feedback measurement to revise plans and forecasts
• 5 uses of inventory - the decoupling function, storing resources, quantity discounts, avoiding stockouts and shortages, irregular supply and demand
• Drop shipping

  directly transfer customer orders and shipment details to your manufacturer or wholesaler, who then ships the goods
• Bulk Shipments

  based on the assumption that buying in bulk is cheaper

  transportation of large quantities of goods in a single shipment
• PROs of Bulk Shipments

  *Highest potential for profitability

  *Fewer shipments mean lower shipping costs

  *Works well with staple products with predictable demand and long shelf life
• CONs of Bulk Shipping

  *Highest capital risk

  * Increased holding cost for storage

  * Difficult to adjust quickly when demand fluctuates