Supply Chain Management Principles LB 4: Inventory Basics

LB Objectives Differentiate between fixed and variable costs and direct and indirect costs Describe the four types of inventory List several key performance indicators for successful inventory management Understand inventory turns Differentiate between inventory and inventory management LO1

What is Inventory Inventory are physical assets held or stored for use in manufacturing or direct sale to customers Inventory is an asset that represents a monetary expense and needs to be turned to make a profit Types of inventory and risks: Fruits and vegetables have different spoil dates Electronic products belong to an industry undergoing rapid change. Their value decreases immediately after the sale Clothing and high-fashion items that change seasonally LO2

What is Inventory Management? Inventory management and inventory control refers to the long-range, mid-range, and day-to-day processes, protection, and deployment necessary - including control of assets - in inventory Inventory management balances risk between stock-outs Companies need to have raw materials to satisfy their manufacturing needs and finished goods to meet the needs of their customers Companies cannot afford to have more inventory than they need Companies cannot afford to have less inventory than their customers need LO1

Inventory Costs The cost specified on a purchase order is the baseline cost or purchased item cost When considering total inventory costs, defined as acquisition costs, the following cost elements must be added to the purchased item cost to calculate the total acquisition or carrying costs: Warehousing costs (Receiving, picking, etc.) Labor Risk of expiration or obsolescence that requires disposal Damage LO1

Types of Inventory Raw Materials Work in process Finished goods Maintenance, Repair, and Operating (MRO) Other raw materials include: Parts Components Semi-processed goods Catalysts Commodities Critical components Packaging LO2

Finished Goods Maybe Unsellable Because: Obsolete – No longer has value or expired Reworks – Manufactured with some form of defect that must be re-manufactured to make it sellable Returns or Reverse Logistics – Merchandise brought back from customers that requires inspection or rework Quarantine – Merchandise requiring a holding period to determine if quality has been maintained MRO products are consumed in the manufacturing operations. They are consumed to support operations, e.g. grease to lubricate machines LO2

Lead Time & Inventory Management Lead time – The time from placing the order with a supplier to receiving the goods Lead time – Includes administrative order processing time and manufacturing time Lead time – Includes transportation from supplier to destination Reorder point must be accurately defined to avoid stock-outs Long lead times require higher inventory levels to avoid stock-outs LO3

Inventory Turns Inventory turns tracks how often a product is used and replaced in a given time period – usually one year High inventory turns – Means products are moving quickly Low inventory turns – Means low sales, or overstocking of unneeded items To improve efficiency and reduce costs, companies use: Lean – Minimize investment and carrying cost Six sigma – 5-S - LO1

Lean and JIT Lean - creates efficient flow. Tasks that do not add value are removed and eliminated JIT – Materials are received as needed thereby reducing warehousing handling and holding costs JIT eliminates the task of moving materials to storage and later retrieving them If extended to manufacturing, finished goods can be manufactured and immediately loaded for shipping thus eliminating stocking and retrieval operations LO5

Supplier-Managed Inventory (SMI) and Third-Party Systems SMI occurs when the supplier is responsible for monitoring and replenishment of inventory as needed Retail stores may use SMI with representatives responsible for re-stocking based on a previously agreed upon stock level Local supermarkets also use SMI’s such as the bread delivery company Similar inventory management can be maintained by third-party warehousing Inventory levels are managed and controlled by contract service providers LO5