Inventory Control: Part 1- Fundamentals

Inventories Materials and Supplies Needed to Operate Business Substantial Part of Total Assets – 20% to 60% In Manufacturing Company It is Desirable to Reduce Inventory (Lean) but We Cannot Eliminate It.

Types of Inventories By Location - Raw Materials - Work-in-Process (WIP) - Finished Goods (Including Distribution) - Supplies (Maintenance, Repair, Operational) By Demand - Independent Demand - Dependent Demand

Types of Inventories By Function - Lot-Size (Cycle or Replenishment) - Instantaneous (Purchase) - Non-Instantaneous (Produce) - Safety (Fluctuation or Buffer) - Anticipation (Seasonal) - Transportation (Pipeline) - Hedge (Beyond Scope of Class)

Lot Size Stocks: Instantaneous Receipts

Lot-Size Stocks: Non-Instantaneous Receipts

Safety Stocks Used for Emergencies Finished Goods: Unexpected Demand (Level Related to Customer Service) Raw Materials: Orders Not Received Work-in-Process (WIP): Worker Unavailable or Machine Breakdown - Decoupling Inventory Also Known as Buffer or Fluctuation Inventory

Inventory Costs Item Costs Carrying or Holding Costs (Capital, Storage, Risk) Ordering Costs (Purchase, Production Control, Set Up, Lost Capacity) Stockout Costs Capacity Associated Costs (Overtime, Hiring, Training, Extra Shifts, Layoff)

Inventory Ratios Inventory Turns = Annual Cost of Goods Sold / Average Inventory in Dollars E.g. $1,000,000 / $500,000 = 2 Days of Supply = On Hand / Daily Usage E.g. 9000 / 200 = 45 Days

Evaluating Inventory First In First Out (FIFO) Last In First Out (LIFO) Average Cost Standard Cost

ABC Inventory Classification Amount of Control Over an Item (Stock-Keeping Unit or SKU) Depends on Value Pareto’s Law: A Small Percentage of Items Account for Large Percentage of Value Typically - A Items: 20% of Items Account for 80% Value - B Items: 30% of Items Account for 15% Value - C Items: 50% of Items Account for 5% Value

Steps in ABC Analysis 1 – Determine Annual Usage for Each Item 2 – Multiple Annual Usage of Each Item by Cost 3 – Sort Items According to Annual Dollar Usage 4 – Cumulate Annual Dollar Usage and Cumulate Percentage of Items 5 – Examine Annual Usage Distribution and Classify Items A, B, or C Based on Percentage of Annual Usage

ABC Example Part Number Unit Usage Unit Cost $ Annual $ Usage 1 1100 2 2200 600 40 24000 3 100 4 400 1300 5 60 6000 6 10 25 250 7 200 8 1500 3000 9 500 Totals 5510   38250

ABC Answer: By Item Type Part Number Unit Usage Unit Cost $ Annual $ Usage Cumulative $ Usage Cumulative % $ Cumulate % Items Class 2 600 40 24000 62.75 10 A 5 100 60 6000 30000 78.43 20 8 1500 3000 33000 86.27 30 B 1 1100 2200 35200 92.03 4 1300 36500 95.42 50 500 37000 96.73 C 3 400 37400 97.78 70 9 200 37800 98.82 80 6 25 250 38050 99.48 90 7 38250 100.00

ABC Answer: By Item Usage Part Number Unit Usage Unit Cost $ Annual $ Usage Cumulative $ Usage Cumulative % $ Cumulate % Items Class 2 600 40 24000 62.75 10.89 A 5 100 60 6000 30000 78.43 12.70 8 1500 3000 33000 86.27 39.93 B 1 1100 2200 35200 92.03 59.89 4 1300 36500 95.42 83.48 10 500 37000 96.73 92.56 C 3 400 37400 97.78 94.37 9 200 37800 98.82 98.00 6 25 250 38050 99.48 98.19 7 38250 100.00

Control Using ABC A Items Need High Degree of Control and Frequent Review. B Items Need Normal Control. C Items Need Simple Control – MRP May Not be Needed – Use Safety Stocks or Two-Bin System.