1. Supply Chain Management Principles
LB 4: Inventory Basics

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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