1. Inventory Control: Part 1- Fundamentals

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

3. 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

4. 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)

5. Lot Size Stocks: Instantaneous Receipts

6. Lot-Size Stocks: Non-Instantaneous Receipts

7. 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

8. 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)

9. 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 / 200 = 45 Days

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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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.