1. 1 5
Inventory Concepts

2. INVENTORY IS A
LARGE AND COSTLY
INVESTMENT

3. What are Inventories? Finished product held for sale
Goods in warehouses
Work in process
Goods in transit
Any owned or financially controlled raw material, work in process, and/or finished good or service held in anticipation of a sale but not yet sold
CR (2004) Prentice Hall, Inc.

4. Where are Inventories? Inventory locations 9-4
Material
sources
Inbound
transportation
Production
Outbound
Finished goods
warehousing
Customers
Inventory locations
Shipping
Inventories
in-process
Receiving
materials
CR (2004) Prentice Hall, Inc.
9-4

5. Inventory Pipeline 4 Raw & In-Process Finished Goods 1 Vendor
In-Transit to
Mfr.
Plant
Whse
Mfg.
Process
Plant.
In-
Transit
to DCs
Field
Pick &
Load
Custmr
Customer 4 1

6. Inventory Decisions in Strategy
PLANNING
ORGANIZING
CONTROLLING
Transport Strategy •
Transport fundamentals
Transport decisions
Customer
service goals
The product
Logistics service
Ord
. proc. & info. sys.
Inventory Strategy
Forecasting
Inventory decisions
Purchasing and supply
scheduling decisions
Storage fundamentals
Storage decisions
Location Strategy
Location decisions
The network planning process
IMPLEMENTING
CR (2004) Prentice Hall, Inc.

7. Inventory Management Objectives
Good inventory management is a careful balancing act between stock availability and the cost of holding inventory. ,
Stock out probability
Inventory Holding costs
(inventory Carrying Costs)
Service objectives
Setting stocking levels so that there is only a specified probability of running out of stock
Cost objectives
Balancing conflicting costs to find the most economical replenishment quantities and timing
CR (2004) Prentice Hall, Inc.

8. MAIN AIMS OF INVENTORY MANAGEMENT
To improve cash flows
To improve return on investment (ROI, the benefit (return) of an investment is divided by the cost of the investments)
ROI= Gains from investment – Cost of investment
Cost of Investment
$700, $500,000 = 40%
$500,000

9. MEASURES OF INVENTORY MANAGEMENT EFFECTIVENESS
The impact that inventory has on corporate profitability
Measures to decrease inventory-related costs include;
reducing the number of backorders or expedited shipments, purging obsolete or dead stock from the system, or improving the accuracy of forecasts.

10. MEASURES OF INVENTORY MANAGEMENT EFFECTIVENESS (Cont.)
Fill rate is a common measure of the customer service performance of inventory.
Product fill rate: fraction of product demand satisfied from product in inventory (single item) computer
Order fill rate: percentage of units available when multiproduct order is received. Computer+mouse
A 96% fill rate means that 4% of requested units were unavailable when ordered by customer.
Cycle service level: if the store doesn’t run out of stock in 6 out of 10 replenishment cycles, the store achieves a CSL of 60 percent

11. MEASURES OF INVENTORY MANAGEMENT EFFECTIVENESS (Cont.)
inventory turnover ratio would be calculated as units sold divided by units on hand.

12. Inventory Turnover Comparisons

13. Inventory Management Answers Four Important Questions4 3
How to order?
When to order?
What to order?
How much to order?

14. Why Hold Inventory? It enables the firm to achieve economies of scale4 2
It enables the firm to achieve economies of scale
It balances supply and demand
It enables specialization in manufacturing
It provides protection from uncertainties in demand and order cycle
It acts as a buffer between critical interfaces within the channel of distribution

15. Economies of Scale
Inventory is required if an organization is to realize economies of scale in purchasing, transportation, or manufacturing.
Per unit price reductions!
The cost of maintaining this inventory must be “traded off” against the production savings realized.

16. Balancing Supply and Demand
Seasonal supply or demand may make it necessary for a firm to hold inventory. (finished goods)
Demand for a product may be relatively stable throughout the year, but raw materials may be available only at certain times during the year.
Ex: Canned fruits and vegetables

17. Specialization
Inventory makes it possible for each of a firm’s plants to specialize in the products that it manufactures.
The finished products can be shipped to field warehouses where they are mixed to fill customer orders.
Whirlpool Co.- cost savings through specializing manufacturing by plant location and the consolidation of warehouse operations
Focused Factories-specialization by facility

18. Protection From Uncertainties
Inventory is held as protection from uncertainties; that is, to prevent a stock out in the case of variability in demand or variability in the replenishment cycle.
Inventory planning is critical to successful manufacturing operations to protect from uncertainties.

19. Inventory As A Buffer
Inventory is held throughout the supply chain to act as a buffer for the following critical interfaces:
* supplier-procurement
* procurement-production
* production-marketing
* marketing-distribution
* distribution-intermediary
* intermediary-customer/user

20. THE LOGISTICS FLOW Finished goods inventory at plant location Raw
materials
inventory
Work-in-process
inventory
Finished goods
inventory at
field locations
Supplier
inventory
Consumer
inventory
Retail
inventory
Reworking or
repackaging
of product
Forward
logistics flow
Waste and
by-products
Waste
disposal
Reverse logistics flow

21. TYPES OF INVENTORIES
Inventories can be classified based on the reasons for which they are accumulated.
In-transit inventories
Speculative stock
Seasonal stock
Dead stock
Cycle stock
Safety or buffer stock

22. In-transit Inventories
In-transit inventories are items that are en route from one location to another
For calculating inventory carrying costs,in-transit inventory should be considered as inventory at the place of shipment origin since the items are not available for use, sale,etc.

23. Speculative Stock
Speculative stock is inventory held for reasons other than satisfying current demand
Materials may be purchased in volumes larger than necessary:
to receive quantity discounts,
because of a forecasted price increase
materials shortage,
to protect against the possibility of a strike.

24. Seasonal Stock
Seasonal stock is a form of speculative stock that involves the accumulation of inventory before a seasonal period begins
This often occurs with agricultural products and seasonal items.
Ex: back-to-school

25. Dead Stock
Dead stock refers to items for which no demand has been registered for some specified period of time.
Dead stock might be obsolete throughout a company or only at one stock keeping (SKU) location.
J.C. Whitney Company-sells auto parts that are no longer produced
Transshipment of dead stock-Asia markets

26. Cycle Stock
Cycle stock is inventory that results from replenishment of inventory sold or used in production.
It is required in order to meet demand under conditions of certainty; that is, when the firm can predict demand and replenishment times (lead times).
Orders are scheduled to arrive just as the last unit is sold-no extra inventory beyond the cycle stock is required.

27. Cycle Stock
Lot or batch size: The quantity that a stage of supply chain either produces or purchases at a given time
Q: quantity in a lot or batch size
Cycle stock: Q / 2

28. Safety or Buffer Stock
Safety or buffer stock is held in excess of cycle stock because of uncertainty in demand or lead time.
Average inventory at a stock keeping location that experiences demand or lead time variability = half the order quantity (cycle stock)+ the safety stock
Inventory level
time

29. Factors Influencing Safety Stocks
Forecast error
Exposure to stockout
Lead time
Service level requirement 4 14

30. Under certainty Demand per day:20 units Order quantity: 400 units
Lead time: 10 days

31. The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time4
Demand:20 units A . O r d e r q u a n t i t y o f 4 u n i t s I n v e n t o r y O r d e r O r d e r a r r i v a l a r r i v a l 4 O r d e r O r d e r p l a c e d p l a c e d A v e r a g e c y c l e i n v e n t o r y 2 D a y s 1 2 3 4 5 6

32. I n v e t o r y O d p l a c i A g D s 1 2 3 4 5 6 B . q u f
The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time 4 5
Demand:20 units

33. A v e r a g c y l i n t o O d p C . q u f 6 s D 1 2 3 4 5 I
The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time 4 6
Demand:20 units

34. Demand fluctuates between 15 and 25 units per day
With variable demand
Demand fluctuates between 15 and 25 units per day
Lead time is constant

35. Average Inventory Investment Under Conditions of Uncertainty11 A . W i t h v a r b l e d m n
Average Inventory Investment
Under Conditions of Uncertainty I o y g c S s ( f k 5 ) 1 2 8 3 4 D { 4
Demand:2025 units

36. Variable lead time Lead time fluctuates between 8 and 12 days
Demand per day is constant

37. Average Inventory Investment Under Conditions of Uncertainty12
Average Inventory Investment
Under Conditions of Uncertainty B . W i t h v a r b l e d m I n o y A g c ( 1 4 ) 2 10 { 3 D S s f k 4
If orders arrive 2 days late

38. With variable demand and lead time
Lead time fluctuates between 8 and 12
Demand per day fluctuates between 15 and 25

39. Average Inventory Investment Under Conditions of Uncertainty. W i t h v a r b l e d m n I o y A g c ( 2 ) 1 10 { 3 4 D S s f k 8
Average Inventory Investment
Under Conditions of Uncertainty 4 13

40. The EOQ Model E O Q = 2 P D C V where:
P = The ordering cost (dollars per order)
D = Annual demand or usage of the product
(number of units)
C = Annual inventory carrying cost (as a percentage
of product cost or value)
V = Average cost or value of one unit of inventory
The EOQ Model 4 7

41. Cost Trade-offs Required to Determine the Most Economic Order Quantity
Size of order (Q)
Annual cost
(dollars) L o w e s t a l c ( E O Q )
Total cost
Inventory
carrying
cost
Ordering cost
Cost Trade-offs Required to Determine the Most Economic Order Quantity 4 8

42. Cost Trade-offs Required to Determine the Most Economic Order Quantity4 9
Order
Quantity (Q)
Number
of Orders
(D/Q)
Ordering
Cost
PX (D/Q)
Inventory
Carrying
1/2 Q X C X V
Total 40 60 80
100
120
140
160
200
300
400 48 35 30 24 18 12
$ 4,800
3,200
2,400
1,920
1,600
1,400
1,200
960
720
480
$ 500
750
1,000
1,250
1,500
1,750
2,000
2,500
3,750
5,000
$ 5,300
3,950
3,400
3,170
3,100
3,150
4,460
4,470
5,480
D = 4800 units per year
P = $40 per order
C = $1 per unit
V= $25 per unit

43. Assumptions of the Simple EOQ Model
A continuous, constant, and known rate of demand.
A constant and known replenishment cycle or lead time.
A constant purchase price that is independent of the order quantity or time.
A constant transporation cost that is independent of the order quantity or time.
The satisfaction of all demand (no stockouts are permitted).
No inventory in transit.
Only one item in inventory, or at least no interaction among items.
An infinite planning horizon.
No limit on capital availability. 10 4

44. Fixed order point-Fixed order interval policy
Fixed order point policy: EOQ-an order is placed when inventory on hand reaches a predetermined min. level necessary to satisfy demand during order cycle
Fixed order interval policy: Inventory levels are reviewed at a certain –set time interval like every week