1. Inventory Management

2. Introduction What: Managing Inventory Where: Any business that maintains inventory Why: Inventory is a significant contributor to costs

3. Functions of Inventory Separate (decouple) parts of the production process Stock of goods for customers Take advantage of quantity discounts Hedge against inflation

4. Types of Inventory Raw Material Work In Process Maintenance / Repair / Operating Finished Goods

5. Inventory Classification ABC Analysis A type of Pareto analysis Focus resources on a few critical inventory items Annual demand x Cost of item

6. ABC Analysis Class A – High dollar volume – 15% of items, 80% of dollar volume Class B – Medium dollar volume – 30 % of items, 15% to 25% of dollar volume Class C – Low dollar volume – 55% of items, 5% of dollar volume

7. Inventory Policies Purchasing resources much higher for A items Tighter physical control for A items Careful forecasting for A items

8. Record Keeping and Cycle Counting Cycle count – an audit that compares actual inventory to recorded inventory Frequency of count depends on class Eliminate shutdown for a full count Eliminate annual adjustments Use trained personnel for dedicated counts

9. Other Terms SKU – Stock Keeping Unit (item number) Shrinkage Pilferage Holding Cost Ordering Cost Setup Cost (includes Ordering Cost) Setup Time

10. Economic Order Quantity Model Demand is known, constant, independent Lead time known and constant Receipt instantaneous and complete No quantity discount Variable costs are setup and holding costs Stockouts can be avoided

11. Minimizing Costs Order Quantity Annual Cost Holding Cost Curve Total Cost Curve Order (Setup) Cost Curve Optimal Order Quantity (Q*)

12. Reorder Point Reorder Point (ROP) Time Inventory Level Average Inventory (Q*/2) Lead Time Optimal Order Quantity (Q*)