1. Module 7: Inventory Management
Prepared By: Ali Siddiqi

2. Prepared By: Ali Siddiqi
What You Will Learn
Purpose of inventories
Objective of inventory management
Types of inventories
Requirements for an effective inventory system
Inventory control techniques
Prepared By: Ali Siddiqi

3. Purpose of Inventories
To smooth production requirements
To decouple the components of production-distribution system
To provide for anticipated demand
To protect against stock outs
To hedge against price increases
Prepared By: Ali Siddiqi

4. Objective of Inventory Management
To strike a balance between inventory investment and customer satisfaction
Prepared By: Ali Siddiqi

5. Prepared By: Ali Siddiqi
Types of Inventories
Raw material inventory
Inventory that is purchased but is waiting to be processed
Work-in-process inventory
Inventory that is being processed to become output
Maintenance/repair/operating supplies
Inventory used to keep machines and processes running productively
Finished-goods inventory
Waiting for shipment
Used as buffer
Prepared By: Ali Siddiqi

6. Requirements for Effective Inventory System
Track inventory on hand and on order
Reliable forecast of demand
Knowledge of lead times and lead time variability
Classification system for items
Prepared By: Ali Siddiqi

7. Video: Inventory Management System at Cole’s Hardware
Prepared By: Ali Siddiqi

8. Inventory Control Techniques: ABC Analysis
Pareto Principle: 80/20 Rule
Critical few and trivial many
Annual Dollar (Riyal) Volume:
annual demand x cost per unit
Divide inventory into 3 categories:
Class A: High value, low volume (20% of Inv; 70% ADV)
Class B: Moderate value, moderate volume (30% of Inv; 25% ADV)
Class C: Low value, high volume (50% of Inv; 5% ADV)
Prepared By: Ali Siddiqi

9. Inventory Control Techniques: ABC Analysis
Percent of annual dollar usage
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
| | | | | | | | | |
Percent of inventory items
A Items
B Items
C Items
Prepared By: Ali Siddiqi

10. Inventory Control Techniques: Record Accuracy
Firm needs to know inventory on hand
Allows the firm to focus on items needed
Must keep good records of incoming and outgoing inventory
Limited access to inventory storage area
Bins, shelf space, and parts all must be labeled
Prepared By: Ali Siddiqi

11. Inventory Control Techniques: Cycle Counting
Audits
Annual audits: Disadvantageous
Use of ABC classification
A Items: Counted frequently
B Items: Once a quarter
C Items: Twice a year
Prepared By: Ali Siddiqi

12. Inventory Control Techniques: Service Inventories
Inventory in services is highly accessible
Shrinkage
Unaccounted inventory between receipt and sale
Pilferage
Small amount of stolen inventory
Prevention:
Good personnel
Tight control of incoming shipment
Control over all goods leaving facility
Prepared By: Ali Siddiqi

13. Prepared By: Ali Siddiqi
Inventory Models
Independent demand
Dependent demand
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14. Prepared By: Ali Siddiqi
Inventory Costs
Holding Costs
AKA Carrying Costs
Insurance
Spoilage
Pilferage
Warehousing costs
Prepared By: Ali Siddiqi

15. Prepared By: Ali Siddiqi
Inventory Costs
Ordering Costs
Invoices
Determining order amount
Inspection of good
Shortage costs
Opportunity costs
Loss of customer good will
Prepared By: Ali Siddiqi