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COPMAN - Inventory Management

This document discusses key concepts in inventory management. It defines inventory types, functions, and objectives. Effective inventory management requires tracking inventory levels, demand forecasting, and understanding costs like holding, ordering, and shortage costs. Common inventory systems include periodic counting and perpetual systems. Economic order quantity models seek to minimize total inventory costs by balancing ordering and carrying costs. Reorder points and safety stock help manage risk of stockouts.

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35 views

COPMAN - Inventory Management

This document discusses key concepts in inventory management. It defines inventory types, functions, and objectives. Effective inventory management requires tracking inventory levels, demand forecasting, and understanding costs like holding, ordering, and shortage costs. Common inventory systems include periodic counting and perpetual systems. Economic order quantity models seek to minimize total inventory costs by balancing ordering and carrying costs. Reorder points and safety stock help manage risk of stockouts.

Uploaded by

Ryl Soriano
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Inventory Management

1. Inventory: a stock or store of goods


 Independent demand is uncertain. Dependent demand is certain.

Types of Inventories

 Raw materials & purchased parts


 Partially completed goods called work in process
 Finished-goods inventories
 (manufacturing firms) or merchandise (retail stores)
 Replacement parts, tools, & supplies
 Goods-in-transit to warehouses or customers (pipeline inventory)

Functions of Inventory

 To meet anticipated demand


 To smooth production requirements
 To decouple operations
 To protect against stock-outs
 To take advantage of order cycles
 To help hedge against price increases
 To permit operations
 To take advantage of quantity discounts

Objective of Inventory Control

• To achieve satisfactory levels of customer service while keeping inventory costs within
reasonable bounds

• Level of customer service


• Costs of ordering and carrying inventory

Effective Inventory Management

 A system to keep track of inventory


 A reliable forecast of demand
 Knowledge of lead times
 Reasonable estimates of
• Holding costs
• Ordering costs
• Shortage costs
 A classification system

Inventory Counting Systems

• Periodic System Physical count of items made at periodic intervals (Weekly, Monthly) In order
to decide how much to order of each item.
• Perpetual Inventory System System that keeps track of removals from inventory continuously,
thus monitoring current levels of each item

• Two-Bin System - Two containers of inventory; reorder when the first is empty

• Universal Bar Code - Bar code printed on a label that has information about the item to which
it is attached

Key Inventory Terms

• Lead time: time interval between ordering and receiving the order

• Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year

• Ordering costs: costs of ordering and receiving inventory

• Shortage costs: costs when demand exceeds supply

ABC Classification System

 Classifying inventory according to some measure of importance and allocating control efforts
accordingly.

Cycle Counting

• A physical count of items in inventory

• Cycle counting management

• How much accuracy is needed?


• When should cycle counting be performed?
• Who should do it?

Economic Order Quantity Models

 Economic order quantity model


 Economic production model
 Quantity discount model

Assumptions of EOQ Model

 Only one product is involved


 Annual demand requirements known
 Demand is even throughout the year
 Lead time does not vary
 Each order is received in a single delivery
 There are no quantity discounts

Economic Production Quantity

 Production done in batches or lots


 Capacity to produce a part exceeds the part’s usage or demand rate
 Assumptions of EPQ are similar to EOQ except orders are received incrementally during
production

When to Reorder with EOQ Ordering

 Reorder Point - When the quantity on hand of an item drops to this amount, the item is
reordered
 Safety Stock - Stock that is held in excess of expected demand due to variable demand rate
and/or lead time.
 Service Level - Probability that demand will not exceed supply during lead time.

Determinants of the Reorder Point

 The rate of demand


 The lead time
 Demand and/or lead time variability
 Stockout risk (safety stock)

Quantity Discount Model

 Quantity Discount – are price reductions for large orders offered to customers to induce
them to buy in large quantities.

Fixed-Order-Interval Model

 Orders are placed at fixed time intervals


 Order quantity for next interval?
 Suppliers might encourage fixed intervals
 May require only periodic checks of inventory levels
 Risk of stockout

Fixed-Interval Benefits

• Tight control of inventory items

• Items from same supplier may yield savings in:

• Ordering
• Packing
• Shipping costs

• May be practical when inventories cannot be closely monitored

Fixed-Interval Disadvantages

 Requires a larger safety stock


 Increases carrying cost
 Costs of periodic reviews

Single Period Model


 Single period model: model for ordering of perishables and other items with limited useful
lives
 Shortage cost: generally the unrealized profits per unit
 Excess cost: difference between purchase cost and salvage value of items left over at the
end of a period

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