CH7 Inventory Management Assist Prof Banu OZKESER December

CH-7 -Inventory Management Assist Prof Banu OZKESER December, 2015

A quick look to agenda q 7. 1. The Importance of Inventory Management q 7. 2. Inventory Costs q 7. 3. Types of Inventories q 7. 4. Inventory Control Systems q 7. 5. Economic Order Quantity Models (EOQ) q 7. 6. Implementation Examples from Business Life

7. 1. The Importance of Inventory Management Inventory (stock) - materials in a supply chain or in a segment of a supply chain, expressed in quantities, locations and/or values, not used at present, but kept for the future use (consumption/sale).

7. 1. The Importance of Inventory Management Some of the major objectives of Inventory Management: Customer Service Buffering against uncertainty

7. 1. The Importance of Inventory Management In a brief summary: Inventory Management ties up capital, requires handling, uses storage space, deteriorates, sometimes becomes obsolete, requires insurance, incurs taxes, can be stolen or gets lost. Inventory must be considered at each of the planning levels with production planning concerned with overall inventory, master planning with end items and materials requirements planning with components parts and raw material. The primary function of inventory is buffering and decoupling. It serves as a shock absorber between customer demand the manufacturer’s production capability, between input materials required for an operation and the output of the preceding operation, between the manufacturing process and the supplier of raw materials.

7. 2. Inventory Costs

7. 3. Types of Inventories Raw Materials – Raw materials are important for obvious reasons such as the production of goods. The raw goods are what comes from your suppliers and their suppliers. If you do not have a system in place that grants visibility of raw materials, you cannot accurately gauge what you will produce over the next quarter or year. For example, a multi-billion dollar business had to shut down business for four days because they ran out of pallets on which to store and ship their supply. Pallets are very important for shipping and manufacturing companies and if they are ignored, then the business suffers.

7. 3. Types of Inventories Work in Progress – The second type of inventory is composed of the goods currently being produced in your, or a contract manufacturer’s company. Because many companies used to overlook this element, Enterprise Resource Planning (ERP) systems have been implemented to completely track all goods, those even being converted from raw to production, to accurately track profits and assist in the planning of future raw-material purchases.

7. 3. Types of Inventories Finished Goods – This type of inventory is usually controlled by your distributors or by your warehouse. For companies that have many distributors of their product it is important for them to know how much of their product is on the market. Especially when in the case of car manufacturers. It is hard to manufacture for multiple distributors when there is no visibility of your finished goods.

7. 3. Types of Inventories Service Inventory – Distribution inventory barely holds a candle compared to the difficulties of service industry, on of the most difficult of the five types of inventory. Crucial to business, service inventory needs proper management. Global mandates such as recycling and energy regulations need to be managed. You can gather information about failed products, using failure analysis to design better products and be able to leverage parts sales.

7. 3. Types of Inventories Transportation – A supply train of different inventories connected by transportation is the traditional definition of a supply chain, although this has changed now though. Talk to an accountant about the product in-transit and he or she will let you know that the products are in the books or in the books of your trading partners. Accounting for about 5% to 20% of your inventory, this often goes overlooked because the inventory cannot be seen. Being on a plane, truck, or boat does not erase it from your inventory and in-transit inventory is very important to keep track of. If shipments are delayed near the end of accounting periods and there is not appropriate visibility of those products you may receive a supply shipment at the end which would destroy your revenue because in-transit revenue was not accounted for.

7. 4. Inventory Control Systems The Eyeball System: This is the standard inventory control system for the vast majority of small retail and many small manufacturing operations and is very simple in application. The key manager stands in the middle of the store or manufacturing area and looks around. If he or she happens to notice that some items are out of stock, they are reordered.

7. 4. Inventory Control Systems Reserve Stock (or Brown Bag) System: This approach is much more systematic than the eyeball system. It involves keeping a reserve stock of items aside, often literally in a brown bag placed at the rear of the stock bin or storage area. When the last unit of open inventory is used, the brown bag of reserve stock is opened and the new supplies it contains are placed in the bin as open stock. At this time, a reorder is immediately placed. If the reserve stock quantity has been calculated properly, the new shipment should arrive just as the last of the reserve stock is being used.

7. 4. Inventory Control Systems Perpetual Inventory Systems: Various types of perpetual inventory systems include manual, card-oriented, and computer- operated systems. In computer-operated systems, a programmed instruction referred to commonly as a trigger, automatically transmits an order to the appropriate vendor once supplies fall below a prescribed level. The purpose of each of the three types of perpetual inventory approaches is to tally either the unit use or the dollar use (or both) of different items and product lines. This information will serve to help avoid stock-outs and to maintain a constant evaluation of the sales of different product lines to see where the emphasis should be placed for both selling and buying.

7. 4. Inventory Control Systems Controlling Inventory: STEP 1: Inventory Planning STEP 2: Establish order cycles STEP 3: Balance Inventory Levels STEP 4: Review Stocks STEP 5: Follow-up and Control

7. 5. Economic Order Quantity Models (EOQ) The purpose of calculating an economic order quantity is to balance the costs of ordering and the costs of holding stock, such that the two costs are equal or that the sum of the two costsistheminimumtotalcost.

7. 5. Economic Order Quantity Models (EOQ)

7. 5. Economic Order Quantity Models (EOQ) The EOQ Business Scenario is based on: Customer Demand Leadtime Costs

7. 6. Implementation Examples from Business Life Let’s watch our video…

Questions?