INTRODUCTION TO INVENTORY

Inventory

The objective of inventory management has been to keep enough inventory to meet customer demand and also cost effective. However, inventory has not always been perceived as an area to control cost.

The high cost of inventory has motivated companies to focus on efficient supply chain management and quality management. They believe that inventory can be significantly reduced by reducing uncertainty at various points along the supply chain.

With efficient supply chain management, products or services are moved from one stage in the supply chain to the next according to a system of constant communication between customers and suppliers.

Inventory decisions are basically how much to order and when to order to replenish inventory to an optimal level.

Type of Inventory

· Raw Materials

· Purchased parts and supplies

· Work-in-process (partially completed) products (WIP)

· Items being transported

· Tools, and equipment

Two forms of Demand

· Dependent Demand à items are used internally to produce a final product

· Independent Demand à items are final products demanded by external customers

Inventory Cost

· Carrying Cost is the cost of holding an item in inventory.

Include the following items:

1) Facility Storage

2) Material handling

3) Labor

4) Record Keeping

5) Borrowing to purchase inventory

6) Product deterioration, spoilage, breakage, obsolescence, pilferage

· Ordering Costs is the cost of replenishing inventory

· Shortage Costs is the temporary or permanent loss of sales when demand cannot be met.

Inventory Control System

· Continuous Inventory System (fixed-order-quality) à a constant amount is ordered when inventory declines to a predetermined level.

· Periodic Inventory System (fixed-time-period) à an order is placed for a variable amount after a fixed passage of time.

· The ABC Classification System an inventory classification system in which a small percentage of (A) items account for most of the inventory value.

Economic Order Quantity Models

EOQ is the optimal order quantity that will minimize total inventory costs

Assumptions of EOQ model

1) Demand is known with certainty and is constant over time

2) No shortage are allowed

3) Lead time for the receipt of order is constant

4) The order quantity is received all at once

Order Cycle is the time between receipt of orders in an inventory cycle

EOQ is a continuous system.

Production Quantity Model is an inventory system in which an order is received gradually, as inventory is simultaneously being depleted

Quantity Discounts

A quantity discount is a price discount on an item if predetermined numbers of units are ordered.