Notes: Inventory Management Module 4

10/1/2021

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Inventory – Is the biggest asset in a company. (In order to save money and to make money, that asset
needs to be protected and nature it in the right direction)

Other definition of Inventory:

• Stock keeping items – whether finished goods or raw materials.

• Assets of concern – stocked for the purpose of either conversion through production
(conversion of items for sale) or in the case of finished goods, for conversion into revenue
through sale.
• Stock on hand at a given time – Assets needs to be physical/tangible.

Purpose of Inventory

Protection

• To provide sufficient materials to meet demands for production without any delays in
production/conversion schedules.
• To be able to provide for consumer’s demand at the preferred time/point.

Economic Advantage

• Lowering production cost during longer manufacturing runs.

• Lowering the product cost with the purchase of larger quantities.
• Continuous re-supply to cater the consumer demands.

Other purposes:

• Makes operation/production smooth and efficient

• Helps balance the company’s supply with the market forces of demand
• Ensures against any potential production shutdown due to supplier problems, machine
breakdowns, or stock-out
• Promotes efficient utilization of purchasing through acquisition of large volume buying

Definition of terms:

• Minimum Order Quantity (MOQ) – a small set of stock that seller is willing to sell. (If the
quantity is below the MOQ, the seller might not sell or sell it in a higher price)
• Economic Order Quantity (EOQ) – the ideal quantity a company needs to purchase for its
inventory with a set of variables like total cost of production, demand rate, and other factors.
• ABC Analysis – this inventory categorization splits subjects into three categories to identify
items that have a heavy impact on overall inventory cost.
o Just In Time (JIT) – a technique that arranges raw materials orders from suppliers in
direct connection with production schedules. JIT is a great way to reduce inventory
cost. (Companies receive inventory on an as-needed instead of ordering too much and
risking dead-stock.
o Safety Stock Inventory (SSI) – safety stock inventory management is extra inventory
being ordered beyond expected demand. (This technique is used to prevent stock-
 outs typically cost by incorrect forecasting or unforeseen changes in customer
demand).
o First In First Out (FIFO), Last In First Out (LIFO) – LIFO and FIFO are methods to
determine the cost of inventory. FIFO or first in first out, assumes the older inventory
is sold first. FIFO is a great way to keep inventory fresh. LIFO or last in first out,
assumes the newer inventory is typically sold first. LIFO helps inventory from going
bad.
• Re-Order Point Formula – an inventory management technique that is based on a business’s
own purchase and sale cycle that varies on a per-product basis. (A reorder point is usually
higher than safety stock number to factor in lead time)
• Batch Tracking – is a quality control inventory management technique wherein users can
group and monitor a set of stock with a similar trait. This method helps to track expiration of
inventory or trace defective items back to their original batch.
• Perpetual Inventory Management – is simply counting inventory as soon as it arrives. The most
basic inventory management technique and can be recorded manually with pen and paper or
spreadsheet.
• Demand Forecasting – is based on historical sales data to formulate an estimate of the
expected forecast of consumer demands. It’s an estimate of the goods and services a company
expects customers to purchase in the future.

Types of Inventories:

• Seasonal Inventory – these inventories on hand which adjust based on the demand of the
market (e.g., holiday seasons, valentine’s, mother’s day).
• Anticipated Inventory – these inventories acquired in preparation for the seasonal demand.
• Lot Size Inventory – these inventories acquired based on the production cycles of the
company.
• In-transit Inventory – inventories in the process of transport either on the way to the
production facilities, distribution deport, or to the selling areas.
• In-process Inventory – inventories which either been allocated in production, in the process
of production, or are still in the production holding area.
• Hedge Inventory – inventories purchased because of specific circumstance (e.g., lowering of
price, increased in raw material availability, lowering of transport costs).

Inventory Planning

The function that is responsible for planning and control of materials and supplies inventory, ensuring
that they are properly maintained at optimal levels.

Objectives:

1. Ensure optimal level of inventory of materials and supplies.

2. Initiate replenishment action for stock items.
3. Processing and maintenance of documents and records.
4. Initiate and conduct cycle counting to ensure correct inventory counts.
5. Monitor inventory performance.
Importance of Inventory Planning:

• Balance between of inventory cost and customer service.

• Balance between inventory cost and production cost.
• Balance between inventory cost and re-order cost.
• Balance between inventory cost and transportation cost.

Economic Benefits of Inventory Planning

Activities Performed during Inventory Planning:

• Planning of materials
• Ordering rules
• Inventory replenishment
• Process requisitions
• Expedite purchasing
• Record materials movement
• Cycle inventory
• Document transaction
• Surplus disposition
• Reports

Economic Benefits:

• Proper and timely purchase of goods or stocks

• Elimination of duplicate ordering
• Better production control and planned availability of materials
• Knowledge of material losses and problems
• Identification and disposition of obsolete items
• Accurate inventory records

Inventory Planning Strategies:

ABC Analysis – concept of classifying inventory based on their value to the organization. It gives
prioritization in inventory control.

• Class A items are the most critical ones

– these items required tight inventory
controls, frequent review on demand
forecast and usage rate, highly accurate
part data and frequent cycle count to
verify perpetual inventory balance
accuracy.
• Class B items are of lesser criticality – these requires nominal inventory controls, occasional
review of demand forecast and usage rate, reasonably accurate part data and less frequent
but regular cycle count.
• Class C items have the least impact in terms of warehouse activity and financials and therefore
require minimum inventory controls.

Slide 15 to be continue: