Inventory Management

In this chapter, we will explore why inventory is important to an organization.

Inventories are important to all types of organizations, their employees, and their supply
chains.
Inventories profoundly affect everyday operations because they must be counted, paid for,
used in operations, used to satisfy customers, and managed.

There are typically three categories when classifying inventory (using the A-B-C method).
• 3 classes based on dollar usage
• Review A’s frequently to reduce the average lot size and to ensure timely deliveries
from suppliers
• Control the B’s with an intermediate level of control
• C’s require less attention

The above classifications usually fall into the “80/20 Rule”, where 80% of your dollars are tied
up in 20% of your items. There are the class-A items, and should be managed very closely.

Now let’s discuss “Economic Order Quantity (EOQ) briefly.

The formula:
Total annual cycle-inventory cost
Total costs = annual holding cost + annual ordering or set up cost
Or…
C = (Q/2)(H) + (D/Q)(S)
Where:
C = total annual cycle-inventory cost
Q = lot size
H = holding cost per unit per year
D = annual demand
S = ordering cost or set up cost per lot

The text will give you excellent examples of how to calculate the EOQ, and the effects
increasing or decreasing:

 Demand
 Order/Setup costs
 Holding costs

As an operations manager, you’ll want to work very closely with your organization’s materials manager
and/or supply chain manager to ensure the most cost effective means of controlling inventory, while of
course meeting your customer’s demands.

Inventory is necessary in order to keep your operation, however excess inventory is wasteful. Excess
inventory ties-up money, could be lost or damaged, or can even be obsoleted.

It’s your job, as an operations manager, to always control inventory levels and dollars.