Inventory Management

Definitions
Inventory-A physical resource that a firm
holds in stock with the intent of selling it or
transforming it into a more valuable state.

Inventory System- A set of policies and
controls that monitors levels of inventory and
determines what levels should be maintained,
when stock should be replenished, and how
large orders should be dispatched.
What Is Inventory?
Stock of items kept to meet future demand
Purpose of inventory management
how many units to order
when to order
Inventory
Where do we hold inventory?
Suppliers and manufacturers
warehouses and distribution centers
retailers
Types of Inventory
Raw materials
Purchased parts and supplies
Work-in-process (partially completed) products (WIP)
Items being transported (In transit)
Maintenance, Repair and Operating (MRO)
Types of Inventory
Zero Inventory?
Reducing amounts of raw materials and purchased
parts and subassemblies by having suppliers deliver
them directly.

Reducing the amount of works-in process by using
just-in-time production.

Reducing the amount of finished goods by shipping
to markets as soon as possible.
Functions / Need of Inventory
To meet anticipated demand
To smooth production requirements
To protect against stock-outs
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
Continuity of productive operations
Effective use of capital
Economy of Buying
Reduction in risk of loss
Reduction in administrative work load
Independent Demand
A
B(4) C(2)
D(2) E(1) D(3)
F(2)
Dependent Demand
Independent demand is uncertain.
Dependent demand is certain.
Inventory
Two Forms of Demand
Dependent
Demand for items used to produce final
products
Tires stored at a Goodyear plant are an
example of a dependent demand item
Independent
Demand for items used by external
customers
Cars, appliances, computers, and houses are
examples of independent demand inventory
Inventory at WAL
-
MART
Making sure the shelves are stocked with tens of thousands of
items at their 5,379 stores in 10 countries is no small matter for
inventory managers at Wal-Mart.

Knowing what is in stock, in what quantity, and where it is
being held, is critical to effective inventory management.
With inventories in excess of $29 billion, Wal-Mart is aware of
the benefits from improved inventory management.

They know that effective inventory management must include
the entire supply chain.
The firm is implementing radio frequency identification
(RFID) technology in its supply chain.

When passed within 15 of a reader, the chip activates, and its
unique product identifier code is transmitted to an inventory
control system.
Cost associated with Inventory
Inventory Carrying Cost
Capital Cost
Storage Cost
Deterioration & Obsolescence
Insurance Cost