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01 Inventory Management Introduction
01 Inventory Management Introduction
01 Inventory Management Introduction
Introduction
Importance of Inventory
Importance of Inventory
Process Demand
Purpose Others
stage Type
Raw Materials
WIP Independent Cycle Spares
Finished Goods Dependent Safety Consumable
Seasonal
Pipeline
Independent vs. Dependent Demand
Independent Demand
(demand for item is independent
of demand for any other item)
Dependent Demand
(demand for item is dependent
upon the demand for some
other item)
Independent vs. Dependent Demand..
Demand
Company Customers Parent Items
Source
Material
Finished Goods WIP & Raw Materials
Type
Method of
Forecast & Booked Calculated
Estimating
Customer Orders
Demand
Planning
EOQ & ROP MRP
Method
Inventory Type : Purpose
• Seasonal stocks
– These are accumulated to absorb seasonal fluctuations
in supply or demand.
• Cycle stocks
– Due to fixed transportation and handling charges or set
up requirements, it is economical to order or produce
large quantities at a time.
• Safety stocks
– These are built as a hedge against uncertainties in
supply or demand.
• Pipeline stocks
– Inventories in-transit.
ABC Analysis
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0—
10 20 30 40 50 60 70 80 90 100
Percentage of SKUs
ABC Problem
Booker’s Book Bindery divides SKUs into three classes,
according to their dollar usage.
Calculate the usage values of the following SKUs and determine
which is most likely to be classified as class A.
Quantity
SKU Unit Value Annual Dollar
Description Used per
Number ($) Usage ($)
Year
1 Boxes 500 3.00 = 1,500
2 Cardboard 18,000 0.02 = 360
(square feet)
3 Cover stock 10,000 0.75 = 7,500
4 Glue (gallons) 75 40.00 = 3,000
5 Inside covers 20,000 0.05 = 1,000
6 Reinforcing tape 3,000 0.15 = 450
(meters)
7 Signatures 150,000 0.45 = 67,500
Total 81,310
ABC Problem
Class C
100 – Class B
Class
90 – A
Percentage of Dollar Value
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0–
10 20 30 40 50 60 70 80 90 100
Percentage of SKUs
Inventory Cost
• Holding costs - associated with holding or
“carrying” inventory over time
• Shortage cost
Terms used in Inventory
• Material cost = Ci (Average price paid per unit purchased is a key cost in
the lot-sizing decision )
• Fixed ordering cost = Co (Fixed ordering cost includes all costs that do not
vary with the size of the order but are incurred each time an order is placed)
• Holding cost = CH = %*Ci (Holding cost is the cost of carrying one unit in
inventory for a specified period of time i.e. $ CH/Unit/Year)
• Obsolescence • Supplies
• Insurance • Forms
• Extra staffing • Order processing
• Interest • Clerical support
• Pilferage • etc.
• Damage
• Warehousing Setup Costs (Cs)
• etc. • Clean-up costs
• Re-tooling costs
• Adjustment costs
• etc.
Inventory Cost
• Obsolescence cost
• Handling cost
Vary with quantity of product received , ZERO otherwise
• Occupancy cost
Vary with quantity of product stored, ZERO otherwise
• Miscellaneous costs
• Receiving costs
Administrative work such as purchase order matching with
updating inventory records
Quantity dependent should not be included here
• Transportation costs
Fixed cost should be included here
Shortage Costs
So…. It depends on
How company handles the problem ?
Shortage Costs
• Permanent
– Lost profits due to unsatisfied demand
– Lost profits of future sales
• Temporary (CB)
– Backordered, so not necessarily lost
– Special clerical & paperwork costs
– Extraordinary transportation cost to customer