Professional Documents
Culture Documents
Inventory Management
Inventory Management
Time
Input Purchase ----------> Input Utilized
Product value realized
Inventory
Inventory
Inputs Outputs
Process
• Raw Materials • Finished Goods
• Purchased parts • Scrap and Waste
• Maintenance and
Repair Materials (in warehouses, or
“in transit”)
In Process
• Partially
Completed (often on the
Products and factory floor)
Subassemblies
Inventory
Work in
process
Inventory Level
Supply Rate
Inventory Level
Demand Rate
MEANING
• A physical resource that a firm holds in stock with the
intent of selling it or transforming it into a valuable
state.
• Any stored resource used to satisfy a current or future
need (Raw Materials, Work-in-process, finished
goods, etc)
• Inventory is a list/record for goods and materials,
held available in stock by a business
EFFECTS
Bad
Design
Lengthy Poor
Setups Quality
Machine
Inefficient Unreliable
Breakdown
Layout Supplier
To Expose Problems:
Reduce Inventory Levels
Bad
Design
Lengthy Poor
Setups Quality
Machine
Inefficient Unreliable
Breakdown
Layout Supplier
Remove Sources of Problems and Repeat
the Process
Poor
Quality
Lengthy
Setups
Bad
Machine
Design Inefficient Unreliable
Breakdown
Layout Supplier
The Logistics Flow
Finished
Raw Work-in- goods
materials process inventory
inventory inventory at plant
location
Finished goods
Supplier inventory at field
inventory location
Consumer Retail
inventory inventory
Reworking or
repackaging
of product
Reverse logistic move product backward through the channel for a number of
reason
Example: a customer may return a product because it is damaged/ manufacturer may
need to recall a product because of defects
TYPES
Cycle stock
200
0 Days10 20 30 40 50 60
100
0 Days10 20 30 40 50 60
Order arrival:
Inventory
Next order placed
600 Average
Order
place Cycle
inventory
300
0 Days 10 20 30 40 50 60
In-transit Inventories
• Items that are en route from one location to another
• Considered part of cycle stock even though they are
not available for sale or shipment until after they
arrive at the destination
• In-transit inventory should be considered as inventory
at the place of arrival since the items are not available
for use, sale or subsequent reshipment
Inventory
200 Average
Cycle
inventory
100
8
Safety 10 40
10 20 30
Stock
Days
(50)
100
12
Safety 10 40
20 30
Stock
Days
(40)
100
Safety 8 10 12 40
20 30
Stock
Days
(100)
Speculative Stock
Seasonal Stock
• CARRYING COSTS
– Warehousing or storage
– Handling
– Clerical and staff
– Insurance
– Interest
– Deterioration, shrinkage, evaporation and obsolescence
– Taxes
– Cost of capital
• STOCK-OUT COSTS:
– Loss of Sale
– Failure to meet delivery requirements
– Back ordering costs.
• CAPACITY COSTS:
– Overtime payments when capacity is too small
– Layoffs and idle time when capacity is too large.
DECIDING ON THE INVENTORY
MODEL
• Assume an analyst applies an inventory
model that does not allow for spoilage to a
grocery chain’s ordering policy for lettuce
and formulates the strategy of ordering
lettuce in large amounts every 14 days. A
little thought will show that this is
obliviously foolish. This strategy implies
that lettuce will be spoiled. However it is
not a failure of inventory, it is a failure to
apply the correct model.
Inventory Management
Systems/Models
• While managing inventory one must:
• GOLF:
G – Government, O – Ordinary, L –
Local, F - Foreign
SOS CLASSIFICATION
• Raw Materials especially for agriculture units
2 x ACPO x AUU
EOQ = UC x CCP
Where,
ACPO – Acquisition Costs Per Order
AUU – Annual Usage in Units
UC – Unit Cost
CCP – Carrying Cost Percentage
EOQ (Example#1)
• AUU = 4800 units
• ACPU = Rs.40
• UC = Rs.100
• CCP = 25%
EOQ = √ 2x40x4800
100 x 25%
= 124 UNITS
DO IT YOURSELF…….
• It costs you $150 in overhead per order
• You use 5000 units a year
• Your finance department tells you that
annual carrying costs are equal to 20% of
the value of goods in stock.
• You pay $200 per unit
• You should order…………….?
DO IT YOURSELF…….
• It costs you $150 in overhead per order
• You use 5000 units a year
• Your finance department tells you that
annual carrying costs are equal to 20% of
the value of goods in stock.
• You pay $200 per unit
• You should order…………….?
194 units at a time
EOQ Inventory Order Cycle
Demand
Order qty, Q
rate
Inventory
Level
ave = Q/2
Reorder point, R
Where,
ROP = Reorder Point
SSQ = Safety Stock Quantity
QUD = Quantity used daily
ALT = Average Lead Time (in days)
ROP(Example#1)
dollar
control Dollar control represents the planning
and monitoring of the total inventory
The planning
and monitoring investment that a business makes during
of the total a stated period of time. It helps a
inventory business determine the cost of goods sold
investment that and the amount of gross profit or loss
a business during a given period of time.
makes during a
stated period of
time.
Using Both Systems
unit control
Unit control measures the quantities of
The quantities merchandise that a business handles
of
during a stated period of time. It allows
merchandise
that a business purchasing personnel to see what brands,
handles sizes, colors, and price ranges are
during a stated popular.
period of
time.
Using Both Systems
Merchandise
Available
for Sale
Ending Cost of
Inventory Goods Sold
IMPORTANCE OF INVENTORY
VALUATION
• Costing method has important effect on net income
and asset valuation.
(2)
In a period of rising prices, LIFO has the largest cost
of goods sold and FIFO the smallest.
(3)
In a period of rising prices, FIFO has the largest gross
profit and LIFO has the smallest.
Average Cost
When
When aa unit
unit is
is sold,
sold, the
the
average
average costcost ofof each
each
unit
unit in
in inventory
inventory is is
assigned
assigned to to cost
cost ofof
goods
goods sold.sold.
Cost of Units
Goods ÷ available on
Available for the date of
Sale sale
Inventory Costing Method
LIFO Assumption
• Ending Inventory = $54,000
The cost of the first 9,000 units purchased:
9,000 beginning inventory × $6
• Cost of Goods Sold = $288,000
Details: (8,000 × $8.50) + ($15,000 × $8) +
(10,000 × $7) + (5,000 × $6)