Chapter 9: Inventory management

Inventory management
Is the activity of planning and controlling accumulations of transformed resources as they move through supply netwoeks, operations and processes.
The stored accumulation of transformed resources (materials, information, money, etc)
Where is inventory?
o All processes operations and supply networks accumulate inventory o Between stages in process
o Between processes in operation
o Between operations in supply network
Why is inventory?
Inventory is created to compensate for differences in timing between supply and demand
Types of decisions needed in management of inventory
o How much to order
o When to order
o How to control
Reasons to avoid accumulating inventory
o Ties up money in working capital
o Slows throughput
o Hides problems
o Induces risk of obsolesce
o Can be damaged/lost, may be hazardous to store
o Adds on the information to be managed
Reasons to have inventory
o Insurance against uncertainty (fluctuations in demand/supply)
o Creates “flexibility”
o Allows producer to take advantage of short term fluctuations in demand
o Used to anticipate future demand
o Can reduce overall costs
o Can increase in value
o Fills processing pipeline
Reducing inventory
§ Improve forecasting
§ Tighten supply
§ Increase flexibility
§ Use parallel processes
§ Increase volume flexibility
§ Find alternative delivery chains
§ Reduce throughput time in downstream
Is the right quantity being ordered? Or : how to set order quantity
• Inventory costs (Costs of placing order, Cost of price discount, Costs of not serving customer: stockout cost, Cost associated with risk of inventory becoming obsolete, Working capital cost, Cost of storage
• Inventory profiles
• Economic Order Quantity (EOQ) formula:
– Best balance between pro/con of holding stock
– Holding costs = holding cost/unit * avg inventory
– Ordering costs = ordering cost * number of orders per period
Are inventory order being placed at the right time?
– Safety stocks: demand is not completely predictable the way down to 0 inventory will be much more “bumpy”. This makes it necessary to post reorder earlier to avoid running out of materials

– ROP (reorder point): Point at which stock will fall to zero minus the order lead time

Is inventory being controlled effectively?
– Real world inventory systems are much more complex than the basic models of previous section.

– ABC system: Different inventory management decision rules are needed for different classes of inventory

The pareto rule states that around 80 % of an operations’ sales are accounted for by only 20 % of all stocked items.

• Class A – high usage value items (the 20 in the 80/20)
• Class B – medium usage value (usually the next 30% of items
that account for about 10% of value)
• Class C – low usage value around 50% of items accounting for
around 10% of total value of operations