Section D- Inventory Management

Define Inventory and inventory management
Those stocks or items used to support production (raw materials and work-in-process items), supporting actvities ( maintenance, repair, and operating supplies), and customer service (finished goods and spare parts). Up to 20 to 60 percent capital can be tied up into inventory.

Inventory management- The branch of business management concerned with planning and controlling inventories. Inventory management s requred at any organzation that carres inventory. The role involves planning and controlling inventory from a supply chain perspective and an internal process perspective.

Supply chain perspectve of inventory management is concerned with the inflows and outflows at each stage, from the ordering of raw materials to the customer handoff of fnished goods. Therefore this area can benefit strongly from inventory visibility and supply chain collaboration.

Second perspective of inventory managment is an internal or enterprisewide view of inventory processing. Inventory feeds into production and/or result of production, so planners, master planners, and production schedulers coordinate wth each other at level of production planning refinement.

Identify Key supply chain performance indicators relevant to inventory managment
Reduction of inventory cost- related to holding, ordering, and transorting materials, supplies, and finished goods at various points along the chain

Achievement of customer service targets related to the quality, availability, and on-time delivery of products and services (which may depend upon availability of supplies)

Keeping too little inventory in the system can result in such dilemmas as frustratingly long lead times or broken orders, which in turn could lead to lost customers and lower market share. On the other hand, too much inventory could have a negative financial mpact and greater isk of reduction in inventory value or write-offs of obsolete inventory.

The tightrope you walk with invenotyr management is to reduce the cost of holding and transportng goods while meeting or exceeding customer service goals.

Describe the factors that must be weghted when setting an inventory policy
Inventory policy is a way of formalizing the results of strategic inventory decsions so they can be implemented consistently. broad level, inventory policy could specify centralized or decentralized inventory planning or warehousing, frequency of communications. On a specific level, inventory policy can specify rules for order quantities, timing, exceptins to the rule and amounts of specific items.

Customer Demand. Customer demand is knowin in advance of production and/or is forecasted. Inventory policy must compensate for variability in demand forecasts.

Planning horizon, is the amount of time a plan extends into the future. The duration of the planning horizon affects necessary inventory levels; long-term plans may provide sufficient time to change system capacity.

Replenishment lead time- The time requred to replensh stock at various locations in the supply chain is a key inventory policy input, especially for long or highly variable lead times.

Product varety- Similar products may compete for budget allocations or retail shelf space and thus need interconnected inventory policies. Product families are also planned together.

Inventory costs- Inventory cost include order costs (production and transportation) and inventory carrying costs. These cost are disccused later in this section.

Customer service requrements- Inventory policy specifes a level of saftey stock per item and location that balances minimizing failure to fill customers orders within an acceptable time against increassing inventory costs.

Identify the reason why inventory would be managed in aggregate and at the item level
Aggregaton- is the concept that pooling random variables reduces the relative variance of the resulting aggregated varialbe. for exapmple, the relative variance in sales of all models of automobiles sold by a firm is less than that for a single model. Aggregate inventory management is primarily concerned with the financial impact of inventories, which means getting to an optimal level of inventory that can produce the greatest overall profit for the organization and the supply chain.

Aggrating or grouping inventory helps inventory managers determine the cost and benefits of a particular group of inventory. Inventory can be grouped by:

Demand pattern
Production process
Stage of production flow
Relative value to the organization (ABC inventory)
Produc or SKU family or type( finished goalls with similar functions but variations in models, packagin, colors or styles)
Distriubtion pattern (items that orginate at the same source or are to be delivered to the same location or customer zone)

-Inventory is aggregated prior to analysis not only because the large number of indivdual items in some organizations would be impractical to analyze indvidually but also because when forecasting supply and demand patterns, aggregate-level forecast are more accurate than item-level forcasts.

Used to determine
determine the types of inventory to hold
optimize the flow of inventory and provde sutable buffers between stages
match supply with demand
Set inventory objectives and inventory policy
Calculate inventory cost by category
Peroform sales and operations planning, including demand management and production and resource planning.

Identify the main types of inventory
Raw materials inventory- Raw materials are purchased parts, materials, or subasssemblies to a production process that have been acquired but have not yet entered production

Work-in-process (WIP) inventory- Work in process inventory includes goods in various stages of completion throughout the plant, including all material from raw material that has been released for initial processsing up to completely processed material awaitng final inspection and acceptance as finsihed goods inventory. In orther words, work in process inventory is inventory in which value has been added but it is not yet a finished good.

Finished goods inventory. These are the finished, ready to use products waiting to be purchased by the customer.

MRO (maintenance/repair/operating supplies) inventory- MRO inventory includes spare parts, lubricants, hand tools, and cleaning supplies that are needed to maintain production but are not in the final product. MRO is expensed rather than being an asset o the balance sheet like the other types of inventory. Attention to production machinery and MRO forecasing can reduce equipment costs and downtime.

In-transit inventory- In transit inventory is the transportation network and the distribution system, inlcuding the flow through intermediate stocking points.

Anticipation inventory- additonal inventory above basic ppleine stock to cover projected trens of increasing sales, planned sales promotion programs, seasonal fluctuatons, plant shutdowns, and vacatons. It is inteded to cover the demand projected in the organzations demand plan.

Safety stock is held as a buffer agains mscalulatons of timing or quantity.

Lot size inventory is the purchase manufactur of inventoru in quantities grater than needed to recive a quanity discount

Hedge inventory- is not commonly used term in organizations, but manage it it involves managing risk by building, buying or contractually guranteeing addtional inventory at a set price.

Buffer inventory- Buffers are materials maintained to keep production throughput safety steady at work centers. (a quantity of materials awaiting futher processing.)

Decoupling- Creating independence between supply and use of material commonly denote providing inventory between operations so that fluctuations in the production rate of the supplying operation do not sonstrain production.

Describe valid reasons for holding inventory
Acquisition cost- the cost required to obtain one or more units of an item.

Landed cos- The product cost plus the costs of logistics, such as warehousing, transportation, and handling fees. Landed costs for puchased inventory are the sum of all direct cost.

Carrying cost (holding cost)- Customer service targets. Use of safety stock to satisfy unplanned demand should be considered normal to a point. Inventory policy can be used to set an acceptable frequency for use of safety stock. Maybe as high as 40 percent rarely lower than 15 percent.

Storage cost- include allocations for rent, operating cost, taxes, material handling cost, lease payments for equipment, depreciation operating cost. Material, labor overhead.

Captial cost- Inventory requires financing, and capital cost refer to the return expected by creditors and investors because the money could be invested elsewhere (called opportunity cost).

Risk cost- Risk is related to the sensitivity of the inventory to loss of value, such as its perishability, speed of obsolescence, or likelihood of theft. Risk cost include the cost of insurace, inventory value reductions, and inventory write-offs.

Ordering cost ordering costs are all those that do not vary due to quantities ordered but only vary by the frequency of ordering.

Differentiate between inventory cost categories
Describe the effects of inventory on financial statements
Inventory can also be viewed as all the money currently tied up in the supply chain. As much as 40 to 50 percent of the supply chain invested working capital can be tied up into inventory.

In order to keep the cash flow turning over, the goal is to effciently manage the companys inventory level and cost while maintaining and improving customer satisfication.

Use of the financial statements for inventory management is an excerise in inventory management at the aggregate level. Discussions surrounding the finacial impacts of inventory are generally framed around reducing inventory. reducing inventory costs, or increasing the number times per year that cash is invested into inventory and returned in the form of revenue, called inventory turns.

Understand the use of inventory turnover as an inventory control tool
Higher inventory turnover ratios are preferred and can result from increasing sales and/or decreasing average inventory. Increasing this ratio means that there is lower investment in inventory relative to sales volume, lower risk of obsolescene, and greater liquidity. It is expressed as higher inventory veolocity.

It is important because of the profit margins built in to each product. Proft margins directly add to cash and increase owners equity on the balance sheet.

Comprehend that inventory can be given different values on the balance sheet based on how it is valued by accountants
Unsold inventory on the books at the given date is a current asset, MLO cost these assets will become an expense on the income statement when sold, only their profit margin will contribute to net income.

Another reason too much inventory is no tgood is that the value of the inventory on the balance sheet includes the cost involved in producing the inventory.

Inventory valuation is a financial accounting process that follows specific rules based on the age distribution of invnetory.