Managing Inventory

Inventory Management

The objective of inventory management is to strike a balance between inventory investment and customer service

Functions of Inventory

To decouple or separate various parts of the production process

To take advantage of quantity discounts

To provide a selection of goods for anticipated demand and to separate the firm from fluctuations in demand

To hedge against inflation

Types of Inventory

Work-in-process (WIP)

Maintenance/repair/operating (MRO)

Raw material

Finished goods

Managing Inventory

How inventory items can be classified (ABC analysis)

How accurate inventory records can be maintained

ABC Analysis

Divides inventory into three classes based on annual dollar volume (ABC - high, medium, low dollar volum)

Used to establish policies that focus on the few critical parts and not the many trivial ones

Record Accuracy

Cycle Counting

Items are counted and records updated on a periodic basis

Often used with ABC analysis

Eliminates shutdowns and interruptions

Eliminates annual inventory adjustment

Trained personnel audit inventory accuracy

Allows causes of errors to be identified and corrected

Maintains accurate inventory records

Inventory Models

Independent demand

Dependent demand

the demand for item is independent of the demand for any other item in inventory

the demand for item is dependent upon the demand for some other item in the inventory

⭐Holding costs

⭐Ordering costs

⭐Setup costs

the costs of holding or “carrying” inventory over time

the costs of placing an order and receiving goods

cost to prepare a machine or process for manufacturing an order

Inventory Models for Independent Demand

Production order quantity model

Quantity discount model

⭐Basic economic order quantity (EOQ) model

Only variable costs are setup (or ordering) and holding

Quantity discounts are not possible

Receipt of inventory is instantaneous and complete

Lead time is known and constant

Demand is known, constant, and independent

Stockouts can be completely avoided

Minimizing Costs

Annual setup cost = (D/Q)*s

Annual holding cost = (Q/2)*H

Q제곱 = 2DS / H