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