INVENTORY DEFINITIONS Objective of inventory control

- It’s the stock or store of goods. - To achieve satisfactory levels of

PPC: Inventory Management (Lecture 8) customer services while keeping
- Demand determines the type of inventory an
organization will carry. inventory costs (costs of ordering
Reasons for carrying inventory (continue)
o Independent Demand: customer demand and carrying inventory) within
for finished products. It’s UNCERTAIN - To help hedge against price increases, buy reasonable bounds.
o Dependent Demand: necessary parts to now at a low price, store goods for future use Processes for Inventory Management
assemble a finished good. IT’S CERTAIN. (Ex: alcohol, se o governo precisar de álcool
An effective inventory management
vai aumentar a taxa do alcool. Se disser que a
approach will have certain info:
Each firm carries types of inventories relevant to its taxa vai aumentar na semana seguinte, toda
production demands. a gente vai comprar hoje para ter em casa) - A system to keep track of inventory
- To permit operations to operate, operations on hand and on order
- Raw materials & purchased parts require a certain amount of WIP inventory - A reliable forecast demand
- Partially completed goods – called work in - To take advantage of quantity discounts, - Knowledge of order lead times and
progress (WIP) vendors often give discounts when ordering lead time variability
- Finished-goods inventories (manufacturing firms) large quantities - Reasonable estimates of
- Merchandise (retail stores) Operations Strategy o Holding costs
- Replacement parts, tools & supplies for o Ordering costs
- Having too much inventory is not good
maintenance (this part is not easy to control) o Shortage costs
o Tends to hide problems
- Goods-in-transit to warehouses or customers - A classification system for inventory
o Makes it easier to live with (ignore)
Reasons for carrying inventory items
problems than to eliminate the,
- To meet anticipated demand: meeting demand ina o Costly maintain large stocks of Inventory Counting Systems (keep
timely manner enhances customer satisfaction inventories tracking inventory)
(Going to 7/11 to buy instant noodles, if they were o Opportunity costs of potentially doing - Periodic System: Physical count of
implementing JIT, it won’t be possible) something else with the money tied up items made at periodic intervals
- Smooth production requirements across seasons, in inventory - Perpetual Inventory System:
produce one season, sell in the next (produce - Wise (Well-defined) objectives (How to?) System that keeps track of
more in a low season to have more stock on a o Reduce lot sizes (possible only if we removals from inventory
high demand season) minimize the set up costs) continuously, thus monitoring
- To decouple successive operations and maintain o Reduce safety stock (minimize current levels of each item
continuity of production, protects against machine variation/uncertainty) o Two-bin system: two
breakdowns (TPM- total productive maintenance -  Safety stock: allow us to deal containers of inventory:
> prevent breakdown events) with variation and uncertainty reorder when the first bin is
- To protect against stock-outs, vendors do not  Vendor empty
always deliver on time. However, vendors must  Process o Universal product code
deliver on time -> share info on time (demand,  Demand (Bar code): Bar code
quality, etc)  Etc painted on a label that has
Active
- To RFID:
take There’s
advantagea battery
of order inside. Cycle Counting
cycles to minimize o Reduce ordering costs and holding info about the item to which
High distance
purchasing and inventory costs, minimum order costsin inventory.
- A physical count of items it’s attached
size requirements, full
Passive RFID: Just a chip without atruck loads (the  These are difficult to calculate o Quick Response code
Counts are conducted periodically.
transportation cost is the same for 1 or 100)
battery inside. The range is not that far o A: counted frequentlyand oftento
(needed underestimated (QR)
be taken care the most) leading to higher order sizes o Radio Frequency
Lead time

Time interval between ordering and

receiving the order.

If we expect that demand will occur on a

certain day in the future, we’ll need to
place an order several days earlier and
account for:

- Lead time
- Lead time variability
Managers must estimate several types of
inventory-related costs

- Holding (carrying) costs: cost to

carry an item in inventory for a
length of time, usually a year
o Annual cost of 10% of the
value (unit price) of an item
- Ordering costs: costs of ordering
and receiving inventory.
o Fixed dollar amount per
order, regardless or order
size
- Shortage costs: costs when demand
exceeds supply
o Difficult to calculate -often
assumed
ABC Classification system

Classifying inventory according to some

measure of importance and allocating
control efforts accordingly.

A: very imp. B: mod. Important; C: least

important