1. .
Learn and define inventory
management and its objective
2. Define what is inventory an
functions;
3. Know the types of inventor
4. Learn the requirements for
effective inventory manageme
and
5. Differentiate inventory cost
INVENTORY MANAGEMENT
▪ It involves planning, coordinating and controlling
the acquisition, storage, handling, movement,
distribution and possible sale of raw materials,
component parts and subassemblies, supplies and
tools, replacement parts, and other assets that are
needed to meet customer wants and needs.
What is INVENTORY?
▪It is a stock or store of goods.
▪Firms typically stock hundreds or even
thousands of inventory ranging from small
things to large items.
Types of Inventories
o Raw Materials, Components and
Supplies – inputs to manufacturing and
service – delivery process.
Types of Inventories
o Work in process inventory – consists of
partially finished products in various stages
of completion that are awaiting for further
processing.
Types of Inventories
o Finished goods inventory – is completed
products ready for distribution or sale to
customers.
What is Safety stock?
o It is an additional amount that is kept over
and above the average amount required to
meet demand.
Functions of Inventory
1. To meet anticipated customer demand;
2. To smooth production requirements;
3. To decouple operations;
4. To reduce the risk of stockouts;
5. To take advantage of order cycles;
6. To hedge against price increases;
7. To permit operations.
8. To take advantage of quantity discounts.
What is Little’s Law
• The average amount of
inventory in a system is equal
to the product of the average
demand rate and the average
time a unit is in the system.
Objective of Inventory
Management
• Inadequate control of
inventories can result in both
under- and overstocking of
items.
Objective of Inventory
Management
• Understocking results in
misdeliveries, lost sales,
dissatisfied customers and
production bottlenecks.
Objective of Inventory
Management
• Overstocking unnecessarily
takes up space and ties up
funds that might be more
productive elsewhere.
Objective of Inventory
Management
• The overall objective of inventory
management is to achieve
satisfactory levels of customer service
while keeping inventory costs within
reasonable bounds. Two basic issues:
when to order and how much to
order.
What is Inventory
Turnover?
• Ratio of annual cost of goods sold to
average inventory investment.
• It indicates how many times a year an
inventory is sold.
• Generally, the higher the ratio, the
better, implying more efficient use of
inventory.
Days of Inventory of On-
hand
• A number that indicates the expected
number of days of sales that can be
supplied from existing inventory.
• Here, a balance is desirable; a high
number of days might imply excess
inventory, while a low number might
imply a risk of running out of stock.
Requirements for Effective
Inventory Management
1. A system to keep track of the
inventory on-hand and on-order.
2. A reliable forecasts of demand that
includes an indication of possible
forecast error.
3. Knowledge of lead times and lead
time variability.
Requirements for Effective
Inventory Management
4. Reasonable estimates of inventory
holding costs, ordering costs and
shortage costs.
5. A classification system for inventory
items.
Inventory Counting Systems
❑ Periodic systems – Physical count of
items in inventory made at periodic
intervals (weekly, monthly, etc.)
Inventory Counting Systems
❑ Perpetual Inventory System – System
that keeps track of removals from
inventory continuously, thus
monitoring current levels of each
item.
Demand Forecasts
❑ Inventories are used to satisfy
demand requirements, so it is
essential to have reliable estimates of
the amount and timing of demand.
Lead Time
❑ It is the time interval between
ordering and receiving the order.
Inventory Costs
▪ Purchase cost – The amount paid to
buy the inventory.
▪ Holding (carrying ) cost – Cost to
carry an item in inventory for a
length of time, usually a year.
Inventory Costs
▪ Ordering cost – Costs of ordering and
receiving inventory.
▪ Set up cost – The costs involved in
preparing equipment for a job.
▪ Shortage costs – Costs resulting when
demand exceeds the supply of inventory;
often unrealized profit per unit.
THANK YOU! ☺