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Inventory Management
Hussan Peavey
Assistant Professor of Professional Practice
Department of Supply Chain Management
Rutgers Business School
100 Rockafeller Road, Piscataway, NJ 08854
Tel: 848-445-9473 | Email: hussan@[Link]
Website: [Link]
Introduction
A key decision in any product-based supply chain is how much
inventory to keep on hand.
 Inventory is usually one of the company’s largest assets, so
careful management of that asset is an essential business
requirement.
 Maintaining adequate _________________________ allows a
company to fill customer orders immediately
 Maintaining adequate _________________allows a company to
support manufacturing operations and the production plan
while avoiding delays.
 Failing to manage inventory adequately can lead to significant
issues and inefficiencies throughout the supply chain, including
dissatisfied customers, lost sales and revenue, and higher costs.
2
What is Inventory?
Inventory is the __________________________________
___________________________.
Includes all of the materials used to support production, all of the
finished products needed to provide customer service, and all of the
other supplies needed to run a business.
 Inventory is one of the most
important assets of an organization.
 Holding some inventory may be
necessary to maintain operations and
ensure that products are available
when customers demand them.

 Not having enough inventory can be a

serious issue.
3
Inventory is an Asset and Potentially a Liability
Inventory is an ____, however, carrying too much inventory
can be a significant _______.
 Too much inventory ties up capital which could otherwise be used
for purposes such as research and development, marketing and
sales, stockholder dividends, salary increases, etc.

 The more inventory a company holds, the ___________is needed,

and ________________.

 In addition to storage costs, a company may also have to pay for

security, insurance, taxes, etc. to hold inventory.

 Inventory can become a liability if it becomes _________due to

expiration, obsolescence, damage, or spoilage.
4
Categories of Inventory

There are four main categories of inventory:

 Raw Materials
 Work-in-Process (WIP) sometimes called Work-in-Progress
 Finished Goods
 Maintenance, Repair and Operating (MRO) supplies

Work in
Raw Materials Finished Goods
Process

Maintenance, Repair, and Operating

 Individual items within each of these inventory categories can

be current or obsolete
5
Raw Materials
_______________or _________________that are converted via the
manufacturing process into components and products.
 Every company that produces a product generally starts with some type of
raw material, component part or starting material.
 There are strategies around the question of how much raw material a
company should hold in inventory.
— Buy from a supplier and have it delivered to the operation just in time for when it
is needed
— Buy and hold a larger quantity for strategic reasons
 Companies might be willing to increase costs by storing excess raw material
inventory if they fear there may be a potential shortage of the material or if
they suspect that there is an upcoming price increase and want to buy at the
current lower price.
Raw Work in
Finished Goods
Material Process

Maintenance, Repair, and Operating

6
Work-in-Process
A good or goods in __________________________throughout the
plant, spanning from raw material that has been released for initial
processing up to fully processed material awaiting final inspection
and acceptance as finished goods.
 Due to the range of potential stages of completion, and the fact that materials
in WIP may be in a state of continuous transformation, many companies view
WIP as the “black hole” of inventory as they may not have very good or very
timely visibility into this part of their inventory.

 Best practice generally suggests minimizing the amount of WIP inventory in

the manufacturing area since too much WIP may clutter up the physical space
and impede the process flow.

Raw Work in
Finished Goods
Material Process

Maintenance, Repair, and Operating

7
Finished Goods
Those items on which all manufacturing operations, including final
testing, have been completed. These products are ______________
___________________________________.
 From a cost perspective, finished goods are usually worth much more than
raw materials or WIP since all of the material, labor, and overhead costs are
fully applied to finished goods.
 The amount of finished goods inventory that a company decides to maintain is
a strategic decision:
• Companies can operate a _____________ supply chain where the finished
goods are not produced until a customer order is received. Little to no
finished goods inventory is maintained.
• Companies can operate a _____________ supply chain where product is
produced prior to receipt of a customer order based on a forecast of
demand. Significant amounts of finished goods inventory can be
maintained. Raw Work in
Finished Goods
Material Process

Maintenance, Repair, and Operating

8
Maintenance, Repair and Operating (MRO)
Items used in support of _______________________________ such
as maintenance supplies, spare parts, and consumables used in the
manufacturing process and supporting operations.

 Materials that you need to run the manufacturing operation and

the business but do not end up as part of the finished product.

• Some MRO items are consumed during the process of converting raw
materials into finished goods, e.g., oil for the manufacturing equipment.

• Other MRO items are used to facilitate the manufacturing operation, e.g.,
cleaning supplies, spare parts, etc.

• While still other MRO items may be used to facilitate the company’s
administrative activities, e.g., office supplies, coffee for the break room, etc.
Raw Work in
Finished Goods
Material Process

Maintenance, Repair, and Operating

9
Inventory in the Service Industry
Service Inventory - Activities carried out in advance of the
customer’s arrival
 Companies in the service industry ________________________________since
services are basically produced and consumed immediately upon demand.
 Companies can however, maintain inventory of “______________,” which are
those items that are used to help facilitate the service being provided.
 For example:
• Restaurants offer dining services, but cannot inventory the actual dining service; they
can only begin the dining service when the customers arrive.

• Restaurants can inventory the food, tableware, and other elements of the dining
operation as these are facilitating goods necessary to provide the service.

• Restaurants can even prepare some of their meal options in advance, such as salads
or deserts. They can inventory these facilitating products so they are ready to go
when the customers arrive for the dining service.
10
Functions of Inventory - Why hold inventory?
1. To Meet Customer Demand (cycle stock):
 Immediately fill customer orders
 Deploy the product / material near where it will be used
2. To Buffer Against Uncertainty in Demand and/or Supply (safety stock):
 Uncertainty in demand: sales or usage above expectations
or both
 Uncertainty in supply: shortages, delays, disruptions
3. To Decouple Supply from Demand (strategic stock):
 Supply pattern is different from demand pattern:
– Achieve economies of scale in purchasing; take advantage of volume price breaks/discounts
– Speculative buying in anticipation of a price increase e
e parat
– Economical order size, lot size, production output s
u p le =
o
Dec
– Seasonal products/demand
4. To Decouple Dependencies in the Supply Chain (strategic stock):
 Separating operations in a process
 Smoothing production and reducing peak period capacity needs

11
Inventory Management
The function of planning and controlling inventories.
 The goal of inventory management is to help a company be more profitable
by ___________________________and/or by _______________.
 In an effort to achieve this stated goal, effective inventory management
balances two competing considerations:
— Reducing the amount of inventory held in stock, while . . .
— Ensuring there is enough inventory to satisfy customer demand.

So, what is the right amount of inventory?

 The answer to that question is, “It depends.”
— It depends on the supply chain strategy and set-up, the
type of product(s), customers’ expectations, customer
service objectives, product shelf life, etc.
— We will explore this questions throughout the
remainder of this chapter.
12
Inventory Stock Levels Maintenance, Repair and Operating (MRO) supplies
 Not directly related to product creation.

There are three levels of ______ Internal Inventory

inventory which may be held by
companies to:
 Meet customer demand
Strategic Stock
 Buffer against uncertainty in Reported
demand and/or supply Stock
Safety Stock level
 Decouple supply from
demand
 Decouple dependencies in Cycle Stock
the supply chain

There may also be inventory Pipeline Inventory

 Inventory in transit.
which is held _________to the  Inventory held / owned by suppliers, or by
company by downstream supply wholesalers, distributors, retailers, and customers.

chain trading partners

= Obsolete Inventory External Inventory 13

Cycle Stock
Internal Inventory
Inventory that a company Obsolete Inventory
 Stock that is expired, out-of-date, or no longer needed.
builds to satisfy its’ _______
_______.
Strategic Stock
Cycle stock depletes gradually Reported
as customer orders are Stock
received, and is replenished
Safety Stock level
cyclically when supply orders
are received.
Cycle Stock
The amount of cycle stock that
a company holds is dependent
on actual demand in the Pipeline Inventory
immediate time period, supply  Inventory in transit.
 Inventory held / owned by suppliers, or by
replenishment lead time and wholesalers, distributors, retailers, and customers.
order quantities.

External Inventory 14
Safety Stock
Safety stock, also known as Internal Inventory
“buffer stock,” is inventory that Obsolete Inventory
 Stock that is expired, out-of-date, or no longer needed.
is above and beyond what is
actually needed to meet
anticipated demand. Strategic Stock
Reported
A quantity of stock planned to Stock
be in inventory to protect Safety Stock level
against ___________________
__________.
Cycle Stock
Companies operating in a
make-to-stock environment will
generally maintain some
amount of safety stock whether
Pipeline Inventory
 Inventory in transit.
based on a management  Inventory held / owned by suppliers, or by
wholesalers, distributors, retailers, and customers.
decision, or based on a safety
stock determination formula.
External Inventory 15
 Practical use of Safety Stock (Example: Pharmaceuticals)

Active
Ingredients NO Safety Stock Maintained:
× Due to long term stability concerns
Safety Stock
(Centrally Located) × Due to expiry concerns

Safety Stock Maintained:

Dosage
 Due to the long Forms
production lead time
 To provide maximum Finished
flexibility Goods
 As a result of the batch Safety
and campaign size Stock
(Geographically
Dispersed)
 Centrally located
Safety Stock Maintained:

Package
 To respond rapidly to increases
Raw
Materials Components in customer demand
Safety Stock Safety Stock  Geographically dispersed close
(by exception only) (by exception only)
to the end customer

Safety Stock to cover for variability in both Demand and Supply 16

Safety Stock used to Decouple the Supply Chain
(Example Pharmaceuticals)

Cumulative Lead Time without Safety Stock

Chemical Operations Pharmaceutical Operations Distribution 15
12 months 2 Months 1 Month Months

Active
Ingredients Dosage
Forms Finished
Goods
Raw
Materials Package
Components

Cumulative Lead Time with Safety Stock to De-Couple AI and FG Lead Times
Chemical Operations Pharmaceutical Operations Distribution 2
12 months 2 Months 1 Month Months

Active
Ingredients Dosage
Safety Stock Forms Finished
(Centrally Located) Goods
Safety Stock
(Geographically Dispersed)
Raw
Materials
Package
Safety Stock Components
(by exception only)

Safety Stock
(by exception only) 17
Strategic Stock
Additional inventory beyond Internal Inventory
cycle and safety stock, generally Obsolete Inventory
used for a __________________  Stock that is expired, out-of-date, or no longer needed.

or future event, and for a

___________________. Strategic Stock
A company may decide to carry Reported
strategic stock to: Stock
 hedge currency fluctuations Safety Stock level
 take advantage of a price discount
 protect against a short-term
disruptive event in supply Cycle Stock
 take advantage of a business
opportunity
 for life cycle changes: seasonal
demand, new product launch,
Pipeline Inventory
 Inventory in transit.
transition protection  Inventory held / owned by suppliers, or by
wholesalers, distributors, retailers, and customers.
Also called anticipation stock, build
stock, or seasonal stock

External Inventory 18
Pipeline Inventory
Internal Inventory
Inventory in the transportation Obsolete Inventory
network and the distribution  Stock that is expired, out-of-date, or no longer needed.

system. Inventory that is

already ______________ being Strategic Stock
held by wholesalers,
Reported
distributors, retailers, and even Stock
consumers. Safety Stock level
The _________of this inventory
has been ________________ Cycle Stock
______________, but may still
influence decisions the
company makes regarding how
they manage and control their Pipeline Inventory
 Inventory in transit.
internal inventory, and how  Inventory held / owned by suppliers, or by
wholesalers, distributors, retailers, and customers.
much safety stock and/or
strategic stock to hold.
External Inventory 19
Stock Levels & Replenishment
Above Safety Stock Backorder

Below Safety Stock Stockout

Excess Inventory
Target
Inventory Demand Period Demand Period Demand Period Demand Period Demand Period
Level
Month #1 Month #2 Month #3 Month #4 Month #5

Inventory
Replenishment
Point
Cycle Inventory
Internal Inventory

Replenishment
Stock Quantity
Total Inventory

Safety Stock Utilized

Safety
Stock
Critical Inventory Level Reached

Time
External Inventory

Wholesale / Distributor Inventory Backorder

Pipeline
Inventory
“Channel Stock”
Retail Inventory Stockout

= Inventory Position Consumer Inventory 20

Obsolete Inventory Obsolete Inventory
 Stock that is expired, out-of-date, or no longer needed.

Inventory items that have ________________________

established by the company.
Obsolete inventory is stock that is expired, damaged, or
no longer needed.
Obsolete inventory will never be used or sold at full value.
 Writing obsolete inventory off of the books and disposing of it may be a
difficult decision to make as all or part of the obsolete product’s value may be
lost and it may reduce a company’s profit.
 Unusable inventory takes up space and costs money to maintain, so it may be
better to absorb the loss as soon as an item has met the obsolescence criteria
rather than delay and continue to lose money on storage and related fees.
 There may be a cost associated with the actual disposal of the inventory.
 Some companies may donate this inventory to a non-profit organization if it
has any remaining value, which not only helps the non-profit but also avoids
disposal costs and may result in a tax benefit for the company.
21
Maintenance, Repair & Operating (MRO) supplies
These are materials that you need to ________________________
________________________, but do not end up as part of the
finished product.
 Some MRO items are consumed during the process of converting raw
materials into finished goods, e.g., oil for the manufacturing equipment.
 Other MRO items are used to facilitate the manufacturing operation, e.g.,
cleaning supplies, spare parts, etc.
 While still other MRO items may be used to facilitate the company’s
administrative activities, e.g., office supplies, coffee for the break room, etc.
 MRO inventory is separate from production inventory, but it is just as
important.
 Frequently these items are expensed at the time they are purchased, and
there may be a separate function, group, or individual who plans and orders
these MRO items, from those who plan and order production items.
22
Costs Related to Inventory
 ______- directly traceable to unit produced (e.g., materials, labor, etc.)
 _________- cannot be traced directly to the unit produced (e.g.,
overhead; MRO items, buildings, equipment, etc.)

 _________- dependent on the unit volume produced vary with

output level (e.g., materials, labor, utility power, etc.)
 _____(aka Sunk Costs) - independent of the unit volume produced
(e.g., buildings, equipment, rent, allocated overhead costs, etc.)

 ________– costs for physically having inventory on-site and for

maintaining the infrastructure needed to store the inventory and
to secure and insure it over time.
 _____– labor costs associated with placing an order for inventory
and the cost of receiving the order.
23
Hidden Costs of Inventory
Having too much or too little inventory on hand can sometimes build
hidden costs that create a risk for a company.
Having too ______inventory can result in effects like:
 Financial resources tied up in inventory.

 Underlying problems being hidden rather than being exposed and solved,
including quality problems not being immediately identified.
 No incentive for process improvements .

Having too ______inventory can result in effects like:

 Production disruptions creating the need for expediting and additional costs.
 Longer delivery replenishment lead times.
 Reduced responsiveness.
 Lost revenue
24
Inventory Investment

Common measures include:

 Absolute Inventory Value
The value of the inventory at either
its cost or its market value.
Generally found on the balance sheet.

 Inventory Turnover
The number of times that an
inventory cycles, or “turns over,”
during the year.
The more turns, the better !!

Cost of Goods Sold (COGS)

aka, Cost of Sales or Cost of Revenue
Inventory Turnover Ratio =
Average Inventory @ Cost

25
Inventory Policy – Set Target Inventory Levels
To set target inventory levels for all products and
materials, you need to address these three
fundamental questions:

1. When to review inventory?

2. When to order inventory?

3. How much inventory to order?

1. Two models for determining when to review inventory:

 Periodic Review System
 Continuous Review System
26
Periodic Review System
Inventory levels are reviewed at a ____________, e.g., weekly, monthly
 At the time of review, if the stock levels are below the pre-determined level
(i.e., a reorder point), an order for replenishment is placed, otherwise no
action is taken until the next cycle.
Advantages:
 Reduces the time spent analyzing inventory.
 Less expensive to implement and operate than a Continuous Review System.
Disadvantages:
 Can be difficult to determine the best review/reordering intervals.
 It also can make inventory accounting less accurate.
 Since items are only reviewed periodically, there is a greater risk of inventory
dropping well below the reorder point between reviews and, therefore, a
greater potential need for safety stock.

27
Continuous Review System
As the name implies, inventory levels are ____________________.
 As soon as inventory falls below a pre-determined level (i.e., a reorder point),
a replenishment order automatically is triggered.
Advantages:
 Allows for real-time updates of inventory, which can make it easier to know
when to replenish.
 Facilitates accurate accounting, since the inventory system can generate real-
time costs of goods sold.
 Potentially requires less safety stock because inventory is constantly
monitored, and replenishment actions are taken more quickly.
Disadvantage:
 Cost of implementation. Generally requires an automated system. The
hardware and software necessary to run the system can be expensive to
purchase, install, and maintain.
28
2. When to Order Inventory?
The lowest inventory level at which a new order must be placed to avoid a stockout
is known as the ________________
 The ROP is set at a level that provides enough inventory so demand is covered during
the lead time (L) needed to replenish inventory.
ROP = Demand during Lead Time (dL)

Given: Demand (d) = 600/month d = (600 / 30 days) = 20/day

Lead Time (L) = 6 days ROP = dL = (20) x (6) = 120

The new inventory

replenishment order is
placed when the current
inventory level reaches
120 units remaining.
Quantity = EOQ
29
 Reorder Point without Safety Stock
Demand (D) = 150 month / 30 days = 5 units/day

Inventory Lead Time (LT) = 10 days

On Hand Safety Stock (SS) = 0 units
Reorder Point (ROP) = D x LT + SS = (5) x (10) + (0) = 50 units

150 Units

Replenishment Replenishment Replenishment

Order Order Order

ROP = 50 Units

LT = 10 Days Replenishment Replenishment Replenishment

Delivery Delivery Delivery
0 Units

Today 30 Days 60 Days 90 Days

Time
30
 Reorder Point with Safety Stock
Demand (D) = 150 month / 30 days = 5 units/day

Inventory Lead Time (LT) = 10 days

On Hand Safety Stock (SS) = 25 units
Reorder Point (ROP) = D x LT + SS = (5) x (10) + (25) = 75 units
175 Units

150 Units

Replenishment Replenishment Replenishment

Order Order Order

ROP = 75 Units

LT = 10 Days Replenishment Replenishment

Delivery Delivery

25 Units
Safety Stock = 25 Units
0 Units

Today 30 Days 60 Days 90 Days

Time
31
3. How Much to Order?

The two common inventory ordering system categories are:

A. _______________________:
— Inventory is checked in fixed time periods against a target inventory level.
— If the inventory is less than target, a quantity necessary to bring inventory
back up to the target level is ordered.
— The amount of inventory ordered will potentially vary from period to
period based on the remaining inventory at each time interval checked.

B. _______________________:
— A continuous inventory review system in which the same order quantity is
used from order to order.
— When the inventory position drops to a predetermined reorder point, a
predetermined fixed order quantity is placed
— The time between orders (i.e., order period) varies from order to order.
32
A. Fixed-Time Period System
The order quantity is the difference between the ______________ on
the review day, and the pre-determined ____________________.
Q = R – IP
where: Q = order quantity
R = target inventory level
IP = inventory position
The order quantity in this system will differ from one order to another
depending on the on-hand quantity on the day of the review.
 A target inventory level (R) is established
 Inventory levels are checked/reviewed in fixed time periods (T)
 If (IP) < (R) then (Q) is ordered and (R) is restored when each new
order is received.

33
B. Fixed-Order Quantity System
If the review determines that an order should be placed, then the
order for a ___________________for that item is placed.
Two main variables to calculate:
– Reorder Point (ROP)
– Order Quantity (Q)
Assumptions:
• A constant demand (d) rate, i.e., not erratic, seasonal, etc.
• Inventory position (IP) is reduced (i.e., consumed/used) by a rate of (d).
• Replenishment order placed when reorder point (ROP) is reached.
• When inventory is received, (IP) increases by the order quantity (Q).
• (Q) computed using the economic order quantity (EOQ) model.
• Lead time (L), i.e., the time between placing an order and receiving delivery
of the order, is known and constant.
• Inventory position (IP) is reviewed on continual basis.
34
The Economic Order Quantity (EOQ) Model

EOQ is a fixed-order quantity model

A quantitative decision model based on the trade-off
between annual inventory order costs and annual
inventory carrying costs.
Where the sum of the annual order costs & the
annual inventory carrying costs is minimized.

 ____________are costs that are incurred each time an order is

placed.

 _____________are costs that are incurred for holding inventory

in storage.

35
Inventory Order Costs & Carrying Costs
Order Costs - incurred each time __________________
 Order preparation costs
 Order transportation costs
 Order receipt processing costs
 Material handling costs

Carrying Costs - incurred for _________________

 Cost of capital - specified by senior management
 Taxes - on inventory held in warehouses
 Insurance - based on estimated risk or loss over time and facility characteristics
 Obsolescence - deterioration of product during storage, and shelf-life
 Storage - facility expense related to product holding rather than product
handling
36
The Economic Order Quantity (EOQ) Model

Costs ($)

$500

$250 X

carrying

Order Quantity (units)

EOQ = 500 units
37
Example EOQ EOQ = 
2 x Order Cost x Annual Demand Volume
Annual Carrying Cost % x Unit Cost

Order Cost $25 per order

Annual Demand Volume 5,000 units
Annual Inventory Carrying Cost (%) 20% per year
Unit Value @ Cost (purchase price) $5 per unit

2 x 25 x 5,000 250,000
EOQ =  0.20 x 5.00 = 1

=  250,000 = 500
Proof:
Annual Order Cost = (5,000/500 x $25.00) = 10 x $25 = $250
Annual Carrying Cost = [500/2 x (5 x 0.20)] = 250 x 1 = $250

38
Assumptions of the EOQ Model EOQ = 
2 x Order Cost x Annual Volume
Carrying Cost % x Unit Cost

 The model must be calculated for one product

at a time.
 The demand must be constant throughout the
year.
 The delivery replenishment lead time does not In the “real world”
these assumptions do
fluctuate. not hold true over time
 Replenishment is instantaneous. Supply Chain Managers
 The purchase price (i.e., unit cost) is constant must make adjustments
to the basic EOQ
and no discounts or price breaks are factored
into the model.
 Carrying cost is known and constant.
 Order cost is known and constant.
39
Volume Economies of Scale Impact EOQ
The EOQ calculation will be impacted by volume economies of scale
such as the following:
 Individual Item Purchase Price Discounts
 Discounts for ordering larger quantities. If the volume discount is
sufficient to offset the added cost from carrying additional inventory, then
ordering a larger volume may be desirable.

 Multiple-Item Purchase Price Discounts

 If you purchase a combination of items from a supplier you may be able to
take advantage of a volume discount based on the total volume across all
the items purchased rather than just an individual item’s volume.

 Transportation Freight-Rate Discounts

 Ordering a larger quantity may mean that you can take advantage of
Transportation Freight-Rate Discounts which will lower the per unit costs.
40
Constraints on the Practical use of EOQ
____________: The model may generate an order quantity which the company
does not have sufficient available funds to purchase at one time.

_____________: The model may generate an order quantity which the company
does not have sufficient storage capacity to handle at one time.

____________: The item being ordered and transported may require specialized
or dedicated transportation, impacting the quantity per order.

____________: The model may generate an order quantity which would create
spoilage or obsolescence.

________________: The supplier may require the company to order an item in

full production lot sizes.

________: The supplier may require the company to order an item in full pack,
case, or pallet configurations.
Because of these constraints and assumptions, the EOQ is
generally only used as a baseline. Supply chain managers
make adjustments to the EOQ based on their judgement
41
Other Types of Inventory Systems
Other types of inventory systems
which are essentially variations on
the basic continuous and periodic
review methods are:

 ABC System

 Bin System

 Base Stock Level System

 “Single-Period” Inventory Model

42
ABC System
An ABC system classifies inventory based the __________
____________:
1. Determine annual usage or sales for each item.
2. Determine % of total usage or sales that each item represents.
3. Rank items from highest to lowest %.
4. Classify items into groups:
A: Highest Value
B: Moderate Value
C: Least Valuable

43
ABC System (continued)
A method to determine which inventories should be counted and
managed more closely than others
Groups inventory as A, B, or C based on a set criterion
 A items are given the highest priority. “80/20 rule”
Generally, A items account for approximately 20% of the total
number of items, but about 80% of the total inventory cost.
 B & C items account for the other 80% of the total number of
items, but only 20% of total inventory cost.
– B items require closer management since they are
relatively more expensive (per unit), require more effort to
purchase / make, & may be more prone to obsolescence.
– C items have the lowest value, and hence the lowest
priority

44
Bin System
Inventory system that uses either one or two bins to hold a quantity
of the item being inventoried.
 It is mainly used for small or low value items.
 When the inventory in the first bin has been depleted, an order is placed to
refill or replace the inventory.
 The second bin is set up to hold enough inventory to cover demand during the
replenishment lead time so as to last until the replacement order arrives.

1 Demand

Bin #2 Bin #1

Replenish
2 Inventory Demand

Bin #2 Bin #1 Replenish

3 Inventory Demand

Bin #2 Bin #1 45
Base Stock Level System

 Base Stock Level System - a type of inventory system that issues

an order ____________________________from inventory.

– Replenishment order quantity is equal to the quantity withdrawn

from inventory.

– This will maintain the inventory at a base stock level.

– Used primarily for very expensive items, e.g., airplane engine

– A form of just-in-time.

46
Single-Period Model

 “Single-Period” Inventory Model - a type of inventory system in

which inventory is __________________________.

– The objective is to maximize profits.

Examples: Christmas tree lots, and Newspaper stands.

47
Inventory Control Tools
Many inventory control tools exist in today’s market. Those
that incorporate barcode tracking or RFID tagging generally
offer the most flexibility and ease of use.

 Linear Barcode

 2D Barcode

 Radio Frequency Identification (RFID)

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Barcodes
Barcode systems help businesses track products and stock levels for
inventory management.
 _______(1D) Bar Codes are “a series of alternating bars and spaces printed or
stamped on parts, containers, labels, or other media, representing encoded
information that can be read by electronic readers.
— Linear bar codes do have some limitations: they are one-dimensional, can
only be read horizontally, and can only hold a maximum of 85 characters.
 ___ Bar Codes are a graphical image that stores information both horizontally
and vertically.
— 2D Barcodes can store over 7,000 characters, allowing transmission of
almost two paragraphs of information.
 A barcode reader (or barcode scanner) is an electronic device that can read
barcodes and transmit the data to a computer. These might be handheld
cordless devices, corded devices that attach directly to a PC’s USB port, or
computers with integrated laser scanners
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Radio Frequency Identification (RFID)

Successor to the barcode for tracking individual unit of goods.

RFID does ___________________________to read a tag, and the
information on the tag is updatable.

RFID Tags (Transponders) Readers Information Infrastructure (Local/ERP Servers)

Item

Hand Held Readers

Shelf Readers
Box Fixed Portal Readers Database
RFID Middleware
Local / ERP Server
Pallet
Crate

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Radio Frequency Identification (RFID)

Automates the supply chain:

 Materials Management – Processor
Chip
Antenna
goods automatically counted
and logged as they enter the
supply warehouse
Linear Barcode RFID Tag
 Manufacturing – assembly instructions encoded on RFID tag
provide information to computer controlled assembly devices

 Distribution Center – shipment leaving DC automatically updates

ERP to trigger a replenishment order and notify customer for
delivery tracking

 Retail Store – no check out lines as scanners link RFID tagged

goods in shopping cart with buyers credit card
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Radio Frequency Identification (RFID) continued

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Measuring Inventory Performance

Common metrics for inventory:

 Units – the number of units available

 Dollars – the amount of dollars tied up in inventory
 Weeks of Supply - (avg. on-hand inventory) / (avg. weekly usage)
 Inventory Turns - (cost of good sold) / (avg. inventory value)

Every unit/dollar of inventory that

you can reduce drops right to the
bottom line as pure savings
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End of Chapter Quiz

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