Inventory Management
7 August 2001
Introduction



What: Managing Inventory
Where: Any business that maintains
inventory
Why: Inventory is a significant
contributor to costs
Functions of Inventory




Separate (decouple) parts of the
production process
Stock of goods for customers
Take advantage of quantity discounts
Hedge against inflation
Types of Inventory




Raw Material
Work In Process
Maintenance / Repair / Operating
Finished Goods
Inventory Classification




ABC Analysis
A type of Pareto analysis
Focus resources on a few critical
inventory items
Annual demand x Cost of item
ABC Analysis



Class A – High dollar volume – 15% of
items, 80% of dollar volume
Class B – Medium dollar volume – 30 %
of items, 15% to 25% of dollar volume
Class C – Low dollar volume – 55% of
items, 5% of dollar volume
Inventory Policies



Purchasing resources much higher for A
items
Tighter physical control for A items
Careful forecasting for A items
Record Keeping and Cycle
Counting





Cycle count – an audit that compares
actual inventory to recorded inventory
Frequency of count depends on class
Eliminate shutdown for a full count
Eliminate annual adjustments
Use trained personnel for dedicated
counts
Other Terms







SKU – Stock Keeping Unit (item number)
Shrinkage
Pilferage
Holding Cost
Ordering Cost
Setup Cost (includes Ordering Cost)
Setup Time
Economic Order Quantity
Model






Demand is known, constant,
independent
Lead time known and constant
Receipt instantaneous and complete
No quantity discount
Variable costs are setup and holding
costs
Stockouts can be avoided
Minimizing Costs
Annual Cost
Order (Setup) Cost Curve
Optimal
Order Quantity (Q*)
Order Quantity
Reorder Point
Inventory Level
Average
Inventory
(Q*/2)
Optimal
Order
Quantity
(Q*)
Reorder
Point
(ROP)
Lead Time
Time