Receiving
Production Process
Finished
Goods
Raw Materials
Work
center
Work center
WIP
Work center
Work
center
WIP
Inventory Management
Locations
Inventory Management
•
Determining
the amount of inventory to keep in
stock
•
How
much to order and when to replenish, or
order.
Customer Demand
•
The starting point for the management
of
inventory.
•
Inventory exists to meet customer
demand.
•
Two types of customers:
–
Internal customers
–
External customers
Demand & Inventory
•
Determinant of effective inventory
management is
an accurate forecast of demand.
•
Forecasting & inventory are
interrelated.
Independent Demand
A
B(4)
C(2)
D(2)
E(1)
D(3)
F(2)
Dependent Demand
Independent demand is uncertain.
Dependent demand is certain.
Inventory
: a stock or store of goods
Inventory Costs
•
4 types of inventory costs:
–
Purchasing Costs
–
Carrying Costs (Holding costs)
–
Ordering Costs
–
Shortage Costs (Backorder costs)
Inventory Costs
•
Carrying Costs (Holding costs)
–
Are the costs of holding an item in inventory.
–
The greater the level of inventory over a period of time, the
higher the
carrying costs.
–
Includes:
•
Cost of losing the use of funds tied up with inventory
•
Direct storage costs such as rent, heating, cooling, lighting, security,
refrigeration,
record keeping & transportation
•
Interest on loans used to purchase inventory
•
Depreciation
•
Obsolescence
•
Product deterioration & spoilage
•
Breakage
•
Taxes
•
Pilferage
Inventory Costs
•
Ordering Costs
–
Are the costs of replenishing inventory.
–
As the number of orders increases, the ordering cost
increases.
–
Includes:
•
Requisition & purchase orders
•
Transportation & shipping
•
Receiving
•
Inspection
•
Handling & storage
•
Accounting & auditing costs
Inventory Costs
•
Shortage Costs (Backorder Costs)
–
Also referred to stockout costs
–
Are temporary or permanent loss of sales when demand cannot
be met.
–
Demand cannot be met because of insufficient inventory.
–
Difficult to determine.
–
Includes:
•
Loss of profits
•
Loss of goodwill
•
Price discounts or rebates
•
Work stoppages which can cause delays
•
Downtime costs
•
Cost of lost of production
–
As the amount of inventory on hand increases, the carrying
cost increases,
whereas shortage costs decrease.
Functions of Inventory
•
To meet anticipated demand
•
To smooth production requirements
•
To decouple operations
•
To protect against stock
outs