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