Principles of Supply Chain Management (5e)
INVENTORY
MANAGEMENT
Prepared by Cynthia Wisner, MBA
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Introduction
 Inventory can be one of the most expensive assets of
an organization
 Management must reduce inventory levels yet avoid
stockouts
 Managing perishable inventory presents a unique
challenge
 Excessive inventory is a sign of poor inventory
management
 Excessive inventory adversely affects financial
performance
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Dependent & Independent
Demand
 Dependent Demand –
internal demand for parts based
on demand of the final product in which parts are used
 Examples include; Subassemblies, components, & raw materials
 Independent Demand – demand for end products &
has demand pattern affected by trends, seasonal patterns, &
general market conditions
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Functions of Inventory
• Buffer from uncertainty in the marketplace
• Decouple dependencies in the supply chain (e.g., safety
stock)
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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Principles of Supply Chain Management (5e)
Categories of Inventory
• Raw materials- unprocessed purchase inputs
• Work-in-process (WIP)- partially processed materials not yet
ready for sales
• Finished goods- completed products ready for shipment
• Maintenance, repair & operating (MRO)- materials & supplies
used in producing products (e.g., cleaners & brooms)
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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Principles of Supply Chain Management (5e)
Inventory Costs
• Direct costs- directly traceable to unit produced (e.g., labor)
• Indirect costs- cannot be traced directly to the unit produced
(e.g., overhead)
• Fixed costs- independent of the output quantity (e.g,
buildings, equipment)
• Variable costs- vary with output level (e.g., materials)
• Order costs- direct variable costs for placing an order
• Holding or carrying costs- incurred for holding inventory in
storage
• In mfg, setup costs are related to machine setups
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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Principles of Supply Chain Management (5e)
Turnover Ratio
How many times inventory “turns” in an accounting period.
Higher number is better
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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