Inventory Decisions
What are Inventories?
• Stockpiles of raw materials, supplies, components,
work in process, and finished goods.
• Appear at numerous points throughout a firm’s
production & logistics channel
• Having inventories on hand can cost between 20 –
40 percent of their value per year
Why Hold Inventories?
• Improve customer service
• Reduce costs
– May encourage economies of production by allowing
larger, longer, and more level production runs
– Fosters economies in purchasing and transportation
– Buying today in anticipation of higher prices tomorrow
– Variability in time to produce & transport can cause
uncertainties that impact on operating costs & customer
service levels. Inventories serve as a buffer against this
– Unplanned & unanticipated shocks can befall the
logistics system (labor strikes, natural disasters, etc)
Why Not Hold Inventories?
• Wasteful in that they absorb capital that might
otherwise be put to better use
• Do not contribute to the direct value of the product
(do store value however)
• Can mask quality problems
• Encourages insular attitudes – isolating one logistics
channel stage from another
Types of Inventories
• Pipeline stock
– Products in transit between stocking or production points
• Speculation stock
– Typically products bought in anticipation of seasonal
selling or for price speculation
• Regular (or cyclical) stock
– Inventories necessary to meet the average demand during
the time between replenishments
• Safety stock
• Obsolete (or dead, or shrinkage) stock
Cost of Inventories
• Procurement Costs
• Carrying Costs
Space Costs
Capital Costs
Inventory Service Costs (insurance, taxes, etc.)
Inventory Risk Costs
• Out-of-Stock Costs
– Lost sale costs
– Back order costs
Purchasing Activities
Selecting & qualifying suppliers
Rating supplier performance
Negotiating contracts
Comparing price, quality, & service
Sourcing goods & services
Timing purchases
Setting terms of sale
Evaluating the value received
Measuring inbound quality
Predicting price, service, & demand changes
Specifying the form in which goods are to be received
Basic Types of Products Purchased
• Generics
– Low-risk, low value items and services that do not enter
the final product
• Office supplies, MRO items
• Commodities
– Low-risk, high value items or services
• Basic production items, basic packaging, logistics services
Basic Types of Products Purchased
• Distinctives
– High-risk, low value items & services
• Engineered items, parts available only from limited suppliers,
items with long lead times
• Criticals
– High-risk, high value items or services that give the
buyer’s product a competitive advantage in the
• Unique items, items critical to the final product
Advantages of Electronic Procurement
• Lower operating costs
– Reduced paperwork
– Reduced sourcing time
– Improve control over inventory & spending
• Improve procurement efficiency
Find new supply sources
Improve communications
Improve personnel use
Lower cycle times
• Reduce procurement prices
– Improve comparison shopping
– Reduce overall prices paid
Disadvantages of Electronic
Lack of face-to-face contact between buyer & seller
Lack of standard protocols
System reliability
Technology problems
Reluctance to invest time & money to learn new