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Lecture 10

GMS 401 Lecture 10: Lecture 10
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17 Pages
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Department
Global Management Studies
Course Code
GMS 401
Professor
Wally Whistance- Smith

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Description
Chapter 10: Inventory Management How much do you want and when do you want it? Placing an order with manufacturer/supplier for 100 items and want it next week You supplier depending on level of trust and cooperation can ship on time or ahead or after of time, what you want or partial quantity of what you want, or more than what you want or the wrong item There is a whole lot of possibilities Ultimately you want what you need, and you order what you need. Carrying additional inventory into their operating line and cant use that for whatever you need use for When you want it and where you want it to derive you purchasing decision Question whether or not we will get what you need it? What Is Inventory? Stock of items kept to meet future demand Decisions of inventory management o how many units to order o when to order sometimes we refer to it as stock and trade big decision: when should we place the order and how many and based on our likelihood of receiving those orders Types of Inventories raw materials and purchased parts partially completed items called work in process (WIP) finished-goods (or merchandise) spare parts, tools, and supplies o consider as inventory but they arent assets they are parts that work as machinery so must be included in inventory. They are items that feed the tools and manufacturing capacity Items that we have ordered that are in transit or inbound goods o The minute Ive initiated the order and it leaves the manufacturer on route to my grocery store I own those items. Even though they arent on me, they were items that Ive paid for or items that I will be paying for. And if truck breaks down and item damaged (ice cream) they are my destroyed items. May have issued an insurance claim on warehousing or transportation companies o Inbound items that Ive ordered are considered part of inventory Functions of Inventory Inventory is important in the sense that we should know how to manage them You have 1-million-dollar worth of inventory. Go to a bank and say, I will pledge my inventory for operating line, how much can I borrow? Banks will typically say loans to via 65% to 75% of your inventory. 65000-75000 worth of inventory but give a cap at $300 000. Youll only be able to borrow $300 000 They do that to make you drop inventory levels. In this case they want you to drop your inventory levels down to $300 000 Tends to minimize risk. The less stocks the easier to manage. The more inventory the more they have to deal with the risk of managing them and hence they try to encourage you not to carry inventory. Carrying inventory comes with the cost of borrowing them Banks dont want WIP. They can return raw materials to supplier for credits. They can liquidate finished goods. They dont want to lend out to work in process to wait while in transit to protect against stock-outs o difficult to get new customers. (19 times the cost of getting the new customer than satisfying the existing one) o breaks down the loyalty bridge between the client and customer o you can forgive and forget but if they continue that you will eventually switch to take advantage of quality discounts o the more you order the less you pay. If I order 12000 parts over the year than it would cost less than If I order than all at once. Because less order handling and babysitting to smooth production requirements o there are always unanticipated demand. We want to take advantage of those orders and we would want little bit more inventory on hand to produce to decouple operations o if I short a certain amount of inventory and I still have demand for various jobs. The alternative of stocking is to free up production line on items that are short and redirect to produce where I have full inventory at the time to hedge against price increases o in the event there will be an increase in a price of the item due to less supply. You may want to order ahead to hedge against any issues in prices Objective of Inventory Control To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds 65% of all shrinkage in the company is all done by a group of two individuals as employees of that corporations 2/3 of every item thats stolen, or stock shrinkage, is a function of our workers The more stock the more probability of people stealing from you (problem with overstocking) Level of customer service (not understock) o Fill rate Costs of ordering and carrying inventory (not overstock) o Inventory turnover Effective Inventory Management Managing quantity, cost and building in control make sure that our inventory is effectively being controlled so its not philtered, damaged A reliable forecast of demand Knowledge of lead times Reasonable estimates of o Holding costs o Ordering costs o Shortage costs A classification system A system to keep track of inventory Safely Storing Inventory Warehouse Management System (WMS) computer software that controls the movement and storage of materials within a warehouse, and processes the associated transactions Warehouse/storeroom concerns o Security o Safety o Obsolescence Safety is a primary concern. Different ways to move around inventories. (forklifts) Security concerns: break ins or something is stolen, the potential for increasing liability insurance will be there Slow moving inventory that become technologically obsolesce Technological obsolescence due to poor warehousing and not realizing what stock you have is a big concern for management and stock counting Inventory Counting Systems Periodic counting: Physical count of items made at periodic intervals Perpetual (or continual) tracking keeps track of removals from and additions to inventory continuously, thus providing current levels of each item In retails managers ask employees to count inventory and hand it in. In the process, the employee is not motivated to do so and not paying attention to how much stock there really is (if they see 10 theyll put down 10, without counting). This system is as good as the info put into them. So, when someone orders for that 10 item when it is not there, they wont be able to get that item. Inventory Replenishment Fixed Order Quantity/Reorder Point Model o An order of a fixed size is placed when the amount on hand drops below a minimum quantity called the reorder point o When stock falls down to a certain point, an order is always generated o Computer system model, sometimes however, you dont need them o The concern is that you may not act fast enough for the slow-moving inventories Two-Bin System o Two containers of inventory; reorder when the first is empty o Two containers of inventory so when one is empty you order more. o Very primitive system Bar Code o A number assigned to an item or location, made of a group of vertical bars of different thickness that are readable by a scanner o Universal Product Code (UPC) Radio Frequency Identification (RFID) o technology that uses a RFID tag attached to the item that emits radio waves to identify items. Microsoft Hollande expected to be beneficial for inventory counting Costs Associated with Goods for Sale Managing inventories to increase net income requires effectively managing costs that fall into these five categories: 1. Purchasing Costs 2. Ordering Costs 3. Carrying Costs cash on hand to finance things. 4. Stockout Costs loss of customers or good will 5. Quality Costs manufacture something put into inventory and it can be damaged, rework, reshipping Management of Inventory Costs 1. Purchasing Costs the cost of goods acquired from suppliers, including freight 2. Ordering Costs the costs of preparing and issuing purchase orders; receiving and inspecting the items included in the orders; and matching invoices received, purchase orders, and delivery records to make payments 3. Carrying Costs the costs that arise while holding inventory of goods for sale. This includes the opportunity cost of the investment tied up in inventory, and costs associated with storage 4. Stockout Costs the costs that result when a company runs out of a particular item for which there is customer demand (stockout) and the company must act quickly to meet the demand or suffer the costs of not meeting it 5. Quality Costs the costs that result when features and characteristics of a product or service are not in conformance with customer specifications. These costs include: o Prevention o Appraisal o Internal Failure o External Failure o The cost we incur when making sure the item performs properly is still a cost Why Hold Inventory - Five reasons 1. To decouple workcenters; 2. To meet variations in demand; 3. To allow flexible production schedules; 4. As a safeguard
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