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GMS 401 Lecture Notes - Opportunity Cost, Economic Production Quantity, Fixed Cost

Global Management Studies
Course Code
GMS 401
Wally Whistance- Smith

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Chapter 11 – Inventory Management
Inventory: An idle material or product
Many of the items a company carries in inventory relate to the kind of business it engages in.
Inventory Management: planning, coordinating, and controlling activities related to the flow of inventory into,
through, and out of an organization
Inventory system: is the set of policies and controls that monitor levels of inventory and determines what
levels should be maintained, when stock should be replenished, and how large orders should be
Importance of Inventories
- Inventories are a vital part of business. Not only are they necessary for operations, but they also
contribute to customer satisfaction.
- A typical company probably has 30% of its current assets and as much as 90% of its working capital
invested in inventories.
- One widely used measure of managerial performance relates to return on investment (ROI), which is
profit after taxes divided by total assets.
- Inventories may represent a significant portion of total assets, but a reduction of inventories can result in
a significant increase in ROI
Functions of Inventory
1. To meet expected sales or usage
2. To wait while being transported
3. To protect against stock outs
4. To take advantage of economic lot size and quantity discount
5. To smooth seasonal production requirements
6. To decouple operations
7. To hedge against price increases
Objectives of Inventory Control
Inadequate control of inventories can result in both under and overstocking of items.
- Inventory management has two main concerns, one is the level of customer service and the other is the
costs of ordering and holding inventories
-The overall objective of inventory management is to achieve satisfactory levels of customer service
while keeping inventory costs within reasons boundaries

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-Managers measure performance through customer satisfaction, but also through inventory turnover:
ratio of annual cost of goods sold to average inventory investment.
Two basic functions concerning investories; to establish a system to safely store and use inventories, to
accuractely keep track of levels of inventories; these require the following;
1. A system to safely store and use inventories
2. A system t keep track of inventories, and replenishment models
3. Reliable forecasts of demands and knowledge of lead times
4. Reasonable estimates of inventory holding, ordering, and shortage costs
5. 5. A-B-C classification
Inventory Counting and Replenishment Models
Periodic Counting: Physical count of items in inventory made at period intervals (e.g. weekly, monthly)
-Fixed order interval model: periodically checking shelves and stockroom to determine quantities on
hand. Then estimating how much of it will be demanded prior to the next delivery.
- Advantage - orders from the same supplier can be issued at the same time, resulting in economies in
prices and shipping
- Disadvantage – possibility of stock out between reviews.
Perpetual tracking: System that keeps track of removals from and additions to inventory continuously, thus
providing current levels of each item
-Fixed order-quantity or reorder point model: An order of a fixed size, usually equal to the economic
order quantity, is placed when the amount on hand drops to or below a minimum quantity called the
reorder point
-Advantages - shortages are avoided, can determine an optimal order quantity and use it for every order
- Disadvantage – added costs of continual record keeping, and possibly frequent orders
Two-bin System: two containers of inventory, reorder when the first is empty (with a reorder card at the
bottom), use the second bin until order arrives
- Advantages – no need to record each withdrawal from inventory or keep track of inventory on hand
- Disadvantages – the reorder card may not be turned in
Bar Codes: a number assigned to an item or location, made of a group of vertical batrs of different thickness
that are readable by a scanner. (5 different types)
Demand Forecasts and Lead-Time Information
Purchase lead time: Time interval between ordering and receiving the order
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