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Lecture 8

33:799:301 Lecture 8: 0008-IntrotoSupplyChain-2017-03-07

Supply Chain Management
Course Code
James King

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A key decision in any product-based supply chain is how much inventory to keep on hand
Inventory is often one of the company’s largest assets, so careful management of that asset is
an essential business requirement
Management must reduce inventory levels yet meet revenue and customer service targets
Inventory must be secured, tracked and verified (counted)
The primary functions of inventory are to:
- Buffer uncertainty in the marketplace
- Decouple dependencies in the supply chain (safety stock)
Maintaining adequate finished product inventory allows a company to fill customer orders
Maintaining adequate materials inventory allows a company to support manufacturing
operations and the production plans
Failing to manage inventory adequately can lead to significant issues and inefficiencies
throughout the supply chain, including dissatisfied customers, lost sales and revenues, poor
cash flow and higher costs
The goal of inventory management is to meet customer expectations while also meeting the
company’s financial targets
- Enable sales
- Increase profitability
- Improve cash flow
Inventory is the goods and materials that are held in stock for sales, service, production and
Four levels of inventory”
1. Raw material used in production
2. Work-in-process items (semi-produced but not complete)
3. Finished products to provide customer service
4. Maintenance, repair, and operating supplies needed to run a business
Crude or processed material that can be converted by a manufacturing process into a new and
useful product
- Raw materials can be purchased
- Input that starts the production process
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Material in various stages of completion, from raw material that has been released for initial
processing through fully processed material awaiting final inspection and acceptance as finished
- WIP value is higher than raw materials as it now includes labor cost
- Postponement Strategy generally suggests maintaining an amount of almost completed
WIP inventory near the point of consumption to enable quick response to customer
orders for customized products
Those items on which all manufacturing operations, including final testing, have been
completed, these products are available for sale
Materials that you need to run the manufacturing operation and the business but do not end up
as part of the finished product
Inventory in the Service Industry:
Companies in the service industry cannot maintain inventory of services since services are
produced and consumed immediately upon demand
Companies in the service industry do maintain inventory of “facilitating goods” which are those
items that are used in the service being provided
Inventory includes: food, tableware, other elements of the dining operation
Car repair facilities require il, filters, tools, and other fluids to enable the maintenance operation
There are three levels of internal inventory held by companies to:
- Meet customer demand
- Buffer against uncertainty in demand and/or supply
- Decouple supply from demand
- Decouple dependencies in the supply chain
There is also inventory which is held external to the company by downstream supply chain
channel partners
Pipeline inventory
- Inventory in transit
- Inventory held/owned by suppliers, or by wholesalers, distributors, retailers, and
1. Cycle Stock - To Meet Customer Demand
2. Safety Stock - The buffer against uncertainty and decouple dependencies in the supply
3. Strategic Stock - To decouple supply from demand
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