Operations Inventory Management Review Notes.docx

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Management and Organizational Studies
Management and Organizational Studies 3330A/B
May Tajima

Inventory Management Review Notes  Inventory: a stock of items or materials held to satisfy eventual demand o Raw materials, purchased parts and supplies o Work in progress products o Finished goods o Rework items o Tools, machinery, and equipment o Labour  Tracking inventory is a big component  Types of Inventory o Anticipation Inventory  Meet demand forecast (e.g. seasonality) o Safety Stock  Buffer to protect against uncertainties  “Just in case” o Lot-size inventory  Result of batch ordering o Pipeline Inventory  In transit o Hedge inventory  To protect against future events (e.g. price increase of raw materials) o Maintenance, repair, and operating (MRO) inventory  To support general operations and maintenance o Decoupling  Work in process items waiting for the next step  Why keep inventory? o Buffer against expected and unexpected changes o Faster customer service o Economics of scale (production, purchasing) o Not to be dependent on suppliers  Why is too much inventory bad? o Cost o Need for storage space o Need for labour o Complacency  General Objective: o To keep enough inventory to meet customer demand and be cost efficient  Main operational concern: o When to order and how many to order  Inventory Control Systems o Q System  Fixed quantity  Reorder when a fixed quantity (Q) whenever the inventory falls to or below a reorder point  Continuous review system: reviews the inventory each time a withdrawal occur  Time between orders varies  E.g. Grocery shop every when your fridge is empty o P System  Fixed time period  Reorder after a fixed time period (P)  Periodic review system – reviews inventory periodically  Order quantity (Q) varies  Q = target inventory level – current inventory level  E.g. grocery shop every Tuesday o ABC System  An inventory classification in which a small percentage of items (A-level) account for most of the inventory value  A:  5-15% of units  70-80% of dollar value  Don’t have many but takes a lot of % of annual income  High priority  Tight control  Carefully determined quantity  Very accurate and detailed inventory records, updated monthly  Typical system: Q  B:  30% of units  15% of dollar value  Moderate priority  Moderate control  Order quantities or order points reviewed quarterly  Batch updating of inventory records  Typical system: P (e.g. order weekly)  C:  50-60% of units  5-10% of dollar value  A lot of items but lower cost and not a big percent of annual income  Low priority  Simply control  Large inventories, visual review  Simplified counting, annual review  Typical system: P (e.g. order monthly)  Step 1: classify products into ABC categories  Step 2: Apply a different inventory policy to each category  Inventory Management Costs o Ordering (Set-up) Cost  Fixed cost incurred whenever a replenishment order is placed, regardless of the quantity  Requisition and purchase ordering, transportation and shipping, receiving and storage, inspecting, accounting and auditing costs o Holding (Carrying) Cost  Cost to keep one item in inventory for a period of time (usually one year)  $ per unit period or % of a unit cost/
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