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Chapter 12

Chapter 12 BU395.docx

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Maryam Hafezi

BU395 Chapter 12 – Inventory Management Week 3 Introduction -Good inventory management is important for the successful operation of most organizations and their supply chains -Poor inventory management hampers operations, diminishes customer satisfaction, and increases operating costs -Inventory – an idle material or product usually in a warehouse or storeroom -Inventory management – planning and controlling the inventories Importance of Inventories -A typical company probably has about 30% of its current assets and perhaps as much as 90% of its working capital invested in inventories -The major source of revenue Functions (Purposes) of Inventories 1. To wait while being transported 2. To protect against stock-outs 3. To take advantage of economic lot size and quantity discount 4. To smooth seasonal demand or production 5. To decouple operations 6. To hedge against price increases - occasionally a buyer or manager will suspect that a substantial price increase is about to occur and will purchase large than normal amounts to avoid the price increase – anticipation inventory Importance and Objectives of Inventory Management -Inadequate management of inventories can result in both under- and overstocking of items -Understocking results in missed deliveries, lost sales, dissatisfied customers, and production stoppage -Overstocking unnecessarily ties up funds that might be more productive elsewhere and also ties up storage space -Inventory management has two main concerns: 1. Level of customer service (Availability) – to have the right goods, in sufficient quantities, in the right place, at the right time 2. 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 reasonable bounds -A buyer must make two fundamental decisions: -Timing of order -Size of order -Managers have a number of measures of performance they can use to judge the effectiveness of their inventory management -Inventory turnover – ratio annual cost of goods to average inventory investment -The higher the ratio the better -A benefit of this measure is that is can be used to compare companies of different size in the same industry -Days of inventory is a number that indicates the expected number of days of sales or usage that can be supplied from existing inventory Requirements for Effective Inventory Management -Inventory managers are required to perform the following activities: 1. Safely storing and using inventories 2. Tracking inventories and using inventory control models 3. Forecasting demands and lead times 4. Estimating inventory costs 5. Performing A-B-C classification BU395 Chapter 12 – Inventory Management Week 3 Safely Storing and Using Inventories -Most inventory items need to be protected from harsh outdoor environments such as rain and snow -Inventory is usually stored indoors -A warehouse should be uncluttered so that items can be stored and retrieved easily -Warehouse management system – a computer software that controls the movement and storage of materials within a warehouse, and processes the associated transactions -Some inventoried items are expensive, so access to the building should be controlled, and items that are prone to theft should be locked p in secure areas -A common problem is items going obsolete -To be efficient, outdated items should be either sent back to the supplier or sold at a discount Tracking Inventories and Using Inventory Control Models -Periodic counting- physical count of items in inventory made at periodic intervals (Ex. Weekly, monthly) -Perpetual tracking – keeps track of removals from and additions to inventory continuously, thus providing the current inventory level of each item -Fixed order quantity/reorder point model – an order of a fixed size is placed when the amount on hand drops to or below a minimum quantity called the reorder point -Two bin system – reorder when the first bin is empty; use the second bin until order arrives; top off the second bin and leave the rest in the first bin; start drawing inventory from the first bin until it is empty again, and repeat -Bar code – a number assigned to an item or location, made of a group of vertical bars of different thickness that are readable by a scanner Forecasting Demands and Lead Times -Purchase lead time – time interval between ordering and receiving the order -Point-of-sale (POS) systems – software for electronically recording sales at the time and location of sale Estimating Inventory Costs -Three basic costs are associated with inventory: holding, ordering, and shortage costs -Holding (Carrying) cost – cost to keep an item in inventory -Ordering cost – cost of the actual placement of an order (not including the purchase cost) -Shortage cost – cost of demand exceeding supply of inventory on hand; includes unrealized profit per unit, loss of goodwill, etc. -Setup – preparing the machine for the job by adjusting it, changing cutting tools, etc. Performing A-B-C Classification -Items held in inventory are typically not of equal importance in terms of dollars invested, profit potential, sales or usage quantity, or shortage cost -A-B-C Classification – grouping inventory items into three classes according to some measure of importance, and allocating inventory control efforts accordingly -A = very important -B = moderately important -C = least important -A items generally account for about 15 to 20 percent of the types of items in inventory but about 70 to 80 percent of the annual dollar value -C items may account for about 50 to 60 percent of SKUs but only about 5 to 10 percent og the annual dollar value (ADV) -A items should receive close attention through better forecasting, more frequent ordering, and better safety stock determination -The C items should receive only loose control, and the B items should have controls that lie BU395 Chapter 12 – Inventory Management Week 3 between the two extremes -Annual dollar value may be the primary factor in classifying inventory items -Cycle counting – regular actual count of the items in inventory on a cyclic
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