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Inventory Management I
Definitions
 Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.
 Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be
Inventory
 Def. - A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.
Raw Materials
 Works-in-Process
 Finished Goods
 Maintenance, Repair and Operating (MRO)
 Expensive Stuff
 The average carrying cost of inventory across all mfg.. in the U.S. is 30-35% of its value.
What does that mean?
 Savings from reduced inventory result in increased profit.
Zero Inventory?
 Reducing amounts of raw materials and purchased parts and subassemblies by having suppliers deliver them directly.
 Reducing the amount of works-in process by using just-in-time production.
 Reducing the amount of finished goods by shipping to markets as soon as possible.
 Inventory Positions in the Supply Chain
Reasons for Inventories
 Improve customer service
 Economies of purchasing
 Economies of production
 Transportation savings
 Hedge against future
 Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.)
 To maintain independence of supply chain
Inventory and Value
 Remember this?
 Quality
 Speed
 Flexibility
 Cost
Nature of Inventory: Adding Value through Inventory
 Quality - inventory can be a “buffer” against poor quality; conversely, low inventory levels may force high quality
 Speed - location of inventory has gigantic effect on speed
 Flexibility - location, level of anticipatory inventory both have effects
 Cost - direct: purchasing, delivery, manufacturing
indirect: holding, stockout.
HR systems may promote this-3 year postings
Nature of Inventory:
Functional Roles of Inventory
 Transit
 Buffer
 Seasonal
 Decoupling
 Speculative
 Lot Sizing or Cycle
 Mistakes
 Design of Inventory Mgmt. Systems: Macro Issues
Need for Finished Goods Inventories
 Need to satisfy internal or external customers?
 Can someone else in the value chain carry the inventory?
 Ownership of Inventories
 Specific Contents of Inventories
 Locations of Inventories
 Tracking
How to Measure Inventory
 The Dilemma: closely monitor and control inventories to keep them as low as possible while providing acceptable customer service.
 Average Aggregate Inventory Value: how much of the company’s total assets are invested in inventory?
 Ford:6.825 billion
 Sears: 4.039 billion
Inventory Measures
 Weeks of Supply
 Ford: 3.51 weeks
 Sears: 9.2 weeks
 Inventory Turnover (Turns)
 Ford: 14.8 turns
 Sears: 5.7 turns
 GM: 8 turns
 Toyota: 35 turns
Reasons Against Inventory
 Non-value added costs
 Opportunity cost
 Complacency
 Inventory deteriorates, becomes obsolete, lost, stolen, etc.
Inventory Costs
 Procurement costs
 Carrying costs
 Out-of-stock costs