CHAPTER 7 INVENTORY MANAGEMENT

1. CHAPTER 7INVENTORY MANAGEMENT Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, PhD

2. � 2009 South-Western, a division of Cengage Learning 2 Learning Objectives You should be able to: Distinguish dependent from independent demand inventories. Describe the four basic types of inventories & their functions. Understand the costs of inventory & inventory turnovers. Understand ABC classification, ABC inventory matrix & cycle counting.

3. � 2009 South-Western, a division of Cengage Learning 3 Learning Objectives (Cont.) Know RFID & how it can be used in inventory management. Understand the EOQ model & its underlying assumptions. Understand the Quantity Discounts & the EMQ Models & their relationships with the basic EOQ model. Understand & able to distinguish among the various statistical ROP models. Describe the continuous review & periodic review systems.

4. � 2009 South-Western, a division of Cengage Learning 4 Chapter Seven Outline Dependent Demand & Independent Demand Concepts & Tools of Inventory Management The Functions & Basic Types of Inventory Inventory Costs Inventory Investment The ABC Inventory Control System Radio Frequency Identification

5. � 2009 South-Western, a division of Cengage Learning 5 Chapter Seven Outline (Cont.) Inventory Models The Economic Order Quantity Model The Quantity Discount Model The Economic Manufacturing Quantity Model The Statistical Reorder Point The Continuous Review System versus the Periodic Review System The Continuous Review System The Periodic Review System

6. � 2009 South-Western, a division of Cengage Learning 6 Introduction Inventory can be one of the most expensive assets of an organization Inventory may account for more than 10% of total revenue or 20% of total assets Management must reduce inventory levels yet avoid stockouts and other problems This chapter will discuss: Dependent & independent demand Tools for managing inventory Basic types of inventories Various inventory management approaches

7. � 2009 South-Western, a division of Cengage Learning 7 Matching Supply & Demand Suppliers must accurately forecast demand so they can produce & deliver the right quantities at the right time at the right cost. Suppliers must find ways to better match supply & demand to achieve optimal levels of cost, quality, & customer service to enable them to compete with other supply chains. Problems that affect product & delivery will have ramifications throughout the chain.

8. � 2009 South-Western, a division of Cengage Learning 8 Dependent & Independent Demand Inventory management models are generally classified as dependent demand and independent demand models. Dependent Demand Describes the internal demand for parts based on the demand of the final product in which the parts are used. Subassemblies, components, & raw materials are examples of dependent demand items. Independent Demand The demand for final products & has a demand pattern affected by trends, seasonal patterns, & general market conditions.

9. � 2009 South-Western, a division of Cengage Learning 9 Concepts and Tools of Inventory Management Functions and Basic Types of Inventory The primary functions of inventory are to: Buffer uncertainty in the marketplace & Decouple dependencies in the supply chain (e.g., safety stock) Four broad categories of inventories Raw materials- unprocessed purchase inputs. Work-in-process (WIP)- partially processed materials not yet ready for sales. Finished goods- products ready for shipment. Maintenance, repair & operating (MRO)- materials used in production (e.g., cleaners & brooms).

10. � 2009 South-Western, a division of Cengage Learning 10 Concepts and Tools of Inventory Management (Cont.) Inventory Costs Direct costs- directly traceable to unit produced (e.g., labor) Indirect costs- cannot be traced directly to the unit produced (e.g., overhead) Fixed costs- independent of the output quantity (e.g, buildings, equipment, & plant security) Variable costs- vary with output level (e.g., materials) Order costs- direct variable costs for making an order. In mfg, setup costs are related to machine setups Holding or carrying costs- incurred for holding inventory in storage

11. � 2009 South-Western, a division of Cengage Learning 11 Concepts and Tools of Inventory Management (Cont.) Inventory Investment Firms should diligently measure inventory investment to ensure that it does not adversely affect competitiveness. Measures include: Absolute value of inventory (found on balance sheet) Inventory turnover or turnover ratio- how many times inventory �turns� in an accounting period. Faster is better!