Part I
Basic Concepts 1
Chapter outlines
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INTRODUCTION
• Inventory is a stock or store of goods
• Firms typically stock hundreds or even thousands of
items in inventory, ranging from small things such
as pencils, paper clips etc. to large items such as
machines, trucks etc.
• Independent-demand items that are ready to be
sold or used
• Dependent-demand items, which are components
of finished products, rather than the finished
products themselves
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THE NATURE AND IMPORTANCE
OF INVENTORIES
• Inventories are a vital part of business
• Some very large firms have tremendous
amounts of inventory
• Inventory decisions in service organizations can
be especially critical. Hospitals, for example,
carry an array of drugs and blood supplies
• Inventories may represent a significant portion
of total assets, a reduction of inventories can
result in a significant increase in ROI
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kinds of inventories
• Raw materials and purchased parts.
• Partially completed goods, called work-in-
process (WIP).
• Finished-goods inventories (manufacturing
firms) or merchandise (retail stores).
• Tools and supplies.
• Maintenance and repairs (MRO) inventory.
• Goods-in-transit to warehouses, distributors, or
customers (pipeline inventory).
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Functions of Inventory
1. Meet anticipated customer demand
2. Smooth production requirements
3. Decouple operations
4. Protect against stock-outs
5. Take advantage of order cycles
6. Hedge against price increases
7. Permit operations
8. take advantage of quantity discounts
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Objectives of Inventory Control
• Avoid under- and overstocking of items
• Under stocking results in missed deliveries, lost
sales, dissatisfied customers, and production
bottlenecks
• overstocking unnecessarily ties up funds that
might be more productive elsewhere
• Price tag for excessive overstocking can be
staggering when inventory holding costs are
high
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Main concerns of Inventory management
1. Level of customer service, that is , to have the
right goods, in sufficient quantities, in the
right place, at the right time
2. costs of ordering and carrying inventories
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Overall objective of inventory management
• Overall objective of inventory management is
to achieve satisfactory levels of customer
service
• keep inventory costs within reasonable
bounds.
• Achieve a balance in stocking.
• Decide the timing and size of orders
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Performance measures of I.M
1. Inventory Turnover Ratio of annual cost of goods
sold to average inventory investment.
• It indicates how many times a year the inventory is
sold.
• Generally, the higher the ratio, the better
2. Days of inventory on hand, the number of days of
sales that can be supplied from existing inventory.
• High number of days might imply excess inventory
• Low number might imply a risk of running out of
stock
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REQUIREMENTS FOR EFFECTIVE
INVENTORY MANAGEMENT
1. keep track of the inventory on hand and on order.
2. A reliable forecast of demand
3. Knowledge of lead times and lead time variability.
4. Reasonable estimates of inventory holding costs,
ordering costs, and shortage costs.
5. A classification system for inventory items.
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[Link] track of the inventory on hand and
on order
Inventory Counting Systems may be periodic
or perpetual
I. Periodic inventory system
II. Perpetual inventory system also called as
continual system
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(I)Periodic inventory system
• Periodic inventory system, a physical count of items
in inventory is made at periodic intervals (e.g.,
weekly, monthly) in order to decide how much to
order of each item.
• A manager periodically checks the stock to
determine the quantity on hand.
• Then the manager estimates how much will be
demanded prior to the next delivery period and
bases the order quantity on that information
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Advantages and Disadvantages
• Advantage orders for many items occur at the
same time which may result in economies in
processing and shipping orders cost
• Disadvantages
• Lack of control between reviews.
• Need to protect against shortages between
review periods by carrying extra stock.
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II Perpetual inventory system
• Perpetual inventory system (continual
system) keeps track of removals from
inventory on a continuous basis, so the system
can provide information on the current level
of inventory for each item.
• When the amount on hand reaches a
predetermined minimum , a fixed quantity, Q,
is ordered.
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Perpetual systems
a. Two-bin system Two containers of inventory;
reorder when the first is empty.
b. Universal product code (UPC) Bar code printed on
a label that has information about the item to
which it is attached.
c. Point-of-sale (POS) systems electronically record
actual sales
d. Radio frequency identification (RFID) tags are also
used to keep track of inventory in certain
applications
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Advantages and Disadvantages
Advantage
• Provided control by the continuous monitoring of
inventory withdrawals ,
• management can determine an optimal order quantity.
Disadvantage
• Additional cost of record keeping.
• Physical count of inventories must still be performed
periodically to verify records because of possible errors,
pilferage, spoilage, and other factors that can reduce
the effective amount of inventory
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Part I concluded
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