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Chapter 9 Managing Inventory in The Supply Chain

This document discusses inventory management in the supply chain. It covers several key points: 1) There are various rationales for holding inventory, including batching economies, uncertainty/safety stocks, in-transit stocks, seasonal stocks, and anticipatory stocks. 2) Inventory impacts several functional areas including finance, marketing, and manufacturing. It is an asset and incurs carrying costs. 3) There is a tradeoff between order costs and inventory carrying costs that organizations must consider. Just-in-time and vendor-managed inventory approaches aim to reduce costs. 4) ABC analysis prioritizes inventory items based on their value and impact in order to focus management attention most effectively.

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Gino Naval
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66 views

Chapter 9 Managing Inventory in The Supply Chain

This document discusses inventory management in the supply chain. It covers several key points: 1) There are various rationales for holding inventory, including batching economies, uncertainty/safety stocks, in-transit stocks, seasonal stocks, and anticipatory stocks. 2) Inventory impacts several functional areas including finance, marketing, and manufacturing. It is an asset and incurs carrying costs. 3) There is a tradeoff between order costs and inventory carrying costs that organizations must consider. Just-in-time and vendor-managed inventory approaches aim to reduce costs. 4) ABC analysis prioritizes inventory items based on their value and impact in order to focus management attention most effectively.

Uploaded by

Gino Naval
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 9 Managing Inventory in the

Supply Chain
Inventory

is an asset on the balance sheet and


inventory cost is an expense on the income
statement.
Inventories impacts return on asset (ROA)
Inventory is important to sales and customer
service
Inventory is also important to sourcing and
production

Inventory in US Economy

Rationale for Holding Inventory

Batching Economies
Procurement
Production
Transportation

Uncertainty/Safety Stocks
All

organizations are faced with uncertainty.


On the demand side, there is uncertainty in the quantity
and timing of customer orders
On the supply side, there is uncertainty about getting
what is needed from suppliers and order fulfillment time

Rationale for Holding Inventory

In-Transit and Work-in-Process (WIP) Stocks


Time

required for transportation means that even while


goods are moving, an inventory cost is incurred. The
longer the transit time, the higher the inventory cost.

WIP

stock inventory cost can be significant while they


sits in a manufacturing facility.

Rationale for Holding Inventory

Seasonal Stocks
Seasonality

can occur in the supply of raw materials, in


the demand for finished product, or in both.
Those faced with seasonality issues are constantly
challenged when determining how much inventory to
accumulate.
Seasonality can impact transportation.

Anticipatory Stocks
A

fifth reason to hold inventory arises when an


organization anticipates that an unusual event might
occur that will negatively impact its source of supply.

The Importance of Inventory in Other


Functional Areas
Inventory

is more prominent in the interface of


logistics with other functional areas

Finance (both balance sheet & income statement)

Marketing (sales growth, customer service, market


share)

Manufacturing (production runs, seasonality)

Inventory Costs
Inventory

Carrying Costs

Cost of capital tied up in inventory


lost

of opportunity from investing that capital


elsewhere

hurdle

rate

weighted

average cost of capital (WACC).

Inventory Costs
Storage Space Cost
includes

handling costs associated with moving


products into and out of inventory, as well as costs
like rent, heat, and light

Inventory Service Cost


includes

insurance and taxes

Inventory Risk Cost


reflects

the possibility that inventory value might


decline for reasons beyond firms control

Calculating the Cost of Carrying Inventory


Calculating

the cost to carry (or hold) a


particular item in inventory involves three steps.
Step 1, determine the value of the item stored in
inventory.
Step 2, determine the cost of each individual carrying
cost component to determine the total direct costs
consumed by the item while being held in inventory.
Step 3, divide the total costs calculated in Step 2 by
the value of the item determined in Step 1.

Trade Off between Order Cost and Inventory Carrying Cost

Order Cost is the expense of placing an order for additional inventory

In-Transit Inventory Carrying Cost


Owner

of product while it is in transit will incur


inventory carrying costs.

In-transit

inventory carrying cost becomes


especially important for global supply chains
since distance and time from the shipping
location both increase.

Determining the Cost of In-Transit


Inventories
storage

space cost not relevant to inventory in

transit
insurance needs requires special analysis
inventory in transit may incur obsolescence or
deterioration costs

The Just-in-Time Approach


Four

major elements

zero inventories

short, consistent lead times

small, frequent replenishment quantities

high quality, zero defects

Vendor-Managed Inventory
Basic

principles:

The vendor and its customer agree on which products


are to be managed.
An agreement is made on reorder points and
economic order quantities for each of these products.
As these products are shipped, the customer notifies
the vendor by SKU, of the volumes shipped on a realtime basis.
The vendor is responsible to ensure timely
replenishment and no stock out.

ABC Analysis: Focusing management attention


on the important few

Application of Paretos Law, or the 8020 Rule

Many business situations were dominated by a relatively few


vital elements

Assigns inventory items to one of three groups according


to the relative impact or value of the items

A items are considered to be the most important

B items being of lesser importance

C items being the least important

Relationship between Items in Product line and Sales contribution

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