Chapter 11:

Managing Inventory Flows in

the Supply Chain
2
Introduction
Inventory management is important as comp.
struggle to reduce:
investment in fixed assets that accommodate
inventory (plants, warehouses, etc.).
Cost of holding inventory
Ultimate challenge is to balance supply and
demand for inventory.
3
Inv in the Firm: Rationale for Inv.
Firm, w/salers & retailers must keep inv.
at acceptable level because difficulty in
forecasting & customers expectation.
Preference can change quickly
makes managing inventory levels a very
challenging.
Twin goals reduced inv. level
while maintaining appropriate customer
service.
4
Inventory in the Firm:
Cycle Stocks
Inventory that will be used up or sold over some
period of time.
Large purchases For price/quantity discounts
& transportation rate discount, but effect costs
of storing inventory.
Cycle stocks can be beneficial as long as the
appropriate analysis is done to cost
justify the storage of inventory.

5
Inventory in the Firm:
Uncertainty/Safety Stocks
Companies accumulate safety stock to buffer
themselves against uncertainty (unexpected
events).
Safety stock more challenging and complex
to manage for many firms.
6
Inventory in the Firm:
Seasonal Stocks: Inventory accumulated and held
in advance of the period during which the firm will
need it to satisfy anticipated demand.
2 reasons:
Perishable supply agriculture
products, transportation issues.
Seasonal demand peak demand
at a certain period, followed by idle
capacity for the rest of the month.
7
Inventory in the Firm:
Anticipatory Stocks: Firms hold in inventory
more products than necessary due to
forecasted event that will negatively impact the
production cycle.
Ex: Labor strikes, shortage of supplies due to
weather or political event, or significant price
increases.
8
Inventory Costs:
Why are they so important?
First, inventory costs are a significant portion
of total logistics costs for many firms.
Second, inventory levels affect customer
service levels.
Third, inventory cost trade-off decisions affect
inventory carrying costs.
9
Inventory Costs:
Inventory Carrying Cost
Capital Cost
Opportunity cost associated with investing in
inventory, or any asset.
What is the implicit value of having capital tied
up in inventory, instead of some other
worthwhile project?
Storage Space Cost
Handling costs, storage cost
(rent), utilities.

10
Inventory Costs:
Inventory Carrying Cost
Inventory Service Cost
Insurance and taxes on stored goods.
Premium depends on product value
Some countries impose a tax on inventory value
on a monthly basis.
Inventory Risk Cost
Largely beyond the control of the firm.
Due to obsolescence, damage,
theft, employee pilferage.
Selling season is underway @
over
11
Inventory Costs:
Order/Setup Costs
Order costs
MIS costs for inventory stock level tracking.
Preparing and processing purchase orders and
receiving reports.
Inspecting and preparing inventory for sale.
Setup Costs
Incurred when production changes
over from one product to another.

12
Inventory Costs:
Carrying Cost versus Order Cost
Order costs and carrying costs respond in
opposite ways to increases in volume.
13
Inventory Costs:
Expected Stockout Cost
Cost of not having product available when a
customer wants it.
Includes backorder costs (special order).
Losing a customer permanently if customer
finds they prefer the substituted product.
Possible to handle by adding safety stock.
Manufacturing firm - stockout
may result in lost hours of
production until the item is
restocked.

14
Inventory Costs:
Inv. in Transit Carrying Cost
Moving inventory is company-owned until
delivered to the customer.
Faster delivery the sooner transaction is
completed, lower transit carrying cost.
But might increase the transportation cost.
In transit carrying cost is
generally less than any
other costs.