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MANAGING

INVENTORIES

WHAT ARE
INVENTORIES?
A detailed list of things in stock for a period
of time.
Inventories consist of raw material, work-
in-process and finished goods which are
held by a business in ordinary course of
business, either for sale or for the purpose
of using them in the process of producing
goods and services.



Inventory Management involves
planning, coordinating, and controlling
the acquisition, storage, handling,
movement, distribution, and possible
sale of raw materials, component parts
and subassemblies, supplies and tools,
replacement parts, and other assets
that are needed to meet customer
wants and needs.


Quality products need to be maintained in
as good a condition as possible while they are
being stored. For perishable products this
means not storing them for very long.
Speed inventories must be in the right place
to ensure fast response to customer requests.
Dependability the right stock must be in the
right place at the right time to satisfy customer
demand. There is no point having the wrong
products in stock.

Flexibility stock should be managed to
allow the operation to be flexible. For
example, that may mean keeping sufficient
stock to allow the operations processes to
switch to producing something else and yet
being able to satisfy customers during that
period from existing stock levels.
Cost if possible the total cost of managing
stock levels should be minimized.


Basic Inventory
Concepts
Basic Inventory Concepts
Raw materials, component parts,
subassemblies, and supplies are inputs to
manufacturing and service-delivery processes.
Work-in-process (WIP) inventory consists
of partially finished products in various stages
of completion that are awaiting further
processing.
Finished goods inventory is completed
products ready for distribution or sale to
customers.
Basic Inventory Concepts
Cycle inventory (order or lot size
inventory) is inventory that results from
purchasing or producing in larger lots
than are needed for immediate
consumption or sale.
Safety stock inventory is an additional
amount of inventory that is kept over and
above the average amount required to
meet demand.

Inventory managers deal with two
fundamental decisions:
1. When to order items from a
supplier or when to initiate
production runs if the firm makes
its own items
2. How much to order or produce
each time a supplier or production
order is placed

Inventory Management
Decisions & Costs
Inventory Management Decisions & Costs
Four categories of inventory costs:
Ordering costs or setup costs are incurred
as a result of the work involved in placing
purchase orders with suppliers or configuring
tools, equipment, and machines within a
factory to produce an item.
Inventory-holding costs or inventory-
carrying costs are the expenses associated
with carrying inventory.

Inventory Management Decisions & Costs
Shortage costs or stockout costs
are the costs associated with a SKU
being unavailable when needed to
meet demand.
Unit cost is the price paid for
purchased goods or the internal cost of
producing them.


Economic order quantity model- is multiple
order inventory model which determines an
optimal fixed order quantity once the
inventory level drops to a certain point, which
is called the re-order point. This model is also
called the Q model, fixed order quantity
model, or sawtooth inventory level model. It is
used in inventory management to
avoid product stock outs when there is a
certain lead time for products and a steady
demand pattern

Time interval inventory model - relay on
periodical inventory ordering and use the
passage of time as a trigger to review the
amount of inventory on hold and to place
inventory orders. This model doesn't need
constant tracking and inventory levels are
only reviewed at the set time interval; daily,
weekly, fortnightly, monthly or even
yearly.It is less complex than the EOQ
model.
One-bin inventory system - simple inventory
control system which depends on replenishing
supply at fixed time intervals and not at a
minimum stock level or a Kanban signal. These
time intervals must be set in accordance to bin
size, demand and lead time for the bin to be
replenished up to its maximum limit no matter
the rate of consumption. The bin is drawn
down of material or product and when the
time interval between replenishments has
passed it is replenished by the supply source
up to its maximum capacity.
Two bin systems are common on assembly and
moving manufacturing lines where components
are added to the product or item being built. The
two bin system is just like its name suggests, it is
composed of two bins which are full of
components or materials to start. As production
commences one bin is drawn down of materials
and the other bin, which is still full, acts as
the buffer or safety stock.

In the ABC warehousing inventory
management model all items in the
warehouse or in inventory are classified by
their dollar volume into three categories; A, B,
and C type items. This segmentation allows
the inventory controller to separate the most
important inventory items from the not so
important items, and allows the controller to
focus more on better managing the higher
inventory value items including the correct
amount of Safety stock to avoid stock outs.

A FIFO warehouse system is an inventory
management system in which the first or oldest
stock is used first and the stock or inventory that
has most recently been produced or received is only
used or shipped out until all inventory in the
warehouse or store before it has been used or
shipped out. This ensures that the oldest stock is
used first and reduces the costs of obsolete
inventory. It is also considered the ideal stock
rotation system. This inventory system is common
used in many industries and is sometimes combined
with other warehouse, inventory management
models and inventory systems such as the EOQ
model or any other multiple order inventory
model.