module 7: inventory management 1prepared by: ali siddiqi

Prepared By: Ali Siddiqi 1

Module 7:

Inventory Management


What You Will Learn

Purpose of inventories Objective of inventory management Types of inventories Requirements for an effective inventory

system Inventory control techniques


Purpose of Inventories

• To smooth production requirements• To decouple the components of production-

distribution system• To provide for anticipated demand• To protect against stock outs• To hedge against price increases


Objective of Inventory Management

• To strike a balance between inventory investment and customer satisfaction


Types of Inventories

• Raw material inventory– Inventory that is purchased but is waiting to be processed

• Work-in-process inventory– Inventory that is being processed to become output

• Maintenance/repair/operating supplies– Inventory used to keep machines and processes running

productively• Finished-goods inventory– Waiting for shipment– Used as buffer


Requirements for Effective Inventory System

• Track inventory on hand and on order• Reliable forecast of demand• Knowledge of lead times and lead time

variability• Classification system for items


Video: Inventory Management System at Cole’s Hardware


Inventory Control Techniques: ABC Analysis

• Pareto Principle: 80/20 Rule• Critical few and trivial many• Annual Dollar (Riyal) Volume:

annual demand x cost per unit• Divide inventory into 3 categories:

Class A: High value, low volume (20% of Inv; 70% ADV)Class B: Moderate value, moderate volume (30% of Inv;

25% ADV)Class C: Low value, high volume (50% of Inv; 5% ADV)


Inventory Control Techniques: ABC Analysis

A Items

B ItemsC Items

Perc

ent o

f ann

ual d

olla

r usa

ge 80 –70 –60 –50 –40 –30 –20 –10 –

0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100

Percent of inventory items


Inventory Control Techniques: Record Accuracy

• Firm needs to know inventory on hand• Allows the firm to focus on items needed• Must keep good records of incoming and

outgoing inventory• Limited access to inventory storage area• Bins, shelf space, and parts all must be labeled


Inventory Control Techniques: Cycle Counting

• Audits• Annual audits: Disadvantageous• Use of ABC classification– A Items: Counted frequently– B Items: Once a quarter– C Items: Twice a year


Inventory Control Techniques: Service Inventories

• Inventory in services is highly accessible• Shrinkage– Unaccounted inventory between receipt and sale

• Pilferage– Small amount of stolen inventory

• Prevention:1. Good personnel2. Tight control of incoming shipment3. Control over all goods leaving facility


Inventory Models

• Independent demand• Dependent demand


Inventory Costs

• Holding Costs– AKA Carrying Costs– Insurance– Spoilage– Pilferage– Warehousing costs


Inventory Costs

• Ordering Costs– Invoices– Determining order amount– Inspection of good

• Shortage costs– Opportunity costs– Loss of customer good will

module 7: inventory management 1prepared by: ali siddiqi

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