Inventory Management

INVENTORYMANAGEME

NT

by: Agaton; Patricio; Ramos, C.N.

Objectives:What is inventory management?

01

Elements of good inventory management02

Techniques in inventory management03

Basic guidelines in handling different

types of inventory 04

?what isinventory

Inventoryis a stock or store of goods

?what are thekinds of inventory

Raw materialsaWork in processb

Finished goods inventorycMaintenance and repairs (MRO) inventoryd

Goods-in-transit to warehouses,

distributors, or customers (pipeline

inventory)e

...kinds of inventory

based on demand

Dependent-demanda

Independent-demandb

components of finished products

items that are ready to be sold

?what are itsfunctions

Avoid lost sales01

To achieve efficient production runs

02

To take advantage of quantity discounts

03

To protect against stock-outs04

To reduce order costs05

what does it mean?

01

inventory management

Inventory management

is the process of making sure the right materials are in the right place at the right time at the lowest possible cost. 

It aims to...achieve satisfactory levels of customer service

keeping inventory costs within reasonable bounds

while

With regards to inventory:establish a system to keep track of items in inventory

make decisions about how much and when to order

and

Inventory controlthe process of knowing how

much inventory you have and where it is

what are the things to consider?

02

elements of good inventory management

A system to keep track of inventory

a

A reliable forecast of demandb

Knowledge of lead timesc

Reasonable estimates of holding costs, ordering costs, and shortage costs

d

A classification systeme

Periodic system Perpetual system

tactic Physical count at periodic intervals

Continuously tracks removals from inventory

advantageOrders occur at the same time

• Control• Fixed order quantity

disadvantageLack of control between reviews

• Costly record keeping• Need for verification

Inventory count systems

Two-bin system

Universal Product Code (UPC)

Point-of-sale (POS) systems

Two containers. Reorder the first stock emptied

Bar code printed on a label that hasinformation about the item to which it is attached

Record items at time of sale

Demand forecasts and lead time

Lead time is the time interval between ordering and receiving the order

Holding costscost to carry an item in inventory for a length of time, usually a year

Ordering costscosts of ordering and receiving inventory

Shortage costscosts when demand exceeds supply

how do they keep track of inventories?

03

techniques in inventory management

Selective inventory control01

Set up various stock levels02

Systems of inventory control03

Economic Order Quantity04

Reorder point and safety stock05

06

Application of computers for inventory

07

Just-in-Time inventory management

08 Inventory ratio

09 Aging schedule of inventory

Selective inventory control

NAME USE FUNCTION

ABC (Always Better Control)

value of conceptionto control raw material, components, and WIP inventories of the business

HML (High, Medium, Low)

material unit price to control purchase

VED (Viral, Essential, Desirable)

criticality of the common parts

to determine the stocking level of the spare

Selective inventory control

NAME USES FUNCTION

FSN (Fast, Slow, Non-moving)

consumption pattern of the component

to control obsolescence

SDN (Scarce, Difficult, Easy-to-obtain)

problems faced in procurement

lead time analysis and purchasing strategies

GOLF (Gov’t, Ordinary, Local, Foreign Sources)

source of materialprocurement strategies

Selective inventory control

NAME USES FUNCTION

SOS (Seasonal, Off-seasonal)

nature of supplies procurement strategies for seasonal items

Setting up various stock levels

STOCK LEVEL FORMULA

MaximumReorder Level − Expected minimum consumption in units during minimum weeks to obtain delivery + Reorder quantity

MinimumReorder Level − (Average usage per period × Average time to obtain delivery)

Reorder

Setting up various stock levels

STOCK LEVEL FORMULA

Maximum reorder period × Maximum usage 

Average Maximum level + minimum level2

Economic Order Quantity

The order size that minimizes total annual cost

where:D = annual demand

S = order cost

H = annual holding cost per unit

𝑸=√𝟐𝑫𝑺𝑯

Reorder pointwhen the quantity on hand of an item drops to this amount, the item is reordered

where:d = demand rate

LT = lead time

𝑹𝑶𝑷=𝒅×𝑳𝑻

¿𝒆𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒅𝒆𝒎𝒂𝒏𝒅𝒅𝒖𝒓𝒊𝒏𝒈 𝒍𝒆𝒂𝒅𝒕𝒊𝒎𝒆+𝒔𝒂𝒇𝒆𝒕𝒚 𝒔𝒕𝒐𝒄𝒌

Safety stockstock that is held in excess of expected demand due to variable demand rate and/or lead time.

Application of computers

ADVANTAGES DISADVANTAGES

• Saves time • Reliance on technology• Speed and efficiency • Expense• Document generation • Risk of fraud

Just-in-Time Inventory Management

Increases efficiency and decreases waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.

Inventory Ratio

where:COGS = sales − gross profit

Ave. Inventory = Inventory, beg + Inventory, end2

𝑰𝑻𝑹=𝑪𝒐𝒔𝒕𝒐𝒇 𝑮𝒐𝒐𝒅𝒔𝑺𝒐𝒍𝒅𝑨𝒗𝒆𝒓𝒂𝒈𝒆𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚

Aging schedule of inventoryClassification of inventories in accordance with age

Helps assist in identifying inventories which are moving slowly to production or sale

That in all thingsGod may be glorified!