Inventory

1. NASHVILLE STATE Community College Warehouse & Inventory Management LOGI 1030 What is Inventory? 1

2. What is Inventory? 1. A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state 2. Purpose of inventory management: How many units to order When to order When to return or replace 2

3. Improve customer service Maintain independence of the supply chain Bullwhip effect Seasonal or cyclical demand Hedge against the future (demand, price volatility…) Inventory provides independence from vendors Take advantage of price discounts Transportation discounts Protection from shocks (labor strikes, natural disasters, surges in demand, etc.) Reasons We Keep Inventory 3

4. Reasons We Keep Inventory Adding value through inventory: Quality – Inventory can act as a buffer against poor quality. Speed – Location of inventory can have a significant impact on fulfilling customer demand Flexibility – Location and level of anticipatory inventory directly effect the firm’s flexibility to meet demand Cost – Direct effect: purchasing, delivery, manufacturing Indirect: inventory holding costs, stockouts 4

5. Reasons Against Inventory Non-value added costs Lost opportunity costs Complacency Inventory deteriorates, becomes obsolete, spoils, lost, stolen, etc. 5

6. Raw materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment Types of Inventory 6

7. Dependent A demand based on demand for another item Independent A demand that is not based on demand for another item Two Forms of Demand For example , The demand for the chairs of a table and the table itself is based on the demand for the table. The table in this example is the item with independent demand and the chairs are the item with the dependent demand. 7

8. Inventory management is the process of keeping track of inventory, and having the delicate balance of supply and demand firmly mastered. Inventory management helps to ensure that proper inventory is maintained at all times. Inventory costs money. Therefore, a company does not want to have too much inventory or too little inventory. What is Inventory Management? Properly executed, inventory management helps ensure the company will have exactly the amount of inventory needed. Inventory Management must be designed to meet the dictates of the marketplace and support the company's strategic plan. 8

9. The basic building blocks of inventory management are: Sales Forecasting/Demand Management Sales and Operations Planning Production Planning Material Requirements Planning Inventory Reduction Inventory Management 9

10. Inventory and Quality Management Customers usually perceive quality service as the availability of goods they want when they want them Inventory must be sufficient in both quantity and quality to provide high-quality customer service 10

11. Objectives of Inventory Control Maximize the level of customer service by avoiding stockouts Promote efficiency in production and purchasing by minimizing the cost associated with providing an adequate level of customer service 11

12. Inventory Costs Carrying cost cost of holding an item in inventory Ordering cost cost of replenishing inventory Shortage cost temporary or permanent loss of sales when demand cannot be met 12

13. Economic Order Quantity (EOQ) Models EOQ optimal order quantity that will minimize total inventory costs Basic EOQ model Production quantity model 13

14. Assumptions of Basic EOQ Model Demand is known with certainty and is constant over time No shortages are allowed Lead time for the receipt of orders is constant Order quantity is received all at once 14

15. Inventory Order Cycle Demand rate Time Lead time Lead time Order placed Order placed Order receipt Order receipt Inventory Level Reorder point, R Order quantity, Q 15

16. EOQ Cost Model Order Quantity, Q Annual cost ($) Total Cost Carrying Cost Slope = 0 Minimum total cost Optimal order Ordering Cost 16

17. Production Quantity Model An inventory system in which an order is received gradually, as inventory is simultaneously being depleted Non-instantaneous receipt model assumption that not all inventory is received at once 17

18. Production Quantity Model Inventory level Time Order receipt period Begin order receipt End order receipt Maximum inventory level Average inventory level 18

19. Safety Stock Safety stock - buffer added to on hand inventory during lead time Stockout - an inventory shortage Service level - probability that the inventory which is available during lead time will meet demand 19

20. Classifying Inventory Items ABC Classification A Items – very tight control, complete and accurate records, frequent review B Items – less tightly controlled, good records, regular review C Items – simplest controls possible, minimal records, large inventories, periodic review 20

21. Planning Supply Chain Inventory Levels Two Methods Anticipatory – Allocate supply to each warehouse based on a forecast Determine requirements by forecasting demand for the next production run Establish current on-hand quantities Add appropriate safety stock based on stock availability levels and uncertainty in demand levels Response-Based (Demand) – Replenish based on the specific need of each warehouse Replenishment, production, or purchase of stock are made only when it has a need exists downstream Requires shorter order cycle time, often more frequent, are lower volume orders Determine stock level requirements to meet only most the immediate planning period (short term) 21

22. Accurate sales forecasting allows a company to effectively control inventory, production facilities, labor, inventory levels and logistics, and is the base of which most all other operations within the company function. Sales Forecasting/Demand Management Sales forecasting allows a company to better negotiate contracts for raw materials, logistics, and vendor supplied assemblies. An accurate sales forecast provides for a smother running operation with fewer last minute rushes to fulfill customer requirements. Production Planning Production planning is a complex process that covers a wide range of activities that insures that material, capacity, and human resources are available when needed. It is the foundation upon which the manufacturing/distribution organization operates. Yogi Berra said it best " if you don't know where you are going, you might not get there " 22

23. Material Requirements Planning Material Requirements Planning or MRP involves getting material on hand when needed for production or sales. The goal of the MRP or Material Requirements Planning document is to supply information that will enable the company to have enough inventory on hand to fulfill demand, only when needed, at a quality level that meets specification, and at the lowest price. Inventory Reduction Inventory reduction is about eliminating excess inventory, improving inventory turn rates, increasing inventory turnover, and meeting on time delivery. Excess inventory ties up money and needs to be reduced in order to free up cash for investment in revenue-growth activities. 23

24. Guide to Inventory Accuracy Think of inventory as $$$ sitting on the shelf Creating the Culture for Inventor Accuracy Attitude Process Definition Procedure Documentation Employee Training Monitoring Process for Compliance Setting Standards Tracking Accuracy Count, Count, Count Reevaluate 24

25. Attitude: Maintaining inventory accuracy must be an integral part of the attitude of the organization. No compromising. Process Definition: You will struggle to maintain your inventory if you do not clearly define the processes throughout the organization that affect inventory. Process Documentation: Document the previously defined processes. Employee Training: Set a training schedule to train all employees. Make it clear the documented process is the ONLY way to perform the task. Employee Testing: Formally test the employees on the procedures. This is the only way to know if they know and understand the processes. Monitoring Processes for Compliance: Any observed actions which do not comply with the written procedures must be addressed immediately. Setting Standards: Establish minimum production and accuracy standards wherever practical. Standards should be set high enough, yet be achievable. Creating the Culture for Inventor Accuracy 25

26. Tracking Accuracy: Track accuracy on the individual level, department level and organizational level. Measure as a percent of total transactions performed. Accountability: Hold people accountable to the documented processes and standards. Count, Count, Count: Cycle count to evaluate inventory accuracy and to identify areas requiring additional focus. Cycle counting is often the first step in identifying problems in your processes. Reevaluate: Regularly reevaluate your processes and procedures. Again, cycle counting will help direct you to inefficiencies within your processes. Creating the Culture for Inventor Accuracy 26

27. Types of Cycle Counts 100% Audit: This can be done either all at once one time a year, or it can be done throughout the year. Random Cycle Count: Cycle Counts performed at random. Not a very effective method to verify inventory accuracy. Forced Cycle Count: Usually done when there is an indication of a problem with the accuracy of a give storage location. Follow Up Cycle Count: This is done directly after a stocker or picker has visited a location. The intent is to verify that the stockers and pickers are working in compliance with the documented processes. 27