(Lecture notes/slide contents of session # 6 dated 28 April, 2008 and onward)
Definition: Inventory is the stock of any item or resource used in an organization.
• Inventory may be defined as the stored accumulation of material resources to be used in a transformation process (Fahim??).
• An Inventory system is the set of policies and controls that monitors levels of inventory and determines what levels (volumes) should be maintained, when stock should be replenished (restored or regained), and how large the orders should be.
• By convention, manufacturing inventory generally refers to items that contribute to or become a part of a firm’s product or output.
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Determining how frequently to order, and in what quantity, is called lot sizing. Two principles apply in cycle inventory:
1. The lot size (Q) varies directly with the elapsed time (or cycle) between orders. If the lot is ordered every five weeks, the average lot size must equal five weeks’ demand.
2. The longer the time between orders for a given item, the greater the cycle inventory must be.
Safety Stock Inventory:
• The stock of inventory that must be maintained in order to avoid problems of delayed supply. To avoid customer service problems, and the hidden costs of unavailable components, companies need to hold safety stock.
• Safety stock inventory protects against uncertainties in demand, lead time, and supply.
• Safety stocks are desirable when suppliers fail to deliver the desired quantity in a specified time.
• Safety stock inventory ensures that operations are not disrupted when such problems occur, allowing subsequent operations to continue.
• The inventory used to absorb uneven rates of demand or supply, which businesses often face, is referred to as anticipation inventory. Predictable, seasonal demand patterns lend themselves to the use of anticipation inventory.
• Anticipation inventory also can help when supply, rather than demand, is uneven. A company may stock up on a certain purchased item if its suppliers are threatened with a strike or have severe capacity limitations.
• The inventory moving from point to point in the materials flow system is called pipeline inventory.
• Materials move from supplier to the plant, from one operation to the next in the plant, from the plant to the distribution center or customer, and from the distribution center to a retailer.
• Pipeline inventory consists of orders that have been placed but not yet received.
The Purposes of Inventory (Management)
• The primary and basic purpose of inventory management is to seek answers to TWO basic questions:
• A) When items should be ordered?
• B) How large the order should be?
All firms keep a supply of inventory for the following reasons:
• To maintain independence of operations
• To meet variation in product demand
• To allow flexibility in production scheduling
• To provide safeguard against variation in raw material delivery time
• To take advantage of economic purchase-order size.
• To make the best use of money available or to avoid unnecessary cost penalty
• To avoid obsolescence
The objective of inventory management can be summarized as follows:
“Minimize costs while maintaining production output, quality and customer service.”
Holding (or carrying ) costs: This broad category includes the costs for storage ( and space) facilities, handling, insurance, pilferage, damage, obsolescence, depreciation, taxes, and the opportunity cost of capital. Obviously, high holding costs tend to...