Inventory Management

Inventory-A physical resource that a firm

holds in stock with the intent of selling it
or transforming it into a more valuable
state.

Inventory System- A set of policies and

controls that monitors levels of inventory
and determines what levels should be
maintained, when stock should be
replenished, and how large orders should
be

What are Inventories?

Inventory
-2

Finished product held for sale

Goods in warehouses
Work in process
Goods in transit
Staff hired to meet service needs
Any owned or financially controlled raw
material, work in process, and/or
finished good or service held in
anticipation of a sale but not yet sold
Dickson Chiu 2006

What are Inventories?

Inventory
-3

Inbound
transportation

Production

Outbound
transportation

Receiving

Material
sources

Production
materials

Shipping

Inventories
in-process

Finished goods

Inventory
locations

Dickson Chiu 2006

Finished goods Customers

warehousing

Inventory Positions in the Supply Chain

Raw
Materials

Works
in
Process

Finished
Goods

Finished
Goods
in Field

Inventory Flow
Transfer
Work Orders
Receipt

Count

Issues

Inventory Flow
Purchase
Order
Purchase
Order
Purchase
Order
Purchase
Purchase
Order
Order

Purchase
Order
Receipt

Receiving

Shipments to
Customers

Finished
Goods

Inspection
Manufacturing
(Work-In-Process)
Stockroom

Shipping

Managing Facilitating Goods

Replenishment
order

Factory
Production
Delay

Replenishment Replenishment
order
order

Wholesaler

Distributor

Shipping
Delay
Wholesaler
Inventory

Retailer

Shipping
Delay
Distributor
Inventory

Customer
order

Customer

Item Withdrawn

Retailer
Inventory

Types of Inventories

Raw Materials

Works-in-Process

Finished Goods

Distribution Inventory

Supplies: Maintenance, Repair and Operating

(MRO)

Type of Inventory
Type of Organization

A. Retail systems
1. Sale of goods
2. Sale of services
B. Wholesale / Distribution
systems
C. Manufacturing systems
1. Special project
2. Intermittent process
Continuous process
a. Process industries
b. Repetitive mfging.

Supplies
Raw
In-Process
Finished
Materials
Goods
Goods

*
*

*
*
*

*
*
*

*
*
*

3.

Types of Inventories
Inventory
-10

Pipeline

Speculative

Inventories held to meet normal operating needs

Safety

Goods purchased in anticipation of price increases

Regular/Cyclical/Seasonal

Inventories in transit

Extra stocks held in anticipation of demand and lead time

uncertainties

Obsolete/Dead Stock

Inventories that are of little or no value due to being out of

date, spoiled, damaged, etc.
Dickson Chiu 2006

Reasons for Inventories

Inventory
-11

Improve customer service

Encourage production, purchase, and

transportation economies

Allows purchasing to take place under most favorable price

terms

Protect against uncertainties in demand and lead

times

Allows for long production runs

Takes advantage of price-quantity discounts
Allows for transport economies from larger shipment sizes

Act as a hedge against price changes

Provides immediacy in product availability

Provides a measure of safety to keep operations

running when demand levels and lead times cannot be
known
for sure

Act as a hedge againstDickson

contingencies
Chiu 2006

Buffers against such events as strikes, fires, and

Reasons Against Inventories

Inventory
-12

They consume capital resources that might be

put to better use elsewhere in the firm
They too often mask quality problems that
would more immediately be solved without
their presence
They divert managements attention away
from careful planning and control of the supply
and distribution channels by promoting an
insular attitude about channel management

Dickson Chiu 2006

Nature of Demand
Inventory
-13

Perpetual demand

Seasonal demand

Not highly variable (3 < Mean)

Terminating demand

Highly variable (3 Mean)

Regular demand

Varies with regular peaks and valleys throughout the year

Lumpy demand

Continues well into the foreseeable future

Accurately forecasting
demand is singly the
most important factor
in good inventory
management

Demand goes to 0 in foreseeable future

Derived demand

Demand is determined from the demand of another item of

which it is a part
Dickson Chiu 2006

Independent and Dependent Demand

Independent demand items are

finished products or parts that are
shipped as end items to customers.
Dependent demand items are raw
materials, component parts, or
subassemblies that are used to produce
a finished product.

Independent vs. Dependent Demand

Independent Demand
(finished goods and spare parts)

Dependent Demand

(components)

C(2)

B(4)

D(2)

E(1)

D(3)

F(2)

Pull vs. Push Inventory Philosophies

Inventory
-16

PUSH - Allocate supply to each

warehouse based on the forecast
for each warehouse

PULL - Replenish inventory with

order sizes based on specific needs
of each warehouse
Demand
forecast
Q1

Warehouse #1

A1
A2
Plant

Q2
Warehouse #2

A3

Demand
forecast

Q3
A = Allocation quantity to each warehouse
Q = Requested replenishment quantity
by each warehouse

Warehouse #3

Dickson Chiu 2006

Demand
forecast

Inventory Management Philosophies

Inventory
-17

Pull

Push

Attempts to synchronize stock flows so as to just meet demand as it

occurs
Minimizes the need for inventory

Supply-Driven

Allocates production to stocking locations based on overall demand

Encourages economies of scale in production

Just-in-time

Draws inventory into the stocking location

Each stocking location is considered independent
Maximizes local control of inventories

Supply quantities and timing are unknown

All supply must be accepted and processed
Inventories are controlled through demand

Aggregate Control - Classification of items

Groups items according to their sales level based on the 80-20 principle
Allows different control policies for 3 or more broad product groups
Dickson Chiu 2006

Inventory Management Objectives

Inventory
-18

Good inventory management is a careful

balancing act between stock availability and
the cost of holding inventory.
Service objectives

Setting stocking levels so that there is only a

specified probability of running out of stock

Cost objectives

Balancing conflicting costs to find the most

economical replenishment quantities and timing
Customer Service,
i.e., Stock Availability

Inventory Holding costs

Dickson Chiu 2006

Objectives of Inventory Control

1) Maximize the level of customer

service by avoiding understocking.
2) Promote efficiency in production and
purchasing by minimizing the cost of
providing an adequate level of customer
service.

Balance in Inventory Levels

When should the company replenish its

inventory, or when should the company
place an order or manufacture a new lot?
How much should the company order or
produce?

INVENTORY PROBLEM CLASSIFICATIONS

Repetitiveness : Single order &
Repeat order
Supply source: Outside supply &
Inside supply
Knowledge of demand :
(1)Constant/ Variable demand
(2)Independent/
Dependent
demand
Knowledge of lead time: Constant
& Variable
Inventory system :
Perpeptual, Periodic,
Material Requirement Planning (MRP),
Distribution Requirement Planning
(DRP)

Costs Relevant to Inventory Management

Inventory
-22

Carrying costs
Procurement costs
Out-of-stock costs

Dickson Chiu 2006

Procurement costs
Inventory
-23

Price of the goods

Cost of preparing the order
Cost of order transmission
Cost of production setup if appropriate
Cost of materials handling or processing
at the receiving dock

Dickson Chiu 2006

Carrying Costs
Inventory
-24

Cost for holding the inventory over time

The primary cost is the cost of money
tied up in inventory, but also includes
obsolescence, insurance, personal
property taxes, and storage costs
Typically, costs range from the cost of
short term capital to about 40%/year.
The average is about 25%/year of the
item value in inventory.
Dickson Chiu 2006

Out-of-stock costs
Inventory
-25

Lost sales cost

Profit immediately foregone

Future profits foregone through loss of
goodwill

Backorder cost

Costs of extra order handling

Additional transportation and handling
costs
Possibly additional setup costs
Dickson Chiu 2006

Balancing Carrying against Ordering Costs

Annual Cost ($)

Higher

Minimum
Total Annual
Stocking Costs

Lower

Total Annual
Stocking Costs
Annual
Carrying Costs
Annual
Ordering Costs
Smaller

EOQ

Larger

Order Quantity

Typical Inventory Conflicting Cost Patterns

Inventory
-27

Minimum cost
reorder quantity

Cost

Total cost

yin
r
r
a

ost
c
g

Procurement cost
Stockout cost
Replenishment quantity
Dickson Chiu 2006

Classifying Inventory Items

ABC Classification (Pareto Principle)

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 and reorder

MANAJEMEN INVENTORY

ABC (PARETO)

Wilfredo Pareto, abad ke-19, ekonom Itali,

melakukan studi tentang distribusi kekayaan

% Annual $ Usage

Class

Ketat
Sedang
Longgar

A
B
C

100
80
60

Control % $ Vol

40

20

0
0

50

100

% of Inventory Items

80
15
5

% Items
20
30
50

Kasus Analisis ABC

PT X sebuah perusahaan distributor barang
makanan, memiliki 50 jenis barang dengan
jumlah dan harga masing-masing barang yang
bervariasi. Di dalam melaksanakan
pengendalian terhadap barang-barang tersebut
pimpinan perusahaan mengalami kesulitan
karena kompleksnya masalah, barang mana
yang sebaiknya dikendalikan dengan ketat dan
barang mana yang diperhatikan tidak secara
ketat, adalah merupakan masalah yang
dihadapi PT tersebut. Kasus tersebut disajikan
pada tabel berikut ini :

Gambar Analisis ABC