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Fundamentals SCM of Inventory
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Supply Chain Management and Inventory
Management
A major emphasis over the past two decades
has been placed on reducing the amount of
inventory
There are many who argue that having
inventory is bad
Their reasoning is based on the financial
implications of holding inventory
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Types of Inventory
Raw materials/Component Parts
Work-in-process
Finished goods
Maintenance, repair, and operating supplies
(MRO)
Transit Inventory
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So, Why Carry Inventory?
Balance Supply and Demand
Seasonality
Production Processes
Provide Buffer against Uncertainty/Variability in
Supply and/or Demand
Basic Economics of Buying
Geographic Specialization
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Financial Implications of Inventory
Inventory represents investment by the firm
It is an asset on the firms balance sheet
Companies typically desire to keep their investment
in assets as low as possible
Maintaining inventory costs money on an ongoing basis.
Thus, inventory also causes expenses to be incurred
These expenses show up on the firms income
statement
However, not having inventory when customers
want it results in negative financial
consequences as well
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Inventory Holding/Carrying Cost
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Cost of capital (opportunity cost)
Cost of owning and maintaining storage space
Taxes
Insurance
Costs of obsolescence and loss
Costs of material handling, tracking, and
management
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INVENTORY HOLDING COST
ELEMENT
Cost of Capital
Taxes
AVERAGE PERCENT
OF COST
PERCENT
RANGE
15.0
1.0
8.0 30.0
0.5 2.0
Storage /handling/mgt.
2.0
2.0 6.0
Insurance
0.5
1.0 4.0
Obsolescence
1.2
0.5 8.0
19.7
11.0 50.0
Total
Percentage is annual percent of average inventory value
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Inventory Carrying Cost
Suppose average inventory for a firm is
$3,500,00. The company has determined that its
inventory carrying cost is 25%. What is the
annual expense of holding inventory?
The company is able to reduce inventory to an
average of $2,750,000? What is the savings
associated with this reduction?
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OTHER COSTS RELATED TO INVENTORY
Ordering Costs
Preparation
Transmittal
Receiving
Payment processing
Stockout Costs
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Measures of Inventory Performance
Inventory turnover
Days of Supply
Service level
Discussed in more detail in Chapter 9, but should
understand the basic concept of a stockout
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Calculating Inventory Turnover
Inventory turnover =
Inventory turnover =
Cost of goods sold
Average inventory at cost
Inventory turnover =
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Net Sales
Average inventory at retail
Sales in Units
Average inventory in Units
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Turnover
Advantages of high turn over:
Fresh inventory from high risk sales
Reduced or mark down from obsolescence
Reduced total carrying costs
Lower asset investment and higher productivity
Dangers of high turnover:
Stockouts may mean lower sales
Increased costs from missing quantity requirements
Increased ordering costs
Turn over
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Turn over
713
Days of Supply
How many days of demand into the future can we satisfy
from inventory on hand?
Current Inventory/expected rate of daily demand
Suppose a firm currently has a total of $8,000 inventory of an
item. It expects demand to average $200 per day. What is the
days of supply of the item?
$8,000/$200 = 40 days
If the firm consistently maintains an average of 40 days of
supply, what inventory turnover rate will it have for the year?
360 days/40days = 9 turns/year (It is convention to think of a year
as 360 days for this calculation just because its simpler arithmetic
than thinking about 365 days).
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Problem Assignment
Work problems 1-4 at the end of Chapter 7.
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ABC Classification
Items differ in importance to you.
Classify products on some meaningful basis
Different levels of SS for different items
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ABC Analysis Ranks Items by Importance
Sales Dollars
Sales in Units
Gross Margin
Contribution Margin
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ABC Analysis
C
Percentage of Sales Dollars
10%
B
20%
100
Sales
90
80
70
60
A
50
70%
40
30
20
No Sales
10
0
A
5%
10
B
10%
20
30
40
50
C
65%
60
70
Percentage of Items
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80
90
D
20%
100
Inventory Information Systems and Accuracy
Identification Systems:
Global Trade Item Number (GTIN): identification
system for finished goods sold to consumers
Part Number: unique identifier used by a specific firm
Inventory Record Accuracy
Cycle Counting: inventory is physically counted on a
routine schedule
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Inventory Information Systems
Item Identification
GTIN
UPC
Several forms
Disadvantages
Data Accuracy
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UPC: How it works
Top Picture
3 Liter Diet Coke
Bottom Picture
2 Liter Sprite
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Other Technologies
Two-dimensional (2-D) bar codes
RF/ID tags and smart cards
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Managing Inventory Across the Supply Chain
Bullwhip Effect: variation increases upstream in
the supply chain (from consumer to manufacturers)
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Managing Inventory Across the Supply Chain
Vendor-managed Inventory (VMI): the vendor is
responsible for managing inventory for the customer
Vendor monitors and replenishes inventory balances
Customer saves costs
Vendor has higher visibility of inventory usage
Collaborative planning, forecasting and
replenishment (CPFR): supply chain partners
sharing information
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