Ch_12 - Inventory Management (Chapter 12) What is...

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Inventory Management (Chapter 12) What is inventory? Stock of items to meet demand Stock of items to meet demand
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Hospitals Hope to Save by Supply Management Textbook case: Lahey Clinic, Burlington, MA Saving in medical supply management: squeeze waste and excess out of the supply chain Using methods as Wal-Mart and Toyota Using sophisticated secure supply cabinets (Pyxis from Cardinal Health Co.) General problem: Health care costs in US: $1.7 trillion or 15.3% of its GDP in 2003. How can it be decreased with efficient supply and inventory management?
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Saving potential of good inventory and supply management In manufacturing and retail the materials and transportation costs account for 50- 70% of revenues . Even a small reduction in these costs can have a substantial impact on profitability . Example: for a company with Revenues of $1 million, Return on Investment of 5%, Materials costs that amount to 50% of sales revenue. Increasing profits by $15,000 would require either 30% increase in sales revenues or a 3% reduction in materials costs . Which one is easier in a saturated market?
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Disadvantages of Inventory: Why to get rid of it? Finance, Accounting Inventory holding (carrying) costs Administration Difficult to control Strategic goals Loss of flexibility Hides production problems (quality management)
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Typical Inventory Holding Cost Factors Inventory investment costs Inventory investment costs 11% Warehousing cost (rent, utilities, labor) Warehousing cost (rent, utilities, labor) 6% 6% Insurance, tax, depreciation Insurance, tax, depreciation 3% 3% Material handling costs Material handling costs 3% 3% Pilferage, scrap, & obsolescence Pilferage, scrap, & obsolescence 3% 3% Total holding cost Total holding cost 26% 26% % of % of Category Category Inventory Value Inventory Value
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Functions of Inventory: Why to keep? Sales, Marketing To meet variation in product demand To protect against stockouts due to demand or delivery uncertainty Purchasing To take advantage of economic purchase order size To take advantage of quantity discounts To help hedge against price increases Production, Distribution To protect against material, component shortage To maintain independence of operations To smooth production To allow flexibility in production scheduling
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Inventory Costs Holding /Carrying Costs ~ the costs of holding an item in inventory e.g .: capital & opportunity costs, storage, insurance, obsolescence. - typically it is proportional with the value of inventory Ordering (in purchase)/ Setup (in production) Costs ~ - the costs of replenishing inventory, including supplier negotiations, authorization, preparing order documents, order follow up, receipt, control, etc. - stop production to change tools, adjust , clean, try machines, etc. - typically it is a fixed cost for an order or setup Shortage / Stockout Costs ~ cost of expediting, backorder, lost sales, lost production time, customer goodwill. etc.
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This note was uploaded on 09/10/2010 for the course ISDS 3115 taught by Professor Woosley during the Fall '08 term at LSU.

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Ch_12 - Inventory Management (Chapter 12) What is...

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