Chapter_7_Fundamentals_of_Inventory - SCM 303 Fundamentals...

 Michigan State University, 2010
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SCM 303
SCM 303
Fundamentals of Inventory
Fundamentals of Inventory

 Michigan State University, 2010
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Supply Chain Management and Inventory
Management
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A major emphasis over the past two decades
has been placed on reducing the amount of
inventory
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There are many who argue that having
inventory is “bad”
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Their reasoning is based on the financial
implications of holding inventory

 Michigan State University, 2010
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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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Balance Supply and Demand
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Seasonality
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Production Processes
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Provide Buffer against Uncertainty/Variability in
Supply and/or Demand
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Basic Economics of Buying
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Geographic Specialization
So, Why Carry Inventory?

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Financial Implications of Inventory
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Inventory represents investment by the firm
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It is an asset on the firm’s balance sheet
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Companies typically desire to keep their investment
in assets as low as possible
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Maintaining inventory costs money on an on-
going basis.
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Thus, inventory also causes expenses to be incurred
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These expenses show up on the firm’s income
statement
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However, not having inventory when customers
want it results in negative financial
consequences as well

 Michigan State University, 2010
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Cost of capital (opportunity cost)
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