Inventory Analysis

my free school tannzania August 07, 2014
Inventory Analysis
Introduction
•       Inventory is an expensive and important asset to many companies.
•       Definition: Inventory is any stored resource used to satisfy a current or future need.
•       Common examples are raw materials, work-in-process, and finished goods.
•       Most companies try to balance high and low inventory levels with cost minimization as a goal.
–      Lower inventory levels can reduce costs.
–      Low inventory levels may result in stock outs and dissatisfied customers.
–      Inventory management has a tradeoff decision between level of customer service/satisfaction and inventory cost
–      How do we measure customer satisfaction in relation to  inventory? By: number and quantities of sales lost, back orders and customer complains
•       In addition to flow time and flow rate(throughput), which we studied in previous lectures, inventory is the third measure of process performance.
•       Inventory allows for indirect control of flow rate and flow time (little’s law) and directly affects cost.
Inventory classification
Inputs Inventory
  • Raw materials and parts
  • These are flow units that are waiting to begin processing.
In process inventory
  • Flow units that are being processed includes  e.g WIP
Outputs inventory: Processed flow units that have not yet exited the process.
Out put inventory in one process can be input inventory in another process.
Importance/ benefits of Inventory Control
–     The decoupling function
–     Storing resources
–     Irregular supply and demand
–     Quantity discounts
–     Avoiding stock outs and shortages
•      Decouple manufacturing processes.
–     Inventory is used as a buffer between stages in a manufacturing process.
–     For  production and capacity smoothing to balance high demand seasons and low demand seasons.
This reduces delays and improves efficiency
•      Storing resources.
–     Seasonal products may be stored to satisfy off-season demand.
–     Materials can be stored as raw materials, work-in-process, or finished goods.
–     Labor can be stored as a component of partially completed subassemblies.
•      Compensate for irregular supply and demand.
–     Demand and supply may not be constant over time.
Inventory can be used to buffer the variability
Inventory measurement
  1. By physical count (periodic inventory system)
  2. Perpetual inventory system (keeping track of removals)
  3. By little’s law

Inventory Decisions
•      There are two fundamental decisions in controlling inventory:
–    How much to order.
–    When to order.
•      The major objective is to minimize total inventory costs while maintaining timely customer response and full utilization of capacity (ie while avoiding stock out)
•      Common inventory costs are:
          1. Physical holding cost
•      Cost of the items (purchase or material cost).
•      Cost of ordering.
•      Cost of carrying, or holding, inventory.
2.  Cost of stock outs.
3. Opportunity cost
Inventory Cost Factors
ORDERING COST FACTORS
CARRYING COST FACTORS
Developing and sending purchase orders
Cost of capital
Processing and inspecting incoming inventory
Taxes
Bill paying
Insurance
Inventory inquiries
Spoilage
Utilities, phone bills, and so on, for the purchasing department
Theft
Salaries and wages for the purchasing department employees
Obsolescence
Supplies, such as forms and paper, for the purchasing department
Salaries and wages for warehouse employees
Utilities and building costs for the warehouse
Supplies, such as forms and paper, for the warehouse

Inventory Cost Factors
•      Ordering costs are generally independent of order quantity.
–     Many involve personnel time.
–     The amount of work is the same no matter the size of the order.
•      Carrying costs generally varies with the amount of inventory, or the order size.
–     The labor, space, and other costs increase as the order size increases.
•      The actual cost of items purchased can vary if there are quantity discounts available.
Economic Order Quantity
•      The economic order quantity (EOQ) model is one of the oldest and most commonly known inventory control techniques.
•      It is easy to use but has a number of important assumptions.
Objective is to minimize total cost of inventory

Economic Order Quantity
Assumptions:
1.    Demand is known and constant.
2.    Lead time is known and constant.
3.    Receipt of inventory is instantaneous.
4.    Purchase cost per unit is constant throughout the year.
5.    The only variable costs are the cost of placing an order, ordering cost, and the cost of holding or storing inventory over time, holding or carrying cost, and these are constant throughout the year.
6.    Orders are placed so that stock outs or shortages are avoided completely.