Chapter 9: Inventory Management

Chapter 9: Inventory Management

• LEARNING OBJECTIVES:
• Identify the advantages, disadvantages, and costs of holding inventory.
• Define the different types of inventory and the roles they play in supply chains.
• Explain the tactics for reducing inventories in supply chains.
• Calculate the economic order quantity and apply it to various situations.
• Understand the order quantity and reorder point for a continuous review inventory control system.
• Understand how periodic review inventory control system works
• Measure the performance of inventory management
• Explore several methods to use for inventory reduction

Why Is Inventory Management Difficult?

• Supply Demand

• Where to put?

• How much to order?

• When to order?

• Decisions related to inventory:
• When to order?
• How much to order?
• Where to deploy the inventory?

Purpose of Inventory

• Advantages
• Better customer service and fast delivery
• Less frequent orders and setups
• Less delays in production due to inventory shortage
• Saving in transportation cost
• Economies of scale from volume purchase
• Disadvantage
• High inventory holding cost (25% of inventory value annually)

• If a company holds $10M of inventory on the average in a year, the inventory holding cost is?
• Annual Inventory Holding Cost = $ 10M * 25%
• = $ 2.5M

• We cannot see the costs from the accounting book directly,
• the inventory holding cost is regarded as hidden costs.