Chapter 9: Inventory Management

Financial Impact of Inventory

• 7–

• Decisions about inventory always need to consider the trade-offs between costs and benefits.

Types of Inventory

• Accounting-purpose
• Raw materials
• Work-in-process
• Finished goods

• Operational-purpose
• Cycle Inventory
• Safety Stock Inventory
• Anticipation Inventory
• Pipeline (Transit) Inventory

Operational-Purpose Inventory

• Cycle Inventory
• Inventory held during the elapsed time (or cycle) between orders.
• The longer the time between orders, the greater the cycle inventory will be
• Safety Stock (SS)
• Inventory reserving to protect against uncertainties in supply and demand
• Anticipation Inventory
• Inventory producing and keeping earlier for expectation of seasonal demand
• Pipeline Inventory
• Inventory moving from a place to another place

• Order cycle

• Q

• 0

• cycle inventory

• Triangle area:
• (Q+0)/2=Q/2

• Seasonal demand

• Capacity

• Time

• Anticipation Inventory

• Christmas

• Toys are produced with slack capacity and kept as inventory to meet high demand during Christmas season.

• Discussion: Think about inventory reduction tactics.

Inventory Reduction Tactics (1 of 2)

• Cycle inventory
• Reduce the lot size

• Reduce ordering and setup costs and allow Q to be reduced
• Increase repeatability to eliminate the need for changeovers

• Safety stock inventory
• Place orders closer to the time when they must be received

• Improve demand forecasts
• Cut lead times
• Reduce supply uncertainties
• Rely more on equipment and labor buffers