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13_inventory.pptxInventory Management
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Inventory is any asset held for future use or sale with objectives of maintaining sufficient amount and variety to meet demands while incurring the lowest possible cost.
Inventory Management involves planning, coordinating, and controlling the acquisition, storage, handling, movement, distribution, and possible sale of raw materials, component parts and subassemblies, supplies and tools, replacement parts, and other assets that are needed to meet customer wants and needs.
Inventory Management
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Inventory is prevalent among manufacturing and some service operations. Think about the reasons we keep inventory (at home or at work) and you understand the purposes of this topic.
Raw materials, component parts, subassemblies, and supplies: inputs to manufacturing and service-delivery processes.
Work-in-process (WIP): partially finished products in various stages of completion that are awaiting further processing.
Finished goods: completed products ready for distribution or sale to customers.
In-transit inventory: items in in-bound or out-bound logistics links.
Safety stock: additional amount of inventory that is kept over and above the average amount required to meet just-in-case demand.
Types of Inventory
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Different types of inventory may require different ways to manage them. In-transit inventory, for example, may be reduced if transportation speed is improved. Safety can also be reduced if more certainty is obtained in the supply chain.
Inventory turnover, or the ability to make more sales with less investment in inventory: the higher the better (a measure of inventory productivity)
Inventory carrying costs, the expenses associated with keeping inventory in hand (obsolescence, storage, moving, etc.)
Shortage costs or stockout costs, or the costs associated with an item being unavailable to meet demand: the lower the better (to an extent).
Inventory Management Decisions & Costs
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There are some KPIs in inventory management. Inventory turnover, for example, can be treated as a measure of inventory (capital) productivity. The best business is making sales without any inventory. Can you come up with a few examples of such models?
When inventory level is high (service level or order fill rate is high): stockouts and resulted lost sales are less likely to happen but inventory carrying costs and obsolescence risks are high.
When inventory level is low (low safety stock): costs of keeping inventory in hand are minimized and inventory turnover is high but there is an increased risk of running out of stock and the customers may not be happy.
The question is how much do you keep in hand?
Inventory Trade-Offs
Safety stock is additional planned on-hand inventory that acts as a buffer to reduce the risk of a stockout. A service level is the desired probability of not having a stockout during a lead-time period.
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Monthly Retail Sales and Inventories, United States, 1992-2013
How do you make sense of this chart? This is your analytical skills at work!
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“A” items account for a large dollar value but relatively small percentage of total items (e.g., 10% to 30 % of items, yet 60% to 80% of total dollar value).
“C” items account for a small dollar value but a large percentage of total items (e.g., 50% to 60% of items, yet about 5% to 15% of total dollar value). These can be managed by automated systems.
“B” items are between A and C.
ABC Inventory (Pareto) Analysis
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Pareto or 80-20 or ABC analysis is a common management concept. When applied in inventory management, managers ought to pay attention to the important items that account for a large portion of the costs and sales. Focusing the attention to what’s important would make management much more effective.
ABC Inventory (Pareto) Analysis
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This is a graphic illustration of ABC analysis. Do you have examples of what items are A, B, and C in a retail setting?
A
C
B
D
E
ABC Inventory Examples
I took these pictures at Lowe’s. Can you tell whether these items are A, B, or C items? Enlarge the pictures to see more details before you decide.
Lean thinking refers to approaches that focus on the elimination of waste in all forms, and smooth, efficient flow of materials and information throughout the value chain to obtain faster customer response, higher quality, and lower costs.
Manufacturing and service operations that apply these principles are often called lean operating systems, initially developed and implemented by the Toyota Motor Corporation.
Lean
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Lean is a philosophy as well as a system. In a lean system, any non-value-add activities should be eliminated.
Eliminate Waste: Eliminate any activities that do not add value in an organization. Includes overproduction, waiting time, transportation, processing, inventory.
Increase Speed and Response: Better process designs allow efficient responses to customers’ needs.
Improve Quality: Poor quality reduces yields, requiring extra inventory, processing time, and space for scrap and rework. Do it right the first time.
Reduce Cost: Simplifying processes and improving efficiency translates to reduced costs.
Principles of Lean Operating Systems
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Just-in-Time (JIT) production system was introduced at Toyota a half-century ago.
Traditional factories use a push system, which produces finished goods inventory in advance of customer demand using a forecast of sales.
The JIT or pull system, products are not produced until the customer demand is more certain or confirmed. Then items are “pulled” from the source or the suppliers “just in time” to make the required parts and products for the customer. The result is lower inventory throughout the system.
Just-in-Time Systems
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Push system often results in too much inventory at hand. Marketers oftentimes use discounts to move inventory out of the system but it hurts the bottom line. Pull system, on the other hand, waits until the final demand is more certain, then starts production and moves quickly to respond to market fluctuations.
Traditional accounting treats inventory as asset, the more the merrier.
Just-in-Time (JIT) treats inventory as (necessary) evil and tries to avoid keeping it at all costs. Inventory is nothing but trouble (expensive) in a JIT system.
Just-in-Time Philosophy
Damages Mark downs Theft or pilferage
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If only we let accountants run the organization…
