Inventory Management

Stock / Inventory

A store of goods

Inventory

A crucial aspect of company is ______________. They are not only vital for business operations, but they also improve client satisfaction.

Return on Investment (ROI)

which is calculated as profit after tax divided by total assets

is one often used metric measuring managerial performance.

1. To fulfill the expected customer demand

2. To simplify the demands of production

3. To separate the two processes

4. To lessen the possibility of stockouts

5. To benefit from order cycles

6. To protect oneself against price hikes

7. To allow for operations

8. To benefit from volume discounts

Functions of Inventory

Overstocking

wastes space and ties up money that may be used more effectively elsewhere

Understocking

causes late deliveries, lost sales, unhappy customers, and production bottlenecks.

Main goal of inventory management

is to maintain acceptable inventory costs while providing customers with satisfactory levels of service.

1. When to order

2. How much to order

Two fundamental questions (decisions) for inventory management.

Expenses and Customer Happiness

which they may gauge through the volume and frequency of backorders as well as through consumer feedback. 

Inventory turnover

which is the ratio of annual cost of goods sold to average inventory investment, is a commonly used metric.

The turnover ratio shows how frequently the inventory is sold each year

Slow turnover rate

is one that takes a while to manufacture or sell

Days of inventory on hand

which represents the anticipated number of days of sales that can be met with existing inventory.

In this case, a balance is preferred; a high number of days could indicate excess inventory, while a low number could indicate a risk of supplies running out

1. It must set up a system to keep track of the things it has on hand

2. It must decide how much and when to order

Two primary responsibilities of management in terms of inventory

Inventory Counting Systems

A physical count of the items in inventory is performed periodically

1. A loss of control in between reviews

2. Requirement to carry extra stock to guard against shortages between review periods

Periodic evaluations drawbacks

Perpetual Inventory System / Continuous Review System

Continuously records deletions from inventory in order to provide data on the current level of inventory for each item.

Additional expense of record keeping

One of the drawbacks of perpetual inventory system

1. Purchase

2. Holding

3. Ordering 

4. Shortfall

Four fundamental expenses connected to inventories

Purchase cost

The sum paid to a supplier or vendor to purchase the inventory. Most expensive inventory expense.

Holding cost

refer to the actual expense of storing objects. The costs also include tracking, picking, interest, insurance, taxes (in some states), depreciation, obsolescence, deterioration, spoiling, pilferage, breakage, and taxes (heat, light, rent, workers, equipment, and security). Keep in mind that the relevant element of these costs is the variable portion.

Classification System

A more sensible strategy would be to distribute control efforts in accordance with the relative value of different inventory items.

Safety Stock

Inventory that is held to lower the likelihood of experiencing a stockout (i.e., running out of stock due to demand and/or lead time unpredictability)

Cycle Stock

Inventory that is meant to satisfy anticipated demand

Economic Order Quantity (EOQ)

can be used to answer the question of how much to order

Fundamental/Basic Economic Order Quantity

it is used to determine a fixed order size that will reduce the total annual expenditures associated with purchasing and maintaining inventory. 

Cycle

govern the ordering and use of inventory

Zero

The order will be fulfilled at the exact moment the inventory on hand reaches ________ because it is assumed that the usage rate and lead time will not change.

Reorder point (ROP)

happens when the quantity on hand falls to a predefined amount

That sum often compromises the anticipated demand durinf lead time and possibly an extra buffer of stock to lessen the likelihood of a stock out during lead time.

1. The rate of demand

2. The lead time

3. The extent of demand and/or lead time variability

4. The degree of stockout risk acceptable to management

Objective of reorder point

ROP

= D x LT

Rop

= Expected demand during lead time + Safety stock