Inventory Management Overview and Key Concepts

Inventory

A stock or store of goods.

Independent-demand items

Items that are ready to be sold or used.

Dependent-demand items

Components of finished products.

Inventory Management

A core operations management activity important for the successful operations of most businesses and their supply chains.

Periodic System

Physical count of items made at periodic intervals (Weekly, Monthly) to decide how much to order of each item.

Perpetual Inventory System

System that keeps track of removals from inventory continuously, thus monitoring current levels of each item.

Two-Bin System

Two containers of inventory; reorder when the first is empty.

Universal Bar Code

Bar code printed on a label that has information about the item to which it is attached.

Lead time

Time interval between ordering and receiving the order.

Purchase cost

The amount paid to buy the inventory.

Holding (carrying) costs

Cost to carry an item in inventory for a length of time, usually a year.

Ordering costs

Costs of ordering and receiving inventory.

Shortage costs

Costs when demand exceeds supply.

ABC Classification System

Classifying inventory according to some measure of importance and allocating control efforts accordingly.

Cycle Counting

A physical count of items in inventory.

Quantity Discount Model

Price reductions for large orders offered to customers to induce them to buy in large quantities.

Fixed-Order-Interval Model

Orders are placed at fixed time intervals with an order quantity for the next interval.