supply chain chapter 4

Inventory

Quantities of goods and materials held in stock to support production and customer demand

Inventory as Asset

Helps meet demand and support operations

Inventory as Liability

Too much ties up capital, increases storage, insurance, and risk of obsolescence

Raw Materials

Basic inputs purchased or extracted to produce goods

Work-in-Process (WIP)

Goods in various stages of production

Finished Goods

Completed products ready for sale

MRO Supplies

Items used to support operations but not part of the final product

Service Inventory

Activities done before customer arrival

Facilitating Goods

Physical items used to deliver a service (e.g., food in a restaurant)

Cycle Stock

Inventory used to meet immediate demand

Safety Stock

Extra inventory to protect against uncertainty

Strategic Stock

Inventory held for specific future purposes (e.g., seasonal demand, price increases)

Decoupling

Separating processes to improve efficiency

Inventory Management

Planning and controlling inventory to balance cost and service

Goal of Inventory Management

Minimize costs while meeting customer demand

Cycle Stock (Level)

Depletes with demand and replenished regularly

Safety Stock (Level)

Buffer against demand/supply variability

Strategic Stock (Level)

Held for planned future events

Pipeline Inventory

Inventory in transit or held externally

Obsolete Inventory

Expired, damaged, or no longer needed stock

Direct Costs

Traceable to production (materials, labor)

Indirect Costs

Not directly traceable (overhead, MRO)

Variable Costs

Change with production level

Fixed Costs

Do not change with production

Carrying Costs

Costs of holding inventory (storage, insurance, taxes)

Order Costs

Costs of placing and receiving orders

Too Much Inventory

Ties up money, hides problems, increases costs

Too Little Inventory

Causes stockouts, delays, lost sales

Inventory Turnover

How many times inventory is sold/replaced per year

Weeks of Supply

Average inventory divided by weekly usage

Inventory Value

Total dollar value of inventory

Periodic Review System

Inventory checked at fixed intervals

Continuous Review System

Inventory monitored constantly

Reorder Point (ROP)

Inventory level at which a new order is placed

ROP Formula

Demand during lead time (d × L)

ROP with Safety Stock

(d × L) + Safety Stock

Fixed-Time Period System

Order quantity varies, timing is fixed

Fixed-Order Quantity System

Order size is fixed, timing varies

EOQ

Optimal order quantity minimizing ordering and carrying costs

Order Cost

Cost per order placed

Carrying Cost

Cost to hold inventory

EOQ Limitation - Capital

May not afford optimal order size

EOQ Limitation - Storage

May not have space

EOQ Limitation - Obsolescence

Large orders may expire

EOQ Limitation - Supplier Constraints

Must order in set quantities

ABC System

Classifies inventory by importance (A high, C low)

80/20 Rule

20% of items account for 80% of value

Bin System

Two-bin system for low-value items

Base Stock System

Reorder when inventory is used

Single-Period Model

One-time order (e.g., seasonal goods)

Barcode

Scans product data (1D or 2D)

RFID

Tracks inventory without line of sight and can be updated