Inventory Management

What is inventory?

Inventory refers to the goods, materials, or products that a business holds for the purpose of resale, production, or use in its operations. It represents the company's current assets and typically includes items such as raw materials, work-in-progress (partially completed goods), and finished goods ready for sale.

Why Inventory?

Smooth-out variations in operation performances 

Avoid stock out or storage 

Safeguard against price changes and inflation 

Take advantage of economy of scale

Inventory Functions

**Balancing supply and demand**

* Seasonality/ Speculative 
* Maintaining supply sources 

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**Buffering against uncertainty**

* Uncertainty in demand 
* Uncertainty in supply 

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**Geographical specialization:** specialization of production across different locations 

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**Decoupling** specialization of production for maximum economic lot sizes within a single facility 

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## Inventory Types

Raw materials

Work-in-process

Finished goods

Maintenance, repair and operating (MRO)

Raw materials

**Raw materials** are unprocessed purchased inputs or materials for manufacturing the finished goods.

* volume purchases to create transportation economies
* take advantage of quantity discounts
* stockpiling in anticipation of future price increases
* avoid a potential short supply;
* keeping safety stock to guard against supplier delivery or quality problems.

Work-in-process (WIP)

**Work-in-process (WIP):** describes materials that are partially processed but not yet ready for sales

* decouple processing stages
* break the dependencies between work centers.

Finished goods

**Finished goods** are completed products ready for shipment.

* kept to buffer against unexpected demand changes
* production process downtime
* stabilize production

Maintenance, repair and operating (MRO)

**Maintenance, repair and operating (MRO)** supplies are materials and supplies used when producing the products but are not parts of the products, used for the maintenance, repair, and operation of machinery, equipment, and facilities.

* gain purchase economies 
* avoid material shortages 

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Inventory Classifications

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1\. Cycle stock (base stock)

2\. Safety stock (buffer stock)

3\. Pipeline stock (in-transit stock)

4\. Speculative stock

5\. Psychic stock

Cycle stock (base stock)

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Cycle stock refers to the inventory that a company holds to meet its regular demand for a product. It is the amount of inventory needed to satisfy demand between the time when an order is placed and when it is received.

Safety stock (buffer stock)

Safety stock is extra inventory held to guard against unexpected demand or supply chain disruptions. It is the amount of inventory that a company holds to protect against stockouts and potential lost sales.

Pipeline stock (in-transit stock)

Pipeline stock is inventory that is in transit from one location to another. It is the amount of inventory that is currently in the supply chain, either en route from a supplier to a manufacturer, or from a manufacturer to a retailer or customer.

Speculative stock

Speculative stock is inventory that a company holds in anticipation of a future increase in demand or price. It is the amount of inventory that a company holds based on a forecast of future market conditions.

Psychic stock

Psychic stock refers to inventory that a company holds based on subjective or non-quantifiable factors such as intuition, experience, or a "gut feeling" about future demand. It is the amount of inventory that a company holds based on perceived market trends or customer preferences.

Inventory Costs

1. Ordering cost
2. Carrying cost (or Holding costs)

Ordering costs

the direct variable costs associated with placing an order with the supplier

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Holding or carrying costs

are the costs incurred for holding inventory in storage for a period of time 

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Approximate percentage of the value of an item: 25% - 26%

When to order

**Fixed order quantity system (continuous system)**

\- Orders placed with a constant size in different time period 

\-Costly

\+Inventory level continuously monitored 

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**Fixed time period system (fixed order interval/ periodic system)**

\-Orders placed for variable amount at specific time intervals 

\-Less direct control 

\+Proactive occasion  

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ROP - reorder point

The lowest inventory level at which a new order must be placed to avoid a stockout 

Economic Order Quantity (EOQ) determines:

* The point at which the sum of carrying cost and ordering cost are minimized


* The point at which carrying cost equal ordering cost

Basic EOC Assumptions

1. The demand is known and constant
2. Order lead time is known and constant
3. Replenishment is instantaneous
4. Price is constant
5. The holding cost is known and constant
6.  Order cost is known and constant
7. Stockouts are not allowed. Inventory must be available at all times

ABC analysis

The ABC analysis states that a company should rate items from A to C, based on:

* Sale volume in money (high to low values)
* Sales volume in units (high to low quantity)
* Fastest-selling items (high to low speed of selling)
* Item profitability (bring most to least revenue)
* Item importance (high to low protective level)
* Fragilenesss level

**Inventory turnover:**

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A ratio showing **how many times** a company’s inventory is sold and replaced over a period of time.

Inventory turnover measures how fast a company is selling inventory and is generally compared against industry averages

**Inventory days:**

The average time a company keeps its inventory before it is sold 

Opening inventory:

the inventory available for use or sale at the beginning of the counting period 

**Closing inventory:**

the inventory available for sale at the end of the accounting period

Average inventory:

Inventory available over a certain period of time

UNCERTAINTY MANAGEMENT

Uncertainty in supply chain management can arise from various sources,

including

* uncertainty of demand and
* uncertainty of lead time.

These uncertainties can individually or combinedly impact the performance of the supply chain.

Uncertainty of demand

Demand fluctuations

Forecasting errors

Order patterns

Product proliferation

Uncertainty of Lead Time

Supplier delays

Customs and regulatory delays

Transportation variability

Production variability

Managing Combined Uncertainty

Collaboration and information sharing

Safety stock and inventory management

Agile and responsive operations

Continuous improvement