Inventory Management
Inventory Introduction
Inventory Management- The value of materials and goods held by an organization
o To support production (raw materials, subassemblies, work in process),
o For support activities (repair, maintenance, consumables), or
o For sale or customer service (merchandise, finished goods, spare parts).
Financing (cash) is very important for any enterprise
Two ways of looking at it:
Cash positive: pay the supplier months later e.g. Sainsbury’s BUT need market power
Cash Negative: pay before selling e.g. corner store
Inventory can be seen as an insurance/ and asset
Types of inventory
Raw Materials:
o Materials to which the manufacturer has not yet added value.
Work-in-progress or Work-in-process (WIP):
o Materials to which the manufacturer has added some value but still has more to
add
o May be held in temporary storage
Finished Goods
o Goods ready for shipment to the customers, with no more value to be added
o Also consider service parts...
Safety and Cycle Stock
o Safety stock: non-active component to protect against fluctuations of demand,
production and supply
o Cycle stock: active component that depletes over time, and is replenished
cyclically
Terminology: Stock-keeping Unit (SKU): an item at a particular location
Advantage of higher inventory
Cheaper product (bulk buy)
Less risk of not having enough stock to meet demand- bugger against uncertainty
o Uncertainty in terms of:
Market demand (seasonality, promotions, etc.)
Production throughput (quality, machine breakdown, etc.)
Supply of components
o Inventory gives you better service if demand and/or production are variable
o Inventory compensates for difference in the timing of demand & resource flows
in materials processing for non-perishable goods
Exploitation of price fluctuations
o Raw materials: cocoa, coffee, etc
Smoothing or levelling of production
o Small variation can be buffered through final goods inventory
Enables the achievement of economies of scale
Little’s Law implies there is a minimum inventory needed to run the factory
, o John DC Little’s Theorem gives a simple relation between inventory & lead time.
o Applies to all types of systems
o Example: A company assembles computers. The process has three stages –
assembly, testing and packing – which take 975 minutes in total. A work day has
7.5 hours, av. daily demand is 1,600 unit. Current WIP levels (for all three
processes combined) are 4,800 units The consultants hired by the CEO think this
is too much, and suggest to reduce stock by 50%
Disadvantages of higher inventory that make it expensive
Ties up working capital
Takes up space
Gets lost , Gets stolen
Gets broken, goes off, Becomes obsolete
Needs handling
Hides the problems- buffers system from learning
Cost involved:
o Cost of capital: value*i, i=interest rate per unit time
o Opportunity cost: How much would the capital earn otherwise?
o Depreciation of goods
o Stock obsolescence and deterioration
o Quality defects due to handling
o Labour and handling
o Warehousing, rent and energy
o Insurance and overhead to admin labour, space, etc.
Overall costs:
, o Typical estimate is 20-30%, but often excludes quality, depreciation, and
opportunity cost
o Key issue: estimates almost always too conservative!
Advantages of lower inventory (Lean & JIT)
More flexibility in that can quickly respond to changes in consumer demand,
circumstances etc
Lower upfront costs- less risk of losing money & sunk costs
Lower storage costs
Less money tied up in stock
Disadvantages of lower inventory (Lean & JIT)
Some higher costs- storage, more frequent transportation
Risk of delays- not as quick
Inventory Management
Managing inventory
o Minimise the costs of placing orders & holding inventory
Managing demand
o TPS & customer pull
o Forecast demand, and plan accordingly
Materials Requirement Planning (MRP)
Manufacturing Resources Planning (MRP II)
Enterprise Resource Planning (ERP)
Lean Production
Krafcik, J.F. (1988): After the Fordist school of thought there was a shift towards more
worker control. The Toyota Production System (TPS) was just original Fordism with a
Japanese slant
o NUMMI executive: "We have 2,100 team members working on the factory floor,
therefore we have 2,100 industrial engineers
o The increased span of worker control combined with Ford system basics led to
the second great leap in manufacturing production
o Toyota succeeded with continuous flow principles
BUFFERED (Western) vs. LEAN (Japanese) production systems
Lean production risk reduced through flexibility
Lean workers have authority to stop the line – builds skills and flexibility
Customer centric philosophy which aims to meet demand instantaneously, with perfect
quality and no waste
Key elements when used as an improvement approach:
o Customer centricity
o Internal customer-supplier relationships
o Goal of perfection
o Synchronised flows
o Reduced variation
o Including all people
o Waste elimination
Inventory Introduction
Inventory Management- The value of materials and goods held by an organization
o To support production (raw materials, subassemblies, work in process),
o For support activities (repair, maintenance, consumables), or
o For sale or customer service (merchandise, finished goods, spare parts).
Financing (cash) is very important for any enterprise
Two ways of looking at it:
Cash positive: pay the supplier months later e.g. Sainsbury’s BUT need market power
Cash Negative: pay before selling e.g. corner store
Inventory can be seen as an insurance/ and asset
Types of inventory
Raw Materials:
o Materials to which the manufacturer has not yet added value.
Work-in-progress or Work-in-process (WIP):
o Materials to which the manufacturer has added some value but still has more to
add
o May be held in temporary storage
Finished Goods
o Goods ready for shipment to the customers, with no more value to be added
o Also consider service parts...
Safety and Cycle Stock
o Safety stock: non-active component to protect against fluctuations of demand,
production and supply
o Cycle stock: active component that depletes over time, and is replenished
cyclically
Terminology: Stock-keeping Unit (SKU): an item at a particular location
Advantage of higher inventory
Cheaper product (bulk buy)
Less risk of not having enough stock to meet demand- bugger against uncertainty
o Uncertainty in terms of:
Market demand (seasonality, promotions, etc.)
Production throughput (quality, machine breakdown, etc.)
Supply of components
o Inventory gives you better service if demand and/or production are variable
o Inventory compensates for difference in the timing of demand & resource flows
in materials processing for non-perishable goods
Exploitation of price fluctuations
o Raw materials: cocoa, coffee, etc
Smoothing or levelling of production
o Small variation can be buffered through final goods inventory
Enables the achievement of economies of scale
Little’s Law implies there is a minimum inventory needed to run the factory
, o John DC Little’s Theorem gives a simple relation between inventory & lead time.
o Applies to all types of systems
o Example: A company assembles computers. The process has three stages –
assembly, testing and packing – which take 975 minutes in total. A work day has
7.5 hours, av. daily demand is 1,600 unit. Current WIP levels (for all three
processes combined) are 4,800 units The consultants hired by the CEO think this
is too much, and suggest to reduce stock by 50%
Disadvantages of higher inventory that make it expensive
Ties up working capital
Takes up space
Gets lost , Gets stolen
Gets broken, goes off, Becomes obsolete
Needs handling
Hides the problems- buffers system from learning
Cost involved:
o Cost of capital: value*i, i=interest rate per unit time
o Opportunity cost: How much would the capital earn otherwise?
o Depreciation of goods
o Stock obsolescence and deterioration
o Quality defects due to handling
o Labour and handling
o Warehousing, rent and energy
o Insurance and overhead to admin labour, space, etc.
Overall costs:
, o Typical estimate is 20-30%, but often excludes quality, depreciation, and
opportunity cost
o Key issue: estimates almost always too conservative!
Advantages of lower inventory (Lean & JIT)
More flexibility in that can quickly respond to changes in consumer demand,
circumstances etc
Lower upfront costs- less risk of losing money & sunk costs
Lower storage costs
Less money tied up in stock
Disadvantages of lower inventory (Lean & JIT)
Some higher costs- storage, more frequent transportation
Risk of delays- not as quick
Inventory Management
Managing inventory
o Minimise the costs of placing orders & holding inventory
Managing demand
o TPS & customer pull
o Forecast demand, and plan accordingly
Materials Requirement Planning (MRP)
Manufacturing Resources Planning (MRP II)
Enterprise Resource Planning (ERP)
Lean Production
Krafcik, J.F. (1988): After the Fordist school of thought there was a shift towards more
worker control. The Toyota Production System (TPS) was just original Fordism with a
Japanese slant
o NUMMI executive: "We have 2,100 team members working on the factory floor,
therefore we have 2,100 industrial engineers
o The increased span of worker control combined with Ford system basics led to
the second great leap in manufacturing production
o Toyota succeeded with continuous flow principles
BUFFERED (Western) vs. LEAN (Japanese) production systems
Lean production risk reduced through flexibility
Lean workers have authority to stop the line – builds skills and flexibility
Customer centric philosophy which aims to meet demand instantaneously, with perfect
quality and no waste
Key elements when used as an improvement approach:
o Customer centricity
o Internal customer-supplier relationships
o Goal of perfection
o Synchronised flows
o Reduced variation
o Including all people
o Waste elimination
