Chapter 4 - Inventory Management
Introduction
- Big decision is how much inventory should we have?; usually one of the largest assets
- Maintaining adequate finished product inventory can fill orders immediately
- Maintaining adequate materials inventory supports manufacturing operations
- Failing to manage inventory can lead to big issues (upset customers, less sale, high costs)
What is Inventory?
- Inventory is how many goods and materials are in stock; an asset
- Too much inventory ties up capital, more space needed, inventory holding costs (security,
insurance, tax), and can be a liability if inventory spoils
Categories of Inventory
1) Raw Materials: purchased items/extracted materials converted into components
- How much raw material to hold? → buy as needed, or buy and hold
- May buy extra in case of an upcoming shortage or price increase
2) Work-in-Process (WIP): still being worked on
- May not have timely visibility, so try to reduce WIP inventory to avoid clutter
3) Finished Goods: completed and worth more than raw materials and WIP
- MTOrder (little to no FG), MTStock (lots of FG)
4) Maintenance, Repair, and Operating (MRO) supplies needed to run manufacturing, but
NOT A PART OF FINISHED PRODUCT
- Consumed: like oil for the machinery
- Facilitate manufacturing: like cleaning supplies or spare parts
- Facilitate admin activities: like office supplies, coffee for break room
Inventory in the Service Industry
- Services are produced and consumed immediately upon demand
- Inventory of facilitating goods
Functions of Inventory - Why hold inventory?
1) To meet customer demand
2) To buffer against uncertainty in demand or supply (safety stock)
3) To decouple supply from demand (strategic stock)
4) To decouple dependencies in the supply chain
Inventory Management
- Planning and controlling inventories
- Goal: be more profitable by lowering COGS and increasing sales (competing conditions)
- Reduce the amount of inventory held in stock
- Ensuring there is enough inventory to satisfy demand
Introduction
- Big decision is how much inventory should we have?; usually one of the largest assets
- Maintaining adequate finished product inventory can fill orders immediately
- Maintaining adequate materials inventory supports manufacturing operations
- Failing to manage inventory can lead to big issues (upset customers, less sale, high costs)
What is Inventory?
- Inventory is how many goods and materials are in stock; an asset
- Too much inventory ties up capital, more space needed, inventory holding costs (security,
insurance, tax), and can be a liability if inventory spoils
Categories of Inventory
1) Raw Materials: purchased items/extracted materials converted into components
- How much raw material to hold? → buy as needed, or buy and hold
- May buy extra in case of an upcoming shortage or price increase
2) Work-in-Process (WIP): still being worked on
- May not have timely visibility, so try to reduce WIP inventory to avoid clutter
3) Finished Goods: completed and worth more than raw materials and WIP
- MTOrder (little to no FG), MTStock (lots of FG)
4) Maintenance, Repair, and Operating (MRO) supplies needed to run manufacturing, but
NOT A PART OF FINISHED PRODUCT
- Consumed: like oil for the machinery
- Facilitate manufacturing: like cleaning supplies or spare parts
- Facilitate admin activities: like office supplies, coffee for break room
Inventory in the Service Industry
- Services are produced and consumed immediately upon demand
- Inventory of facilitating goods
Functions of Inventory - Why hold inventory?
1) To meet customer demand
2) To buffer against uncertainty in demand or supply (safety stock)
3) To decouple supply from demand (strategic stock)
4) To decouple dependencies in the supply chain
Inventory Management
- Planning and controlling inventories
- Goal: be more profitable by lowering COGS and increasing sales (competing conditions)
- Reduce the amount of inventory held in stock
- Ensuring there is enough inventory to satisfy demand
