Chapter 6 Managing materials and inventory
performance
What is inventory?
Inventory is any quantifiable item that is stored and used in a operation to satisfy a customer
demand. Could be one of the most expensive assets owned by an organizations, accounting up to
50% of invested capital
Types of inventory
7 main categories:
- Raw materials
- Work in process (WIP) inventory – semi-finished stock
- Finished goods inventory
- Cycle inventory – inventory of each type of product in a ‘cycle’
- Buffer inventory – safety stock
- Anticipation inventory – anticipation stock for large orders for example during Christmas
- Pipeline inventory – inventory in transit
Why keep inventory?
- Demand is not always predictable, so a buffer may be needed to take account of variation
- Planning ahead for the future requirements can lead to the following competitive
advantages:
Cost – buying in bulk can give cost advantages
Quality – by being able to sort material to obtain the best for each operation
Flexibility – by being able to reach on short-demand by having raw material or
finished goods in stock
Dependability – by ensuring a constant supply of raw materials or finished goods in
stock will help to get customer’s orders delivered on time
Speed – if there is always material available at each work station the process will flow
at a faster rate
Independent or dependent demand
Independent demand: ordering of this item does not influence any other item, so it can be
independently forecast and organized in the most appropriate manner, it is directly influenced by
customer demand (such as food items and cosmetics)
Dependent demand: there is a direct link between the ordering of a particular item and other items
What is inventory management?
Inventory management is the planning and controlling of inventories in order to meet the
competitive priorities of the operation
Stock keeping units (SKUs) = individual items of inventory
ABC inventory classification
= very common inventory classification system
= a way of categorizing inventory items by cost and usage
- Class A items have the highest value (20% by Quantity, 80% by Value)
- Class B items would have less value (25-30% by Quantity, 10-15% by Value)
performance
What is inventory?
Inventory is any quantifiable item that is stored and used in a operation to satisfy a customer
demand. Could be one of the most expensive assets owned by an organizations, accounting up to
50% of invested capital
Types of inventory
7 main categories:
- Raw materials
- Work in process (WIP) inventory – semi-finished stock
- Finished goods inventory
- Cycle inventory – inventory of each type of product in a ‘cycle’
- Buffer inventory – safety stock
- Anticipation inventory – anticipation stock for large orders for example during Christmas
- Pipeline inventory – inventory in transit
Why keep inventory?
- Demand is not always predictable, so a buffer may be needed to take account of variation
- Planning ahead for the future requirements can lead to the following competitive
advantages:
Cost – buying in bulk can give cost advantages
Quality – by being able to sort material to obtain the best for each operation
Flexibility – by being able to reach on short-demand by having raw material or
finished goods in stock
Dependability – by ensuring a constant supply of raw materials or finished goods in
stock will help to get customer’s orders delivered on time
Speed – if there is always material available at each work station the process will flow
at a faster rate
Independent or dependent demand
Independent demand: ordering of this item does not influence any other item, so it can be
independently forecast and organized in the most appropriate manner, it is directly influenced by
customer demand (such as food items and cosmetics)
Dependent demand: there is a direct link between the ordering of a particular item and other items
What is inventory management?
Inventory management is the planning and controlling of inventories in order to meet the
competitive priorities of the operation
Stock keeping units (SKUs) = individual items of inventory
ABC inventory classification
= very common inventory classification system
= a way of categorizing inventory items by cost and usage
- Class A items have the highest value (20% by Quantity, 80% by Value)
- Class B items would have less value (25-30% by Quantity, 10-15% by Value)
