29.4.2014
INVENTORY MANAGEMENT
B. Knezevic, PhD.
WHAT IS INVENTORY?
The value or quantity of raw materials,
components, assemblies, consumables, work in
progress (WIP) and finished stocks that are kept
or stored for use as the need arises
 The term is also applied to:




A detailed list of goods or articles in a given place
A stocktaking
Inventory (or stock) control – techniques used to
ensure that stocks of raw materials or other
goods are kept at levels that provide maximum
service level at minimum costs
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SUPPLIES
 All
the materials, goods and services
used in the enterprise regradless of
whether they are



purchased outside,
transferred from another branch of the
company or
manufactured in house
INVENTORY CLASSIFICATION
(ACCORDING TO PRODUCTION PHASES)




Raw materials – materials that are awaiting to be
conversed into a product in an unprocessed state
ex. steel and plastics
Components or sub-assemblies - pre-processed parts
that are waiting to be incorporated into an end
product
Finished goods –
manufactured
products ready to be
dispatched to customers
Consumables – MROs
- goods which are not
a part of a final
product;
indirect materials
ex. detergents, lubricant oils,
office stationery…
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INVENTORY CLASSIFICATION
(FOLLOWING SUPPLY CHAIN USAGE)

Primary inventory


raw materials, components and sub-assemblies, WIP
and finished goods
Support inventories

various categories of MROs
OTHER CLASSIFICATIONS
Production
application
ABC
analysis
Demand
type
Raw materials
A items
a couple of
valuable
materials
independent
Components
and Subassemblies
B items
dependent
Work in
progress
C items
a bunch of
materials of
small value
Other
MROs
Finished goods
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INDEPENDENT DEMAND
item is influenced by market conditions and not
related to production decisions for any item held
in stock.
 Can only be estimated, usually demonstrates
continuous and definable pattern
 Ex. Final products sold to customers, i.e. tables
(We can estimate that customers on average buy
8 tables per month; minimum is 4, maximum is
12)

DEPENDENT DEMAND






the item derives from the product decision of its
‘parents’
‘parent’ item is one manufactured from one or more
component items
component is one item that goes through one or more
operations to be transformed into a parent
dependent demand can be easily forecasted!
Manufacturing is usually set in lots, so dependent
demand is usually discontinous and “lumpy”
Ex. Table is a parent made from 1 top, 4 legs and 8
fasteners, if we decide to produce 10 tables per month,
then we will need: 10 tops, 40 legs and 80 fasteners
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29.4.2014

We use different production and inventory
control systems according to whether demand is
independent or dependent
Independent demand
Dependent demand
• Company customers
• Finished goods
• Forecasts and booked
customer orders
• Fixed order quantities
• Continuous and
periodic review system
• ABC analysis
• Economic order
quantities
• Parent items
• WIP and raw
materials
• Calculated
requirements
• Materials requirement
planning (MRP)
• Distribution
requirements planning
(DRP)
• Optimised production
technology (OPT)
TEAMWORK

Give some examples of independent demand and
dependent demand within:




Car industry
Bakery
A Restaurant
University
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INVENTORY MEASURES
Basic
measures are:
 Aggregate
 Rate
inventory value
of stock-turn
AGGREGATE INVENTORY VALUE

The total value of all items of all goods held by an
organization at a given date at:



Cost
Or current market price
Whichever is less!
Accounting principle of
prudence (GAAP –
General Acepted
Accounting Principles )
It is required to ascertain the opening and closing
stocks of annual trading or manufacturing
account of a business
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
Informs managers what proportion of current (or
total) assets is tied up in inventory
In manufacturing organization 20-30% of assets
will be tied up in inventory
 At trading companies (wholesalers and retailers)
more than 75%


Calculate aggregate inventory value if company
holds this goods
Item
Mirrors
Tires
Current
market price
per unit (EUR)
50
20
120
35
30
100
Lights
200
10
Doors
70
250
Engines
30
1500
Bumpers

End year
quantity
If total assets of the company are: EUR 200.000;
and if the average proportion of inventories in
assets within this industry is 25%; comment the
current efficiency of the company!
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RATE OF STOCK-TURN
(INVENTORY TURNOVER RATE)



Obtained by dividing annual turnover (sales) at cost
ny the annual average inventory value
Shows how many times average stocks turn within a
year
If a stock turn is 6 company sells the average
stock 6 times per year,
AVERAGE DAYS TO SELL INVENTORY=
365/RST
ADSI = 365/6 = 60,83 days
stocks are likely to be replenished every 60 days
(every two months)
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

“Good stock turn” varies by the product and
industry
Examples:

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Turnover of a supermarket (FMCG) is 20-25 times
larger than turnover of a pet shop
Turnover of a bakery is more than 30 times larger
than turnover of a fashion store
COMPANY A:
annual cost of goods sold = EUR 72.000;
beginning inventory = EUR 12.000;
ending inventory = EUR 10.000
Calculate Rate of Stock turn in Company A!
Calculate how many days are inventories stored at
this company!
Interpret your results!
If Company B has a stock turn of 8, can you give your
opinion on efficiency of inventory management at
Company A?
And what if we have a data that our main competitor
has a turnover of 5?
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3 AIMS OF INVENTORY MANAGEMENT
1.
2.
3.
To provide both internal and external customers
with the required service levels in terms of
quantity and order rate fill
To ascertain present and future requirements
for all types of inventory to avoid situations of
overstocking and bottlenecks in production
To keep costs to a minimum by variety
reduction, economical lot sizes and analysis of
costs incurred in obtaining and carrying
inventories
SIMULATION GAME

Distribution centre

Stocks, costs and in-time delivery!!!
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THE RIGHT QUANTITY FACTORS
The demand for the final products
 Inventory policy of the undertaking
 Dependency / independency of demand
 Service level – how close is to 100%, do we want
to serve all customers no matter on the costs?



Hospital – lack of supplies may endanger lifes
Factory – usually set to some percentage lower than
100% (ex. 95%) in dependance of costs of stock
holding
Market conditions
 Factors influencing economic order quantities

ECONOMICS OF STOCK MANAGEMENT

Costs of obtaining and carrying inventories are
analyzed:

Acquisition costs

Holding costs

Costs of stockouts
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ACQUISITION COSTS

Ordering costs, include:


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Preliminary costs, e.g.
preparing the requisition,
vendor selection, negotiation;
Placement costs, e.g. order preparation,
stationery, postage;
Post-placement costs, e.g. progressing, receipt of goods,
handling, inspection, certification and paying of orders
They are likely to be the same irrespective to quantity
ordered, they do not depend on order size!
Approximation: total cost of a purchasing department
or function over given period is divided by the number
of orders placed in that time (average cost per order)
HOLDING COSTS

Costs poroportional to the value of the
inventory

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Financial costs, e.g. interest on capital tied up
in inventory
Cost of insurance
Losses in value through deterioraion,
obsolence and pilfering
Costs proportinal to the physical
characteristic of inventory



Storage costs,
e.g. storage space, light, heat, power
Labour costs relating to handling and
inspection
Clerical costs relating to stores records and
documentation
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COSTS OF STOCKOUT

Costs of being out of inventory

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Loss of production output; loss of a sales opportunity
Costs of idle time and of fixed overheads spread over
a reduced output
Costs of action taken to deal with stockout, e.g. costs
of obtaining substitutes, costs of “rush” delivery, costs
of production switching
Loss of customer goodwill due to late delivery or
inabillity to supply
Very difficult to estimate!
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