Supply Chain Inventory Management

Inventory management→the planning and controlling of inventories in order to meet the competitive priorities of the organization.

Lot size→the quantity of an inventory ítem management either buys form a supplier or manufactures using internal processes.

Inventory menegement across the organization

Monies invested in inventory are not available for investment in other things→represent a drain on the cash flows of an organization

Too much inventory on hand→reduces profitability

Too mlittle inventory on hand→creates shortages in the supply chain and can damages customer confidence.

Inventory and supply chains

Inventory→a stock of materials used custormer demand or to support the production of services or godos

The difference between input flow rate and the output flow rate determines the level of inventory

The larger the scarp flows, the larger the input flow of materials required for the given level of output.

Pressures for small inventories

Inventory represents a temporary monetary investment→firms incurs an opportunity cost→cost of capital. Arising from the money tired up in inventory that could be used for other purposes

Inventory holding cost→the sum of the cost of capital plus the variable costs of keeping ítems on hand→storage and handling costs and taxes, insurance and shrinkage costs.

Cost is sizable in terms of gross profit margins→less tan 10%-->components of holding cost créate pressures for small inventories.

Cost of capital

Is the opportunity cost of investing in an assetrelative to the expected return on assets of similar risk.

Storage and handling cost

Inventory takes up space and must be moved into and out of storage. Storage and handling costs may be incurred when the firm rents space on either a long or short term basis.

Taxes, insurance and shrinkage

More taxes are paid if end-of-year inventories are high and the cost of insuring the inventories increases.

Obsolence→when inventory cannot be used or sold at full value, owing the model changes, engineering modifications, or unexpectedly low demand.

Deterioration→through physical spoilage or damage do to rough or excessive material handling results in lost value.

Pressures for large inventories

Customer Service

Creating inventory can speed delivery ans improve the firm`s on-time delivery goods.

Stockout→ an order that cannot be satisfied, resulting in loss the sale.

Backorder→a customer order that cannot be filled when promised or demanded but is filled later.

Ordering cost

cost of preparing a purchase order for a supplier or a production order manufacturing.

Setup cost

The cost involved in changing over a machine or workspace to produce a different item→labor

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