InventoryInventory is to supportProduction (raw materials & WIP)Activities(maintenance,repair&operating supplies) Customer service (finished goods & spareparts)
Inventory Inventory is to support ◼ Production ( raw materials & WIP) ◼ Activities (maintenance, repair & operating supplies) ◼ Customer service ( finished goods & spare parts)
Inventory categories -a cookie factory? Input supplies - raw materials (flour, egg,sugar, milk powder, yeast and ete),component (chocolate, almond, and etc)Work-in-process (WIP)Finished goods inventoryMaintenance, repair and operating supplies(MRO)
Inventory categories – a cookie factory Input supplies – raw materials (flour, egg, sugar, milk powder, yeast and etc), component (chocolate, almond, and etc) Work-in-process (WIP) Finished goods inventory Maintenance, repair and operating supplies (MRO)
Role of inventory? Uncertainties in production and sales? Inventory turnover can be calculated bydividing the cost of goods sole for aparticular period by the average inventory forthat period.Eg,the cost of goods sold annually is$200,000 and average inventory on hand is$50,000, inventory turnover equals 4
Role of inventory Uncertainties in production and sales Inventory turnover can be calculated by dividing the cost of goods sole for a particular period by the average inventory for that period. Eg, the cost of goods sold annually is $200,000 and average inventory on hand is $50,000, inventory turnover equals 4
Types of inventoryinventoryCycleinventory0Safetyinventorydays*Cycle(base)inventory,*Safety(buffer)inventory* Pipeline (in-transit) inventory; * Speculative inventory
Types of inventory 0 Cycle inventory Safety inventory inventory days * Cycle (base) inventory; * Safety (buffer) inventory * Pipeline (in-transit) inventory; * Speculative inventory
Inventory related costsInventory carrying costsStockoutcostsTrade-offs between carrying and stockoutcosts
Inventory related costs Inventory carrying costs Stockout costs Trade-offs between carrying and stockout costs
Inventory carrying costs? Inventory carrying costs consist of a numberof different factors that vary from product toproduct.ObsolescenceInventory shrinkageStorage costsHandling,housekeeping and counting costsTaxes and insuranceOpportunity costs including interest charges
Inventory carrying costs Inventory carrying costs consist of a number of different factors that vary from product to product. ◼ Obsolescence ◼ Inventory shrinkage ◼ Storage costs ◼ Handling, housekeeping and counting costs ◼ Taxes and insurance ◼ Opportunity costs including interest charges
Stockout costsCustomerreaction“I'll come backand this proves to be soCall me when it is in.Buys a substitute product that yields a higherprofit.Buys a substitute product that yields a lowerprofit.Placesabackorder and asks tohaveitdeliveredGoes to a competitor only forthis purchaseGoes to a competitor for this and all futurepurchases
Stockout costs Customer reaction ◼ “I’ll come back” and this proves to be so. ◼ “Call me when it is in.” ◼ Buys a substitute product that yields a higher profit. ◼ Buys a substitute product that yields a lower profit. ◼ Places a back order and asks to have it delivered. ◼ Goes to a competitor only for this purchase. ◼ Goes to a competitor for this and all future purchases
Stockout costsLossProbabilityAlternativeAveragecosts$o$o0.101.loyal customers2.$370.65$24.05Comes back3.$3000.25Lost$1,2001$324.05Average cost ofa stockout
Stockout costs Alternative Loss Probability Average costs 1. loyal customers $0 0.10 $0 2. Comes back $37 0.65 $24.05 3. Lost $1,200 0.25 $300 Average cost of a stockout 1 $324.05
Inventory decisions: how muchto order & when to orderHow muchto ordercostTotal costCarrying costOrdercostQuantity
Inventory decisions: how much to order & when to order How much to order Total cost Carrying cost Order cost Quantity cost
When to orderinventoryPlaceanOrderorderarrives400200Average0stock 3001001020304050days
When to order 0 400 inventory 200 100 Place an order Order arrives 10 20 30 40 50 days Average stock 300