INVENTORY

Supply Chain Management

ASSIGNMENT # 02

SUBMITTED BY:
S ADEEL AHMED 1735290
MBA (EVE.) SECTION: I

DECEMBER 15, 2017

Course: Operational Planning in Supply Chain
Instructor: Muhammad Zuhair Mohsin
Shaheed Zulfiqar Ali Bhutto Institute of Science & Technology SZABIST,
Karachi.
Inventory
Inventory or stock is the goods and materials that a business holds for the ultimate goals to have a
purpose of resale. Inventory management is a discipline primarily about specifying the shape and
placement of stocked goods. According to GAAP - Generally Accepted Accounting Principles,
inventory represents tangible personal property which is/are held for sale in the ordinary course of
business; are in process of production for such sale; or, are to be currently consumed in the production.
In other words, inventory (in the form of work-in-process, raw materials, or finished goods) is an
asset because it represents property that is likely to be converted to revenue, as the ultimate goal of
inventory is to facilitate sales for an organization In simple words, Inventory is the raw materials, work-
in-process products and finished goods that are considered to be the portion of a business's assets that are
ready or will be ready for sale.

Managing customer and vendor relationships is a critical aspect of managing supply chains. In many
cases, the collaborative relationship concept has been considered the essence of supply chain
management. However, a closer examination of supply chain relationships, particularly those involving
product flows, reveals that the heart of these relationships is inventory movement and storage. Much of
the activity involved in managing relationships is based on the purchase, transfer, or management of
inventory. As such, inventory plays a critical role in supply chains because it is a salient focus of supply
chains.

Perhaps the most fundamental role that inventory plays in supply chains is that of facilitating the
balancing of demand and supply. To effectively manage the forward and reverse flows in the supply
chain, firms have to deal with upstream supplier exchanges and downstream customer demands. This puts
an organization in the position of trying to strike a balance between fulfilling the demands of customers,
which is often difficult to forecast with precision or accuracy, and maintaining adequate supply of
materials and goods. This balance is often achieved through inventory.

For example, a growing trend is the implementation of sales and operations planning (S&OP)
processes.4 The fundamental purpose of S&OP is to bring the demand management functions of the firm
(for example, sales forecasting, marketing) together with the operations functions of the firm (for
example, manufacturing, supply chain, logistics, procurement) and level strategic plans. This often
involves extensive discussions about the firms on-hand inventory, in-transit inventory, and work-in-
process. Such discussions allow the sales and marketing group to adequately plan for the forthcoming
time horizon by gaining a realistic picture of the inventory levels available for sale. Additionally, the
operations groups are able to get updated and direct sales forecasting information, which can assist in
planning for future inventory needs. Such information may very well result in shifts in manufacturing
plans or alterations to procurement needs because of the strategic decision to focus on specific units of
inventory instead of others in the near future.

Another example of balancing through inventory is the use of point-of-sale (POS) data for perpetual
inventory management in the retail industry. For many retailers, every beep of a cash register upon
scanning of an items bar code during checkout triggers a series of messages that another unit of
inventory has been sold. This information is not only tracked by the retailer but is also shared with
upstream vendors. As items are depleted from inventory, in some cases, both the retailer and vendor work
collaboratively to determine when reordering is necessary to replenish the depleted inventory, especially
at the distribution center level. This is a balancing of supply and demand because demand information is
tracked to determine when to best place replenishment orders based on the time required to get the
inventory to the store location. In essence, inventory decisions are used to effectively time when supply
inflows are needed to handle demand outflows.

pg. 1
Types of Inventory
Generally, inventory types can be grouped into four classifications: raw material, work-in-process,
finished goods, and MRO goods.

RAW MATERIALS
Raw materials inventory are raw materials that your business changes to produce its goods and/or
services. For example, if you manage an ice cream business, raw materials inventory could include milk
you use to make ice cream.

WORK-IN-PROCESS
Work-in-process inventory is any unfinished goods that your business has made. If your business
makes and sells chairs, work-in-process inventory would include any unfinished chairs on hand that your
business has made.

FINISHED GOODS
Finished goods inventory includes any finished goods that are ready to sell. If you have a retail
business that buys and sells toys, the toys you buy would be finished goods inventory.

TRANSIT INVENTORY
Transit inventories result from the need to transport items or material from one location to another,
and from the fact that there is some transportation time involved in getting from one location to another.
Some large companies, such as automobile manufacturers, employ freight consolidators to pool their
transit inventory received from various locations into one shipping source in order to take good thing
about economies of scale.

BUFFER INVENTORY
As previously stated, list of things is sometimes used to keep safe (out of danger) against the
uncertainties of supply and demand, as well as not able to say beforehand events such as poor way of
using voice level of being ready for working or poor quality of a supplier's products. Such a list of things
cushions are often has relation to as safety amount of goods. Safety amount of goods or short-time store
list of things is any amount kept on hand that is over and above that currently needed to have meeting
with request. Generally, the higher the level of short-time store list of things, the better the firm's person
getting goods from store arm.

ANTICIPATION INVENTORY:
Oftentimes, firms will purchase and hold inventory that is in excess of their current need in
anticipation of a possible future event. Such events may include a price increase, a seasonal increase in
demand, or even an impending labor strike. This tactic is commonly used by retailers, who routinely build
up inventory months before the demand for their products will be unusually high (i.e., at Halloween,
Christmas, or the back-to-school season). For manufacturers, anticipation inventory allows them to build
up inventory when demand is low (also keeping workers busy during slack times) so that when demand
picks up the increased inventory will be slowly depleted and the firm does not have to react by increasing
production time (along with the subsequent increase in hiring, training, and other associated labor costs).

pg. 2
DECOUPLING INVENTORY:
Very rarely, if ever, will one see a production facility where every machine in the process produces at
exactly the same rate. In fact, one machine may process parts several times faster than the machines in
front of or behind it. Yet, if one walks through the plant it may seem that all machines are running
smoothly at the same time. It also could be possible that while passing through the plant, one notices
several machines are under repair or are undergoing some form of preventive maintenance. Even so, this
does not seem to interrupt the flow of work-in-process through the system. The reason for this is the
existence of an inventory of parts between machines, a decoupling inventory that serves as a shock
absorber, cushioning the system against production irregularities. As such it "decouples" or disengages
the plant's dependence upon the sequential requirements of the system (i.e., one machine feeds parts to the
next machine).

CYCLE INVENTORY
Those people who are familiar with the idea of economical order variety (EOQ) know that the EOQ is
an hard work to balance inventory having or carrying costs with the costs incurred from ordering or
setting up machinery. When large amounts are ordered or produced, inventory holding costs are
increased, but ordering/setup costs decrease. Conversely, when whole lot sizes decrease, inventory
holding/carrying costs decrease, but the expense of ordering/setup increases since more orders/setups are
required to encounter desire. When the two costs are similar (holding/carrying costs and ordering/setup
costs) the total cost (the sum of both the costs) is minimized. Circuit inventories, sometimes called lot-
size inventories, result from this process. Usually, excess materials is ordered and, therefore, held in
inventory in an effort to reach this minimization point. Therefore, cycle inventory results from ordering in
batches or lot sizes rather than ordering material strictly as needed.

MRO GOODS INVENTORY

Maintenance, repair, and operating supplies, or MRO goods, are items that are used to support and
maintain the production process and its infrastructure. These goods are usually consumed as a result of
the production process but are not directly a part of the finished product. Examples of MRO goods
include oils, lubricants, coolants, janitorial supplies, uniforms, gloves, packing material, tools, nuts, bolts,
screws, shim stock, and key stock. Even office supplies such as staples, pens and pencils, copier paper,
and toner are considered part of MRO goods inventory.

pg. 3
Examples by Course

Example 10.1 Example 10.2

Demand, D = 12,000 computers per year If desired lot size = Q* = 200 units, what would
d = (12,000/12) = 1,000 computers/month S have to be?
Unit cost, C = $500 o D = 12000 units
Holding cost fraction, h = 0.2 o C = $500
Fixed cost, S = $4,000/order o h = 0.2
Q* = Sqrt [(2)(12000)(4000)/(0.2)(500)] = 980 o Use EOQ equation and solve for S:
computers o S = [hC(Q*)2]/2D =
Cycle inventory = Q/2 = 490 [(0.2)(500)(200)2]/(2)(12000) =
Flow time = Q/2d = 980/(2)(1000) = 0.49 $166.67
month To reduce optimal lot size by a factor of k, the
Reorder interval, T = 0.98 month fixed order cost must be reduced by a factor of
Annual ordering and holding cost = k2
= (12000/980)(4000) + (980/2)(0.2)(500) =
$97,980
Suppose lot size is reduced to Q=200, which
would reduce flow time:
Annual ordering and holding cost =
= (12000/200)(4000) + (200/2)(0.2)(500) =
$250,000
To make it economically feasible to reduce lot
size, the fixed cost associated with each lot
would have to be reduced

pg. 4
Example from Internet

Beer Manufacturer
Beer Manufacturers factory generates a demand of 50,000 units of beer bottles (in which beer will be filled)
from bottler vendor each year (D=50,000), and places an order of 8,500 units of bottles at a time (Q=8,500).
There is a cost of $95each time an order is placed (S = $95). Inventory carrying cost is $1.20 per unit per year (H
= $1.20). Assume 52weeks per year. What is the average inventory?

D = 50,000 units
Q = 8,500 units
S = $95 / per order
H = $1.20 / per unit / per year
Weeks = 52 weeks

Cycle inventory = Q/2 = 8,500/2 = 4,250 units

What is the total annual carrying cost?

Carrying cost = H(Q/2) = 1.20 4,250 = $5,100

How many times do we order?

D/Q = 50,000/8,500= 5.88 times

What is total annual ordering cost?

Total ordering cost = S(D/Q)
Ordering cost =95 x (5.88) = $558.6 per year

pg. 5