What Is Inventory?

Stock of items kept to meet future demand Purpose of inventory management

how many units to order when to order

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Types of Inventory
Raw materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment

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Two Forms of Demand

Dependent
Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory
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Independent

Copyright 2006 John Wiley & Sons, Inc.

Inventory and Quality Management

Customers usually perceive quality service as availability of goods they want when they want them Inventory must be sufficient to provide high-quality customer service in TQM

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Inventory Costs
Carrying cost
cost of holding an item in inventory

Ordering cost
cost of replenishing inventory

Shortage cost
temporary or permanent loss of sales when demand cannot be met
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Inventory Control Systems

Continuous system (fixedorder-quantity)
constant amount ordered when inventory declines to predetermined level

Periodic system (fixed-timeperiod)

order placed for variable amount after fixed passage of time

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ABC Classification
Class A

5 15 % of units 70 80 % of value

Class B

30 % of units 15 % of value 50 60 % of units 5 10 % of value

Class C

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ABC Classification: Example

PART
1 2 3 4 5 6 7 8 9 10

UNIT COST
$ 60 350 30 80 30 20 10 320 510 20

ANNUAL USAGE
90 40 130 60 100 180 170 50 60 120
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Copyright 2006 John Wiley & Sons, Inc.

ABC Classification: Example (cont.)

PART TOTAL PART VALUE % OF TOTAL % OF TOTAL UNIT COSTQUANTITY % CUMMULATIVE ANNUAL USAGE VALUE

9 8 2 1 4 3 6 5 10 7

$30,600 1 16,000 2 14,000 3 5,400 4 4,800 5 3,900 3,600 6 CLASS 3,000 7 2,400 A 8 1,700 B 9 C $85,400

10

35.9 6.0 $ 60 18.7 5.0 350 16.4 4.0 30 6.3 9.0 80 5.6 6.0 30 4.6 10.0 4.2 % OF TOTAL 18.0 20 VALUE ITEMS 3.5 13.0 10 12.0 9, 8,2.8 2 71.0 320 17.0 1, 4,2.0 3 16.5 510 6, 5, 10, 7 12.5

20

6.0 90 11.0 40 A 15.0 130 24.0 60 30.0 B 100 40.0 % 58.0 180 OF TOTAL QUANTITY 71.0 170 C 83.0 50 15.0 100.0 25.0 60 60.0 120
Example 10.1 12-9

Copyright 2006 John Wiley & Sons, Inc.