Inventory Management Basics

Definition of Inventory

• Inventory refers to the stock of materials, components, work-in-progress (WIP), and finished goods held at various stages of the production process.
• It represents the tangible assets that an organization maintains to meet customer demand, support production activities, and ensure a smooth and efficient operation of the supply chain.

Types of Inventory and Classification

• ABC Analysis: classifies stocks based on their importance, price, and sales volume into three categories:
  • A class: expensive, high-class items with tight controls and small inventories
  • B class: average-priced, mid-priority items with medium sales volume and stocks
  • C class: low-value, low-cost items with high sales and huge inventories
• Batch Tracking: groups goods of the same production date and materials together to track information such as origin, destination, and expiration date.
• Safety Stock: an additional set of goods held as a preventive measure for market volatility, ensuring a smooth flow of materials and covering uncertainties in supply performance.

Structure of Inventory Problems and Analysis

• Two aspects: procurement of commodities and future demand
• Six components of inventory problems:
  • Knowledge of demand: certainty, risk, and uncertainty
  • Procurement process: outside supply and self-supply
  • Decision process: one-shot and repetitive decisions
  • Probability distribution of demand: constant or varying with time
  • Time lag: constant or probabilistic
  • Relevant cost considerations: procurement, setup, carrying, and systemic costs

Objectives of Carrying Inventories

• To ensure availability of sufficient goods to meet anticipated demand
• To absorb variations in demand and production
• To provide a buffer between production processes
• To obtain discounts on bulk purchases
• To meet possible shortages in the future
• To absorb seasonal fluctuations in demand
• To retain a smooth production process
• To serve as a necessary part of the process

Selective Inventory Analysis

• ABC Analysis: classifies inventory items into three categories based on their importance and control level
• VED Analysis: classifies inventory items into vital, essential, and desirable categories based on their criticality for the industry or company
• FAST, SLOW, & NON-MOVING (FSN) Analysis: classifies inventory items into three categories based on their usage frequency
• XYZ Analysis: classifies inventory items into three categories based on their variability of demand and stock value

Static Model

• A mathematical or analytical representation of a production system that does not change over time
• Characteristics:
  • Fixed time frame
  • No consideration of time dynamics
  • Steady-state assumption
  • Limited adaptability
• Applications:
  • Production scheduling
  • Inventory management
  • Capacity planning

Incremental Analysis

• A decision-making tool that evaluates the impact of changes in production levels or other variables on the overall cost and profitability
• Steps:
  1. Identify relevant factors
  2. Calculate incremental costs and revenues
  3. Compare incremental values
  4. Make informed decisions
• Example: analyzing the additional costs and revenues associated with increasing production by 100 units

Cost of Risk and Decision Criteria Under Uncertainty

• Cost of risk: the financial impact of uncertainties and potential disruptions in production planning and control
• Decision criteria:
  • Risk tolerance
  • Flexibility
  • Cost-benefit analysis
  • Resilience
  • Lead time
  • Scenario analysis