Inventory Management

K.U.B.S

Inventory Management
Inventory Management is responsible for

planning and controlling inventory from the

raw material stage to the customer.
The objective of inventory management is to

provide uninterrupted production , sales,

and/or customer service at the minimum cost.

Inventory At Each Level

Production Planning - Concerned with overall
inventory.

Master Production Scheduling Concerned with

end items.

Material Requirements Planning Concerned

with
raw material, parts and components.

Production Planning Questions

What are we going to make?
What does it take to make it?
What do we already have?
What do we need to get?

Production Plan
Objectives set by the strategic business plan, Production
management is concerned with the Following;
The quantities of each product group that must be produced in each

period.
Maintain the desired inventory level.
In each period, need and availability of resources i.e.
Equipment,
Labor
Material

Types of Production Plan

Generally firms make the following
production plans;

Make to- Stock production plan

Make to- Order production plan

Engineer to- Order Production Plan

Assemble -to- Order Production Plan

Make To Stock Production Plan

Conditions:
Demand is fairly constant and predictable.
Product has a long shelf life.
Very close customer-vendor relationship.

Information:
Forecast by period.
Opening inventory.
Desired ending inventory.

Make To Order Production Plan

Conditions:
Goods are produced to customer specification.
The customer is willing to wait while the order
is being made.

The product is expensive to make and to

store.

Information:

Opening backlog of customer orders.

Desired ending backlog.

Basic Strategies Use to Develop a

Production Plan

Chase : Vary production quantities to meet the demand forecast.

Often used when inventory cannot be used or when resources are
flexible and inexpensive to change.

Level: Establish average demand level and set production rate to

that
level.
Often used when resources difficult or very expensive to change.

Hybrid: Use a combination of some chase and some level.

Subcontracting: Meeting any additional demand through

subcontracting.
Cost avoided associated with excess capacity.

Example - Basic Strategies

Period

Total

Forecast
(Demand)

130

140

160

170

165

135

900

130

140

160

170

165

135

900

Productio
n
Level 150
Strategie
s

150

150

150

150

150

900

140

140

140

160

160

160

900

Chase

Hybrid

For Example
No. of Units

Demand
Time

Chase Production
No. of Units

Chase Production

Demand
Time

Level Production
No. of Units

Level Production

Demand
Time

Level Production
No. of Units

USE Inventory
Level Production

CREATE Inventory

Demand

Hybrid Production
No. of Units

Hybrid
Demand

Example
An automobile industry wants to develop a
production plan. The
expected opening inventory is 120 units, and they
want to reduce that
to 100 units by the end of the planning period.
The number of
Working days is the same for each period. There
1
2
3
4
5
6 Total
arePeriod
no back orders.
The expected demand is as follows.

Forecast
(Demand)

110 125 135 140 150 140 800

Production Plan (Level

Strategy)
Period

Total

Forecast (Demand) 110 125 135 140 150 140

800

Planned Production 130 130 130 130 130 130

780

Planned Inventory
140 145 140 130 110 100
(120)

Production Plan (Chase

Strategy)
Period

Total

Forecast (Demand) 110 125 135 140 150 140

800

Planned Production 90 125 135 140 150 140

780

Planned Inventory
(120)

100 100 100 100 100 100

Production Plan (Hybrid

Strategy)
Period

Total

Forecast (Demand) 110 125 135 140 150 140

800

Planned Production 110 110 110 150 150 150

780

Planned Inventory
(120)

120 105 80

90

90 100

Inventory Management
Fundamentals

1. Types of Inventory

2. Inventory Costs.

Types of Inventory
Inventories can be classified in the following ways;
Material Flow Wise;
Raw Material Inventory
Work in Progress (WIP) Inventory
Finished Goods Inventory

Functional Wise;
Anticipation Inventory
Fluctuation Inventory (Safety Stock or Buffer Stock)
Cycle Inventory
Transportation Inventory
Decoupling Inventory
MRO Goods Inventory

Types of Inventory (Material Flow

Wise)
Raw Materials Inventory:
It is the total raw material, parts and components
currently in stock that have not yet been used in workin process or finished goods production.

There are two types of raw materials, which are;

Direct Materials
Indirect Materials

Types of Inventory (Material Flow

Wise)
Work in Progress Inventory:
Material that has entered the production process but is not
yet a
finished product.
WIP

is generally valued higher than raw materials, but

significantly lower than finished products.

This

generally includes all materialfrom raw material that

has been released for initial processing up to material that has
been completely processed and is awaiting final inspection and
acceptance before inclusion in finished goods.

Types of Inventory (Material Flow

Wise)
Finished Goods Inventory:
The products in a manufacturer's inventory that are
completed
and are awaiting to be sold.

Once the work-in-progress goods are finalized and

converted into finished goods, the companies
have to move them to the warehouses.

Goods that have been purchased in completed

form are known as merchandise.

Types of Inventory (Functional Wise)

Anticipation Inventory:
This inventory is built up in anticipation of future demand.
e.g.
A peak selling season
A promotion program

Vacation shut down

Possibly the threat of strike

For manufacturers, anticipation inventory allows them to build

up inventory when demand is low (also keeping workers busy

during slack times).

Types of Inventory (Functional Wise)

Fluctuation Inventory (Safety Stock):
This inventory is held to protect against the
uncertainties of supply
and demand, as well as unpredictable events such as
poor delivery
reliability or poor quality of a supplier's products.
It is also called Buffer Inventory.
Generally, the higher the level of buffer inventory, the

better the
firm's customer service.

Types of Inventory (Functional Wise)

Cycle Inventory:
Inventory purchased or manufactured greater than the needs .

Use to take advantage of quantity discount, to reduce shipping

and setup cost.
EOQ model is used to balance inventory holding or carrying

costs.
It is also called Lot size inventory.

Transportation Inventory:
Transportation inventory exist because of the time needed to
move
goods from one location to another.
It is also called Pipe Line Inventory or Movement Inventory .

Types of Inventory (Functional Wise)

Decoupling Inventory:
Decoupling inventory consists of inventory stock retained to
make the
independent control of two successive operations.
A decoupling inventory that serves as a shock absorber,

cushioningthe system against production irregularities.

MRO (Maintenance, Repairs and Operations)

Inventory :
This term is referring to the items that are used to fulfill the functions
Of maintenance, repairs, and operations support that is consumables
such as materials and spare parts.
MRO is sometimes used to refer Maintenance and Repair

Organizations.