Inventory value or quantity of raw materials, components, consumer goods, semi-
finished products and finished products that are stored to be used in the case of such a need.
Ensure sales/production continuity. Is a buffer between supply and demand for efficient
operation of the system.
In-transit time
Total in-transit time = time from “available to ship” to “received at destination”.
Typical components :Wait to receive container, Load container, Wait for truck Transport to
port, Clear paperwork, Wait for ship, Load and transport port to port, Unload at port, Clear
customs, Wait for truck, Transport to destination
May include transshipments and additional transport.
Inventory Aims
Lead-time gap: keep finished goods inventory because of the long time that it takes to
manufacture and deliver products. Problem of most organizations is time taken to
procure, make and deliver is longer than the customer wait.
Economies of scale: Producing or purchasing in large lots allows economies of scale
and lower cost. Due to fixed costs with ordering and transportation, quantity discounts
on buying larger lots, and short-term discounts or trade promotions.
Demand uncertainty: Production and inventory planning are based on forecasts of
demand made far in advance of the selling season. To protect against a stockout when
demand exceeds forecast, safety stock is added to base inventory.
Reasons for keeping inventories
stabilizing production – the demand for an item fluctuates hence, the inventory is kept
taking care of this fluctuation so that the production is smooth.
maintaining the assumed level of customer service (SL),
benefits of large lots in transport and procurement – usually the suppliers offer
discount for bulk buying and to gain this price advantage the materials are bought in
bulk even though it is not required immediately.,
protection against changes in prices and exchange rates,
protection against rapid oscillations in demand and supply,
protection against uncertainties in demand and lead times
act as a hedge against contingencies – as strikes, fires, and disruptions in supply.
Pros Cons
guarantee goods in case of discontinuity of Space
deliveries, Costs (space, losses, capital) – annually is
guarantee possibility of using goods in cases of even 20 % of their value.
their unavailability,
ensure a high level of customer service
Types of inventories
Raw material, work-in-progress and finished good products used to feed into a
production stock between different manufacturing processes. Held to meet normal
operating needs.
Decoupling Inventory between two stages of production
Pipeline Inventory moving from point to point in the materials flow system.
Obsolete/Dead Stock little or no value due to being out of date, spoiled, damaged, etc.
Anticipation Inventory used to absorb uneven rates of demand or supply, which
businesses often face.
Cycle stock average inventory that builds up in the supply chain because a stage
either produces or purchases in lots that are larger than those demanded by the customer.
Safety stock protects against uncertainty in dynamics of demand or delivery time.
The level of the safety stock is determined based on demand forecasts and the average lead
time. This level should be increased by the reserve necessary to amortize the signaled
fluctuations in the actual demand and/or lead time.
Overstock (excess stock) Thit stock does not rotate at all and provides no
value for the entire process.
Inventory turnover ratio showing how many times a company has sold and
replaced inventory during a given period. Indicator 2 means, for example, that in a given
period, the inventory stock turned twice (it was ”sold twice”)
Inventory Turnover Period Ratio determines for how many days
inventory is held by the entity before it is eventually sold to the customer.
Demand types
Independent demand - goods suitable for sale – forecasted.
Dependent demand (secondary demand) – goods necessary to produce goods
suitable for sale – this type of demand is usually calculated(MRP), not forecasted
Third order demand – materials and tools used in production,
Gross demand – excluding inventory held,
Net demand – considering the inventory held.
Inventory management methods that enable maintaining stocks of raw
materials, parts, semi-finished products or finished products in a quantity allowing for the
maximum level of customer service at minimum cost.
Objectives Providing the required level of customer service. Current and future demand
monitoring. Inventory costs minimizing by reducing inventory diversity.
Inventory classification
in supplies – stocks of raw materials, materials, and parts,
in production – work in progress stocks,
in distribution – finished goods stocks.
Another classification: spare parts for machines, devices, etc., consumables – fuel, paper,
cleaning goods.
Order costs: associated with placing an order. (physical inventory creation)
Holding costs all costs incurred because of the existence of inventories in the enterprise.
(labour cost)
Stockout costs hidden in general costs. Difficult to estimate or include in inventory models.
(loss or reputation)
Methods of evaluating inventory
FIFO – oldest (first) item in stock is sold first. In rising prices, replacement is at a higher price
than the assumed cost. This method does not reflect current prices, and replacement will be
understated. The reverse is true in a falling price market.
LIFO –newest (last) item in stock is the first sold. In rising prices, replacement is at the current
price. In a falling price market existing inventory is overvalued. However, the company is left
with an inventory that may be grossly understated in value.
Weighted average method – AVCO - stocks valuing using weighted average price.
Deterministic methods of inventory control
ABC based on annual consumption and the annual value of the items. Extension of Pareto
Principle - formulating goals and cause-and-effect analysis.
XYZ classify inventory items according to variability of their demand.
HML based on unit price of the items. high, medium and low-cost items.
FSN based on consumption of the items. Fast, slow and non-moving items.
VED based on criticality of the products. vital, essential and desirable items.
SDE based on availability of items. scarce, difficult, easy.
SOS based on nature of supply of items. seasonal and off-seasonal items.
GOLF based on sources of the items. Government supply, ordinarily available, local availability
and foreign source of supply items.
Method ABC
Category A 15%-20% of item, but 80% of value. Annual consumption value is the highest.
Category B 30%-35% of item, and 15% of the value. Medium consumption value.
Category C 50% of items, but 5% of value. Lowest consumption value.
The ABCD analysis
A class articles –large share in the company’s turnover - all local warehouses,
B class articles –smaller share in the turnover - selected warehouses,
C class articles – small amount on the market - factory warehouses,
D class articles – such a small share in the company’s turnover - do not have to be
stored
XYZ
X class —regular demand
Y class —demand with seasonal fluctuations or a specific trend
Z class – very irregular demand
ABC/XYZ
Inventory Cost
EOQ- Economic Order Quantity
Service level– SL ability to handle variable demand directly from the accumulated
stock. Primary goal of shaping and holding of safety stock.
SL1 – the degree of the realization to the volume of the contract, important for example in
retail, distribution (shortages mean a lost sale).
SL2 – the probability of a lack of stock in each replenishment cycle. Fact of lack is important,
for example, the supply of raw materials and material.
SL1=95%. 95% of demand will be realized. For example, if the demand will be for 100 units, we
will issue 95 from the stock. SL2=95% means that the probability of an event being satisfied in
each replenishment cycle is 0.95. The risk of a lack in the stock is 0.05.
