PRODUCTION AND QUALITY

MANAGEMENT
Session 5: Inventory Management

Majda EL BOUKHARI. PH,D.

Professor

Academic year : 2022-2023

e.isiam.ma
Introduction

• Inventory management is a core operations management

activity. Effective inventory management is important for
the successful operation of most businesses and their
supply chains.

• An inventory is a stock or store of goods.

• Firms typically stock hundreds or even thousands of items

in inventory.
Introduction

• Manufacturing firms carry supplies of raw materials, purchased

parts, partially finished items, and finished goods, as well as
spare parts for machines, tools, and other supplies.

• Department stores carry clothing, furniture, carpeting,

stationery, cosmetics, gifts, cards, and toys. Some also stock
sporting goods, paints, and tools.

• Hospitals stock drugs, surgical supplies, life-monitoring

equipment, sheets and pillow cases, and more.

• Supermarkets stock fresh and canned foods, packaged and

frozen foods, household supplies,
magazines, baked goods, dairy products, and other items.
CRITICAL THINKING

• To be competitive, many fast-food chains began to

expand their menus to include a wider range of foods.
Although contributing to competitiveness, this has
added to the complexity of operations, including
inventory management. Specifically, in what ways
does the expansion of menu offerings create
problems for inventory management?
Nature and importance of
inventories
• Inventory decisions in service organizations can be especially
critical. Hospitals, for example, carry an array of drugs and
blood supplies that might be needed on short notice. Being out
of stock on some of these could endanger the well-being of a
patient. However, many of these items have a limited shelf life,
so carrying large quantities would mean having to dispose of
unused, costly supplies.

• On-site repair services for computers, printers, copiers, and fax

machines also have to carefully
consider which parts to bring to the site to avoid having to make
an extra trip to obtain parts.
The same goes for home repair services such as electricians,
appliance repairers, and plumbers.
Nature and importance of
inventories
• Types of inventory
Inventory basically falls into the overall categories of :
• Raw materials: Used to produce partial products or completed
goods.
• Finished product: This is product ready for current customer
sales.
• Work-in-process (WIP): Items are considered to be WIP during
the time raw material is being converted into partial product,
subassemblies, and finished product. WIP occurs from such
things as work delays and long movement times between
operations.
• Consumables: Light bulbs, hand towels, computer and
photocopying paper, brochures, tape, envelopes, cleaning
materials, paint …
• Spare parts : These are after-market items used to “keep things
going.” that will prevent a machine or a device from becoming
obsolete.
Nature and importance of
inventories
• Functions of inventory

• Inventories serve a number of functions.

1. To meet anticipated customer demand.

2. To smooth production requirements.

3. To protect against stockouts.

4. To take advantage of quantity discounts.

Inventory Management
techniques

• Bulk shipments
• ABC analysis
• Cross-docking
• Backordering
• Just-in-time
• Consignment
• Dropshipping
Inventory Management
techniques
1. Bulk shipments :
You purchase and ship products in bulk.
Bulk shipping is one of the predominant techniques in the industry,
which can be applied for goods with high customer demand.
The downside to bulk shipping is that you will need to lay out extra
money on warehousing
the inventory.
• Pros:
• - Highest potential for profitability
• - Fewer shipments mean lower shipping costs
• - Works well for staple products with predictable demand and long
shelf lives
• Cons :
• - Highest capital risk potential
• - Increased holding costs for storage
• - Difficult to adjust quickly when demand fluctuates
Inventory Management
techniques
1. ABC inventory management :
ABC inventory management is a technique that’s based on
putting products into categories in order of importance, with A
being the most valuable and C being the least. Not all
products are of equal value and more attention should be paid
to more popular products.
• Category A
• Items of high value (70%)
• and small in number (10%)
• Category B
• Items of moderate value (20%)
• and moderate in number (20%)
• Category C
• Items of small value (10%)
• and large in number (70%)
Inventory Management
techniques
• ABC inventory management :

12
Inventory Management
techniques
• ABC inventory management ( SOLUTION ) :

13
Inventory Management
techniques
• ABC inventory management :

1. For each item, multiply annual volume by unit price to get

the annual dollar value.
2. Arrange annual dollar values in descending order.
3. The few (10 to 15 percent) with the highest annual dollar
value are A items. The most (about 50 percent) with the
lowest annual dollar value are C items. Those in between
(about 35 percent) are B items.

14
Inventory Management
techniques
1. ABC inventory management (continued):
• Pros :
• Aids demand forecasting by analyzing a product’s
popularity over time
• Allows for better time management and resource
allocation

• Cons
• Could ignore products that are just starting to trend
upwards
• Requires time and human resources
Inventory Management
techniques
1. Backordering :
You order goods in only after an order has been placed
for them.

• Pros :
• Increased sales and cash flow
• More flexibility for small businesses
• Lower holding costs and lower overstock risk

• Cons:
• Higher risk of customer dissatisfaction
• Longer fulfillment times
Inventory Management
techniques
1. Just in time :
You only purchase inventory a few days before it is needed so
items arrive just in time for
use. This technique lowers the volume of inventory that a
business keeps on hand. It is
considered a risky technique because you only purchase
inventory a few days before it is
needed for distribution or sale.
• Pros :
• Lower inventory holding costs
• Improved cash flow
• Less deadstock
• Cons:
• Problems fulfilling orders on time
• Minimal room for errors
• Risk of stockouts
Inventory Management
techniques
1. Consignement :
You place goods in the invenotry of your retailers, but retain legal
ownership until the products are sold. Typically, selling on
consignment involves a high degree of demand uncertainty from
the retailer’s point of view and a high degree of confidence from
the wholesaler’s point of view.
• Pros (for retailers):
• Offer a wider product range to customers without tying up
capital
• Decrease lag times when restocking products
• Return unsold goods at no cost
• Pros (for wholesalers) :
• Test new products
• Transfer marketing to the retailer
• Collect useful information about product performance
Inventory Management
techniques
1. Dropshipping :
You directly transfer customer orders and shipment
details to a manufacturer or wholesaler, who then ships
the goods directly to your customers.

• Pros (for retailers): No inventory holding costs

• Pros (for wholesalers) : Transfer marketing to the retailer
Requirements for an effective
inventories management

• Management has two basic functions concerning

inventory. One is to establish a system to keep track of
items in inventory, and the other is to make decisions
about how much and when to order. To be effective,
management must have the following:

1. A system to keep track of the inventory on hand and on

order.
2. A reliable forecast of demand and Knowledge of lead
times
3. A classification system for inventory items.
Requirements for an effective
inventories management
• Inventory Counting Systems
• Inventory counting systems can be periodic or perpetual.

• Under a periodic system, a physical count of items in

inventory is made at periodic intervals (e.g., weekly,
monthly) in order to decide how much to order of each
item.

• A perpetual inventory system (also known as a continual

system) keeps track of removals from inventory on a
continuous basis, so the system can provide information
on the current level of inventory for each item.
• PERPETUAL :
• PERIODIC :
Requirements for an effective
inventories management

• Demand Forecasts and Lead-Time Information

• Inventories are used to satisfy demand requirements, so it
is essential to have reliable estimates of the amount and
timing of demand. Similarly, it is essential to know how
long it will take for orders to be delivered.

• Classification system
• An important aspect of inventory management is that
items held in inventory are not of equal importance in
terms of investement, profit potential, sales or usage
volume.
Inventory costs

• Four basic costs are associated with inventories:

• Purchase cost :
Purchase Cost is is the amount paid to a vendor or
supplier to buy the inventory. It is typically the largest of all
inventory costs.

• Holding cost :
Relate to physically having items in storage. Costs
include insurance, detrioriation, tracking,
pickig and warehousing costs.
Inventory costs

• Ordering costs:
• Those are the costs of ordering and receiving inventory.
They are the costs thatvary with the actual placement of
an order.

• Shortage costs:
• They result when demand exceeds the supply of inventory
on hand.