InventoryInventoryistosupportProduction(rawmaterials&WIP)Activities(maintenance,repair&operatingsupplies)Customerservice(finishedgoods&spareparts)Inventorycategories–

acookiefactoryInputsupplies–rawmaterials(flour,egg,sugar,milkpowder,yeastandetc),component(chocolate,almond,andetc)Work-in-process(WIP)FinishedgoodsinventoryMaintenance,repairandoperatingsupplies(MRO)RoleofinventoryUncertaintiesinproductionandsalesInventoryturnovercanbecalculatedbydividingthecostofgoodssoleforaparticularperiodbytheaverageinventoryforthatperiod.Eg,thecostofgoodssoldannuallyis$200,000andaverageinventoryonhandis$50,000,inventoryturnoverequals4.Typesofinventory0CycleinventorySafetyinventoryinventorydays*Cycle(base)inventory;*Safety(buffer)inventory*Pipeline(in-transit)inventory;*SpeculativeinventoryInventoryrelatedcostsInventorycarryingcostsStockoutcostsTrade-offsbetweencarryingandstockoutcostsInventorycarryingcostsInventorycarryingcostsconsistofanumberofdifferentfactorsthatvaryfromproducttoproduct.ObsolescenceInventoryshrinkageStoragecostsHandling,housekeepingandcountingcostsTaxesandinsuranceOpportunitycostsincludinginterestchargesStockoutcostsCustomerreaction“I’llcomeback”andthisprovestobeso.“Callmewhenitisin.”Buysasubstituteproductthatyieldsahigherprofit.Buysasubstituteproductthatyieldsalowerprofit.Placesabackorderandaskstohaveitdelivered.Goestoacompetitoronlyforthispurchase.Goestoacompetitorforthisandallfuturepurchases.StockoutcostsAlternativeLossProbabilityAveragecostsloyalcustomers$00.10$0Comesback$370.65$24.05Lost$1,2000.25$300Averagecostofastockout1$324.05Inventorydecisions:howmuchtoorder&whentoorderHowmuchtoorderTotalcostCarryingcostOrdercostQuantitycostWhentoorder0400inventory200100PlaceanorderOrderarrives1020304050daysAveragestock300WhentoorderROP=(DDxRC)+SSEconomicOrderQuantity(EOQ) EOQ=2AB/C A=annualusage B=administrativecostsperorderofplacinganorder C=carryingcostsoftheinventory(in%oftheinventoryvalue)ApproachestoinventorymanagementABCanalysisJITapproachVendor-managedinventory(VMI)InventorytrackingSomespecialconcernsDefiningstock-keepingunits(SKU).EachSKUrepresentsatypeofindividualitemorpro