[completed] 9과 Inventory Fundamentals

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Introduction

inventories are materials and suppliers that a business or institution carries either for sale or to provide inputs or supplies to the production process. there is a cost for carrying inventories, which increases operating costs and decreases profits.

inventory management is responsible for planning and controlling inventory from the raw materials stage to the customer. 

inventory must be considered at each of the planning levels and is thus part of production planning, master proeuction scheduling, and material requisition planning. production planning is concerned with overall inventory, master planning with end items, and material requirements planning with component parts and raw material.

Aggregate Inventory Management

deals with managing inventories according to their classification ( raw material, work-in process, and finished goods. they perform rather than at the individual item level. it is financially oriented and is concerned with the costs and benefits of carrying the different calssification of inventories. as such, aggregate inventory managemnet involves:

• flow and kinds of inventory needed
• supply and demand pattern
• functions that inventories perform
• objectives of inventory management
• costs associated with inventories

Item Inventory Management

managed not only at the aggregate level but also at the item level.

must establish decision rules about inventory items 

these rules include the following

• which individual inventory items are most important
• how individual items are te be controlled
• how much to order at one time
• when to place an order

this chapter will study aggregate inventory management and some factors influencing inventory management decisions, which include the followings:

• types of inventory based on the flow of materials
• supply and demand pattern
• functions performed by inventory
• objectives of inventory management
• inventory cost

Inventory and the Flow of material

there are many ways to classify inventories. one often-used classification is related to the flow of materials into, through and out of a manufacturing organization.

• raw material
  • purchase item received that have not entered the production process. incldue purchased materials, component parts, and subassemblies.
• work-in-process
  • raw materials that have entered the manufactuing process and are being worked on or waiting to be worked on.
• finished goods
  • are ready to be sold as completed items.
• distribution inventories
  • finished goods located in the distribution system.
• Maintenance, repair and operating supplies(MROs)
  • based on SAP, this could be belongs to consumed material
  • used in production that do not become part of the product.

Supply and Demand Patterns

if supply met demand exactly, there would be little need for inventory.

in that case, demand must be predictable, stable, and relatively constant over a long time period.

if this is so, manufacturing can produce goods on 1)a line-flow basis, matching production to demand. using this system, work flow from one worktation to another is balanced so little work-in-process inventory is  required. becase the variety of products they can make is so limited, demand has to be large enough to justfy economically setting up the system.

demand for most product is neither sufficient nor constant enough to warrant setting up a line-flow system. workstations are 2)organized by functions(batch manufactuing). by the nature of the system, inventory will build up in raw materials, work-in-process, and finished goods.

Functions of Inventoris

in batch manufacturing, the basic purpose of inventoris is to decouple supply and demand. inventory serves as a buffer between:

• supply and demand
• customer demand and finished goods
• finished goods and component availability
• requirements for an operation and the output from the preceding operation
• parts and materials to begin production and the suppliers of materials

based on this, inventories can be classified according to the function they perform.

• anticipation inventory
  • built up in anticipation of future demand.
  • for example, a head of selling season.
  • are built up to help level production and to reduce the costs of changing production rates.
• fluctuation(buffer) inventory(safety stock = buffer stock = reserve stock)
  • is held to cover random unpredictable flucturations in supply and demand or lead time
  • safety stock is carried to protect against the possibility of stock out.
• lot-size inventory
  • item purchased or manufactured in quantities greater than needed immediately create lot-size inventories.
  • this is to take advantage of quantity discounts
  • sometimes called cycle stock
    • it is the portion of inventory that depletes gradually as customer's order come in and is replenished cyclically when supplier's orders are received.
• transportation inventory
  • exist because of the time needed to move goods from one location to another.
  • sometimes called pipe line or movement inventories.
  • I(the average annual inventory in transit) = annual average time of transit * annual demand for each / 365
• hedge inventory
  • some products , such as minerals and commodities, for example, grains or animal products, are traded on a worldwide market. the price foe these products fluctuates according to world supply and demand. 
  • if buyers expect prices to rise, they can purchase hedge inventory ehwn prices are loe. 
• maintenance, repair and operating(MRO)supplies.
  • MROs are item used to support general operations and maintenence but do not become directly part ot a product. they include maintenance supplies, equipment spare parts and consumables such as cleaning compounds.
  • in most cases planners do not create order for purchase of MRO materials. orders are often generated directly from the maintenance or enginerring functions. some MRO material inventoris are maintained based on probability of need, especially in the case of frequently used materials such as cleaning suppliers.
  • materials used for maintenance can often be determined from the preventive maintenance schedule for the equipment. this is especially important for maintenance material that may be too expensive to jusify kepping inventory on had at all times.
  • in that way, maintenance can be scheduled specifically to minimize the probability of a breakdown of the quipment and the purchase of the parts can similarly be synchronized with the maintenance schedule to minimize inventory holding costs.
  • MRO material often represents a substantial financial cost, and location and cout accuracies are often just as important as they are with production material.

Objectives of Inventory Management

• maximum customer service - customer service
  • is the ability of a company to satisfy the needs of customers. in inventory management, the term is used to describe the availability of items when needed and is a measure of inventory management effectiveness.
  • demand and the lead time to get an item are often uncertain, possibley reaulting in stockouts and customer dissatisfaction. for these reasons, it may be necessary to carry extra inventory to protect against uncertainty.
• low-cost plant operation - operating efficiency
  
  • help make a manufacturing operation more productive in four ways
    • inventories allow operation with different rates of production to operate seperately  and more economically
      • decoupling inventory
    • ln case of demand is nonuniform throughout the year, one strategy discussed is level production and build anticipation inventory for wale in the peark periods. this would result in followings; by leveling production, manufacturing can continually produce an amount equal to the average demand.  the advantage of this strategy is that the costs of changing production level are avoided.
      • • lower overtime costs
        • lower hiring and firing cost
        • lower training costs
        • lower subcontracting costs
        • lower capacity required
    • inventories allow manufacturing to run longer production runs, which result in the following;
      • lower setup cost per itme
      • an increast in production capacity due to production resources being used at a greater portion of the time for processing as opposed to settup.
    • inventories  allow manufactuirng to purchase in larger quantities, which results in lower ordering cost per unit and quantity discount.
• minimum inventory investment

 

Inventory Costs

the following costs are used for inventory management decisions;

• item cost
  • is the price paid for a purchased item, which consists of the cost of the item and any other direct costs associated in getting the item into the plant. such as transportation fee, tax, customs duties.
  • the inclusive cost is often called the landed cost.
• carrying costs(sometimes called holding costs)
  • include all expense incurred gy the firm because of the volume of inventory carried. as inventory increases, so do these costs. they can be broken down into three categories;
    • capital costs
      • money invested in inventory is not available for other uses and as such represents a lost opportunity cost.
    • storage costs
      • storing inventory requires space, workers, and equipment.
    • risk cost
      • the risks in carrying inventory are as follows;
        • obsolescence
        • damage
        • pilgerage
        • deterioration
• ordering costs
  • are those costs that are associated with placing an order either with the factory or with a supplier. ordering costs include the following 
    • production control costs: the annual cost and effort expended in production control depends on the numver of ordersp planced. the costs incurred are those of issuing and closing orders schdeuling, loading, dispatching and expediting.
    • setup and teardown costs : every time an order is issued, work center have to set up to run the order and tear down the setup at the end of the run.
    • lost capacity cost : eveytime an order is place at the workcenter, the tiem take to set up is lost as productive output time. this represents a loss of capacity and is directly related to the number of orders placed.
    • purchase order cost : for example, order preparation, follow-up,expediting
    • movement or transportation cost : material for order has to be moved from operation to operation.
• stockout costs
  • stock out can potentially be expensive because of backorder costs, lost sales, and possibley lost customers.
• capacity-associated costs
  • when output lebels must be changed, there may be costs for overtime, hiring,training, extra shifts and layoffs. 

Financial Statement and Inventory -> 이건 일단 패스

ABC Inventory Control

control of inventory is exercised by controlling individual items, which are called stock-keeping units.

in controlling inventory, four questions must be answered

• what is the importance of the inventory item? -abc inventory control
• how are they to be controlled? - abc inventory control
• how much should be ordered at one time?
• when should an order be placed?

to have better control at a resonable cost, it is helpful to classify the items according to their importance.but other criteria may be used. for example, if an item is particularly difficult to obtain and has  a long replenishment lead time, that item amy be placed in a more important classification even though the annual dollar usate may be relatively small.

the abc principle is based on the observation that a small number of items often dominate the result achieved in any situation.

Summary

Key Term

A items

ABC inventory

Anticipation inventories

Asset

Average cost

Balance sheet

C items

Capacity associated costs

capital

carrying costs

cost of goods sold

cycle stock

day of supply

secoupling inventory

distribution inventories

expenses

finished goods

first in first out

fluctuation inventory

general and administrative expense

hedge inventory

income

inventory profiling

inventory turns

inventory velocity

item cost

lanaded cost

last in firt out

liabilities

lot-size inventories

maintenance, repir ans operating supplier(MROs)

owner's equitu

pareto's law

pipeline or movement inventoris

raw materials

retained eranings

return on investment

revenue

satety stock

standard cost

stockout

transportation inventories

work-in-process(WIP)