Inventory Management Overview

Inventory Management Overview

In this lesson, you’re expected to:
– understand the basics of inventory management
– learn about the types and functions of inventory
– explore how to manage inventory systems

Inventory is a stock of items held to meet future demand.

Key questions in inventory management:
• What to order?
• How much to order?
• When to order?

These are easy questions, but difficult to answer!

Reference: Hadley & Whitin (1963)
What is Inventory Management?

Inventory management, in the context of an industry, typically refers to the act of managing the material resources of an organization that can help it earn revenue in the future.

Inventory management involves having the right inventory at the right quantity, in the right place, at the right time, and at the right cost.

For example, a retail store that sells multiple goods (packed food items, groceries, clothes, electronics goods etc.) does not usually store all the goods in the store. In other words, a part of the entire stock of goods is kept at a warehouse. The sum of the goods in the store and at the warehouse at any particular point in time is known as the inventory.

[Optional] What Is Inventory Management?
Reasons for Holding Inventory

The fundamental reason for holding inventory: it is either physically impossible or economically unsound to have goods arrive in a system precisely when demand for them occurs.

Without inventories, customers would have to wait (or they will take their business somewhere else).

Other reasons include:

• The price of some raw materials may exhibit seasonal fluctuation, so the organization might want to take advantage of low-price opportunities.
• There might be quantity discounts when buying large volumes.
• The organization wants inventory of goods to display to customers.
• Meet variations in customer demand.
• Meet unexpected demand.
• Smooth seasonal or cyclical demand.
• Smooth production.

Inventory-related costs represent roughly 3% of U.S. GDP

In 2014, logistics costs amounted to almost $1.5 trillion in the U.S., from which one third ($476B) was related to inventory-carrying costs. That represented almost 3% of the country’s GDP that year. 

Source: 26th CSCMP Annual State of Logistics Report
Logistics Costs in the U.S.
Enlarged version:
[Optional] Inventory Determination
Check out this article to learn more about the need to hold inventory:
Whether it’s too much or too little, having the wrong inventory can damage an organization’s performance
Let’s take a look at an example of this.

Enlarged version:

Cost Factors in Inventory Systems
The figure below represents the fundamental tradeoff in inventory systems.
Types of Inventory

1) Raw Materials (RM): unprocessed, basic material that is used to produce goods.

2) Component Parts (CP): sub-components that can be assembled into finished goods.

3) Work-in-Process (WIP): unfinished material, being processed to become finished goods.

4) Finished Goods (FG): ready for sale material.

Functions of Inventory

• Cycle stock
• Congestion stock
• Safety stock
• Seasonal stock
• Pipeline stock
• Speculative stock

* Non-exhaustive
1) Cycle Stock

• Cycle stock is the portion of the inventory that is normally available to meet the regular (expected) demand in a given period.

• It is stock that is expected to be replenished regularly in order to meet customers’ needs.

2) Safety Stock

• Safety stock, as its name implies, the portion of the inventory used to hedge against uncertainties (at least partially) such as:
– Supply: delayed delivery of material
– Demand: unexpected demand variations

• Safety stock is not expected to be replenished on a regular basis.

3) Seasonal Stock

• Seasonal stock refers to when you accumulate inventory in anticipation of future peak demands (e.g. high-season).

• It can be used in production ’smoothing’. For example, when an organization is expecting demand that is higher than its production capacity in the period. In that case, the organization can produce in excess of demand during the low-season, in order to build up inventory to be used in the high-season.

Other Functions of Inventory

Congestion Stock
• Material waiting for a highly utilized process.

Pipeline Stock
• Material in transit between stocking locations.

Speculative Stock
• Hedge against price variations.
• Buy more when the price is low, so you can buy less when price is high.

[Optional] Introduction to Inventory
Watch this 6-minute video by Professor Bussom from Widener University:
Jim Rohn Sứ mệnh khởi nghiệp