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Inventory control


Floyd D. Hedrick Library of Congress Washington D.C. Editor:Jeannette Budding Communications Manager National Association of Purchasing Management

Inventory control Abstract Inventory control,or inventory management,is an attempt to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory. There are several schools of thought that view inventory and its function differently. These will be addressed later,but first we present a foundation to facilitate the readers understanding of inventory and its function。 Inventory as an important inventory of liquid assets, its existence is bound to take up a lot of liquidity. In general inventories of industrial enterprises accounted for about 30% of the total assets of commercial circulation enterprises is even higher,The control of utilization is directly related to the occupation of the level of corporate funds and asset efficiency.Therefore a business to maintain high profitability should be attached great importance to inventory management. Inventory control at different levels the companys average occupancy level of funding is a big difference. Through the implementation of proper inventory control methods to reduce the level of the average amount of funds used to improve the inventory turnover rate and total assets will ultimately improve the economic efficiency of enterprises. Keyword: Inventory Management ChapterⅠ Inventory Definition Inventory is a quantity or store of goods that is held for some purpose or use the (term may also be used as a verb meaning to take inventory or to count all goods held in inventory).Inventory may be kept”in-house” meaning on the premises or near by for immediate use or it may be held in a distant warehouse or distribution center for future use.With the exception of firms utilizing just-in-time methods,more often than not, the term “inventory” implies a stored quantity of goods that exceeds what is needed for the firm to function at the current time e.g. within the next few hours. Chapter II The meaning of Inventory control 2.1 maintain the list Why would a firm hold more inventory than is currently necessary to ensure the firms operation?The following is a list of reasons for maintaining what would appear to be “excess ”inventory. January February March April May June Demand 50 50 0 100 200 200 Produce 100 100 100 100 100 100 Month-end 50 100 200 200 100 0 inventory Table 1-1 6 month a business demand,production,end balance situation

2.2 Meet demand In order for a retailer to stay in business it must have the products that the customer wants onhand when the customer wants them. If not the retailer will have to back-order the product. If the customer can get the good from some other source he or she may choose to do so rather than electing to allow the original retailer to meet demand later(through back-order). Hence,in many instances if a good is not in inventory,a sale is lost forever. 2.3 Keep operations running A manufacturer must have certain purchased items raw materials components or subassemblies in order to manufacture its product. Running out of only one item can prevent a manufacturer from completing the production of its finished goods. Inventory between successive dependent operations also serves to decouple the dependency of the operations. A machine or workcenter is often dependent upon the previous operation to provide it with parts to work on. If work ceases at a workcenter then all subsequent centers will shut down for lack of work. If a supply of work-in-process inventory is kept between each workcenter then each machine can maintain its operations for a limited time hopefully until operations resume the original center. 2.4 Lead time Lead time is the time that elapses between the placing of an order(either a purchase order or a production order issued to the shop or the factory floor)and actually receiving the goods ordered, if a supplier (an external firm or an internal department or plant)cannot supply the required goods on demand then the client firm must keep an inventory of the needed goods. The longer the leadtime the larger the quantity of goods the firm must carry in inventory. A just-in-time JIT manufacturing firm such as Nissan in Smyrna,Tennessee can maintain extremely low levels of inventory. Nissan takes delivery on truck seats as many as 18 times per day. However steel mills may have a lead time of up to three months. That means that a firm that uses steel produced at the mill must place orders at least three months in advance of their need. Inorder to keep their operations running in the meantime an on-hand inventory of three months steel requirements would be necessary. 2.5 Hedge Inventory can also be used as a hedge against price increases and inflation. Sales men routinely call purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance to purchase material in excess of current need at a price that is lower than it would be if the buyer waited until after the price increase occurs. 2.6 Smoothing requirements Sometimes inventory is used to smooth demand requirements in a market where demand is somewhat erratic. Consider the demand forecast and production schedule outlined in Table1 Notice how the use of inventory has allowed the firm to maintain a steady rate of

out put (thus avoiding the cost of hiring and training new personnel),while building up inventory in anticipation of an increase in demand. In fact, this is often called anticipation inventory. In essence the use of inventory has allowed the firm to move demand requirements to earlier periods thus smoothing the demand. Chapter III Controlling Inventory Often firms are given a price discount when purchasing large quantities of agood. This also frequently results in inventory in excess of what is currently needed tomeet demand. However if the discount is sufficient to offset the extra holding costincurred as a result of the excess inventory the decision to buy the large quantity isjustified. Firms that carry hundreds or even thousands of different part numbers can be faced with the impossible task of monitoring the inventory levels of each part number,in order to facilitate this many firms use an ABC approach. ABC analysis is basedon Pareto Analysis also known as the “80/20” rule. The 80/20 comes from Paretos finding that 20 percent of the populace possessed 80 percent of the wealth. From an inventory perspective it can restated thusly: approximately 20 percent of all inventory items represent 80 percent of inventory costs. Therefore a firm can control 80 percent of its inventory costs by monitoring and controlling 20 percent of its inventory. But it has to be the correct 20 percent. The top 20 percent of the firms most costly items are termed “A” items this should approximately represent 80 percent of total inventory costs. Items that are extremely inexpensive or have low demand are termed “C” items with “B” items falling in between A and C items. The percentages may vary with each firm but B items usually represent about 30 percent of the total inventory items and 15 percent ofthe costs. C items generally constitute 50 percent of all inventory items but only around 5 percent of the costs. By classifying each inventory item as an A B or C the firm can determine theresources time effort and money to dedicate to each item. Usually this means thatthe firm monitors A items very closely but can check on B and C items on a periodic basis ,for example monthly for B items and quarterly for C items. Another control method related to the ABC concept is cycle counting. Cycle counting is used instead of the traditional “once-a-year” inventory count where firms shut down for a short period of time and physically count all inventory assets in an attempt to reconcile any possible discrepancies in their inventory records. When cycle counting is used the firm is continually taking a physical count but not of total inventory. A firm may physically count a certain section of the plant or warehouse moving on to other sections upon completion until the entire facility is counted. Then theprocess starts all over again. The firm may also choose to count all the A items then the B items and finally the C items. Certainly the counting frequency will vary with the classification of each item. In other words A item may be counted monthly B items quarterly and C items yearly. In addition the required accuracy of inventory records may vary according to classification with A items requiring the most accurate record keeping.

Chapter IV Summary Time inventory management is now faced with the defects,The advent through altruism or legislation of environmental management has added a new dimension to inventory management-reverse supply chain logistics. Environmental management has expanded the number of inventory types that firms have to coordinate. In addition to raw materials work-in-process finished goods and MRO goods firms now have to deal with post-consumer items such as scrap returned goods reusable or recyclable containers and any number of items that require repair reuse recycling or secondary use in another product. Retailers have the same type problems dealing with inventory that has been returned due to defective material or manufacture poor fit finish or color or outright “I changed my mind” responses from customers. Finally supply chain management has had a considerable impact on inventory management. Instead of managing ones inventory to maximize profit and minimize cost for the individual firm todays firm has to make inventory decisions that benefit the entire supply chain. References 【1】 D. Bertsekas. Dynamic Programming and Optimal Control (Volumes 1 and 2.) Athena Scientific 2005. 【2】 A. Burnetas and P. Ritchken. Option pricing with downward-sloping demand curves: The case of supply chain options. Management Science 514:566–580 2005. 【3】 F. Chen and M. Parlar. Value of a put option to the risk-averse newsvendor. IIE Transactions 395:481–500 2007. 【4】 J. Cox S. Ross and M. Rubinstein. Option Pricing: A Simplified Approach. International Library of Critical Writings in Economics 143:461–495 2002. 【5】 R. Levine and S. Zervos. Stock markets banks and economic growth. American Economic Review 883:537–58 June 1998. 【6】 E. L. Porteus. Foundations of Stochastic Inventory Theory. Stanford University Press Stanford 2002. 【7】 J. Primbs. Dynamic hedging of basket options under proportional transaction costs using receding horizon control. Preprint 2007.


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