Inventory refers to stocks of goods and materials that are maintained for many purposes,
the most common being to satisfy normal demand patterns.
inventories serve as cushions to accommodate the fact that items arrive in one
pattern and are used in another pattern.
Inventory management is a key component in logistics and supply chain management, in
part because inventory decisions are often a starting point, or driver, for other business
activities.
There are various classifications of inventory:
- Cycle, or base, stock refers to inventory that is needed to satisfy normal demand
during the course of an order cycle.
- Safety, or buffer, stock refers to inventory that is held in addition to cycle stock to
guard against uncertainty in demand or lead time.
- Pipeline, or in-transit, stock is inventory that is en route between various fixed
facilities in a logistics system such as a plant, warehouse, or store.
- Speculative stock refers to inventory that is held for several reasons, including
seasonal demand, projected price increases, and potential shortages of products.
- Psychic shock is associated with retail stores, and the general idea is that customer
purchases are stimulated by inventory that they can see.
A prominent concern involves the costs associated with holding inventory, which are
referred to as inventory carrying (holding) costs.
the costs are expresses in percentage terms, and this percentage is multiplied by
the inventory’s value.
Inventory shrinkage is a component of inventory carrying cost and refers to the fact that
more items are recorded entering than leaving warehousing or retailing facilities.
other components are obsolescence costs, storage costs, handling costs, insurance
costs, taxes and interest costs.
Ordering costs refer to those costs associated with ordering inventory, such as order costs
and setup costs.
can be calculated by multiplying the number of orders per year times the ordering
cost per order.
Stockout costs, or estimating the costs or penalties for a stockout, involve an understanding
of a customer’s reaction to a company being out of stock when a customer wants to buy an
item.
A back order is an order for an item that is out of stock and having it delivered to the
customer when it arrives.
A key issue with respect to inventory management involves the determination of when
product should be ordered; one could order a fixed amount of inventory (fixed order
quantity system), or orders can be placed at fixed time intervals (fixed order interval
system).
in a fixed order quantity system, the time of interval may fluctuate while the order
size stays constant.
in a fixed order interval system, the time interval is constant, but the order size
may fluctuate.
There needs to be a reorder (trigger) point for there to be an efficient fixed order quantity
system.
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