📦Operations Management Unit 6 – Inventory Management

What's Inventory Management?

• Inventory management involves overseeing and controlling a company's inventory levels
• Includes ordering, storing, and using a company's raw materials, components, and finished products
• Aims to ensure the right products are available in the right quantities at the right time
• Balances the need to meet customer demand with the costs of holding inventory
• Effective inventory management minimizes stockouts (running out of products) and overstocking
• Tracks inventory levels in real-time using various methods (perpetual inventory system, periodic inventory system)
• Analyzes past sales data and forecasts future demand to inform inventory decisions

Why It Matters

• Inventory management directly impacts a company's bottom line by affecting costs, cash flow, and profitability
• Holding too much inventory ties up working capital and increases storage and handling costs
• Insufficient inventory leads to stockouts, lost sales, and decreased customer satisfaction
• Effective inventory management helps companies respond quickly to changes in demand or supply chain disruptions
• Optimizing inventory levels reduces waste from obsolete or expired products
• Streamlines operations by ensuring smooth production and fulfillment processes
• Improves cash flow by minimizing the amount of money tied up in inventory
• Enhances customer service by ensuring product availability and timely delivery

Key Concepts and Terms

• Economic Order Quantity (EOQ): The optimal order quantity that minimizes total inventory costs
• Reorder Point (ROP): The inventory level at which a new order should be placed to prevent stockouts
• Safety Stock: Extra inventory held to buffer against uncertainties in demand or supply
• Lead Time: The time between placing an order and receiving the inventory
• Inventory Turnover: The number of times inventory is sold and replaced over a given period
• ABC Analysis: Categorizing inventory items based on their value and importance (A: high value, C: low value)
• Just-in-Time (JIT) Inventory: A system that minimizes inventory by receiving goods only as they are needed
• Vendor-Managed Inventory (VMI): An arrangement where the supplier manages the inventory for the customer

Inventory Models and Systems

• Perpetual Inventory System: Continuously updates inventory records in real-time with each transaction
• Periodic Inventory System: Updates inventory records at regular intervals (weekly, monthly) by conducting physical counts
• Two-Bin System: Uses two bins for each item, ordering new stock when the first bin is empty
• Push System: Inventory is "pushed" through the supply chain based on forecasted demand
• Pull System: Inventory is "pulled" through the supply chain based on actual customer demand
• First-In, First-Out (FIFO): The oldest inventory is sold or used first
• Last-In, First-Out (LIFO): The newest inventory is sold or used first
• Consignment Inventory: The supplier owns the inventory until it is sold by the retailer

Costs and Trade-offs

• Holding Costs: Costs associated with storing and maintaining inventory (storage space, insurance, obsolescence)
• Ordering Costs: Costs incurred when placing an order (administrative costs, transportation, inspection)
• Shortage Costs: Costs resulting from stockouts (lost sales, customer dissatisfaction, emergency shipments)
• Trade-off between holding costs and ordering costs: Larger order quantities reduce ordering costs but increase holding costs
• Trade-off between inventory levels and customer service: Higher inventory levels improve product availability but increase costs
• Balancing the costs of stockouts against the costs of carrying safety stock
• Considering the opportunity cost of capital tied up in inventory

Techniques for Optimization

• ABC Analysis: Prioritizing inventory management efforts based on the value and importance of items
• Economic Order Quantity (EOQ): Calculating the optimal order quantity that minimizes total inventory costs
  • EOQ formula: $Q = \sqrt{\frac{2DS}{H}}$ (Q: order quantity, D: annual demand, S: ordering cost, H: holding cost)
• Reorder Point (ROP): Determining when to place an order to maintain adequate inventory levels
  • ROP formula: $ROP = (Average Daily Usage \times Lead Time) + Safety Stock$
• Safety Stock Calculation: Determining the appropriate level of extra inventory to hold
  • Safety Stock formula: $SS = Z \times \sigma \times \sqrt{LT}$ (Z: service level factor, $\sigma$: standard deviation of demand, LT: lead time)
• Inventory Turnover Analysis: Measuring how quickly inventory is sold and replaced
  • Inventory Turnover formula: $Turnover = \frac{Cost of Goods Sold}{Average Inventory}$
• Just-in-Time (JIT) Inventory: Minimizing inventory by synchronizing orders with production and demand
• Vendor-Managed Inventory (VMI): Collaborating with suppliers to optimize inventory levels and replenishment

Tech and Tools

• Inventory Management Software: Automates inventory tracking, ordering, and reporting processes
• Barcode Scanning: Enables accurate and efficient tracking of inventory movements
• Radio-Frequency Identification (RFID): Uses radio waves to automatically identify and track inventory items
• Warehouse Management Systems (WMS): Optimizes warehouse operations, including inventory storage and retrieval
• Enterprise Resource Planning (ERP) Systems: Integrates inventory management with other business functions (accounting, sales, production)
• Demand Forecasting Tools: Analyzes historical data and market trends to predict future demand
• Inventory Optimization Software: Uses algorithms to determine optimal inventory levels and replenishment strategies
• Cloud-based Solutions: Provides real-time visibility and collaboration across the supply chain

Real-world Applications

• Retail: Managing inventory levels across multiple stores and channels (brick-and-mortar, e-commerce)
• Manufacturing: Ensuring the availability of raw materials and components for production
• Healthcare: Managing inventory of medical supplies, pharmaceuticals, and equipment
• Food and Beverage: Optimizing inventory to minimize spoilage and waste
• Automotive: Coordinating inventory across a complex supply chain of parts and suppliers
• Fashion: Balancing inventory levels with rapidly changing trends and seasonal demand
• Electronics: Managing inventory of high-value components with short product life cycles
• Construction: Ensuring the availability of materials and supplies for building projects