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Summary Chapter 9: inventory management
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Chapter 9: Inventorymanagement
P167-188 in textbook + extra content added
1. The importance of inventory management
• Inventory is another name for materials and is any material that a firm holds in order to satisfy
customer demand (and these customers may be internal and / or external to the firm)
• Inventory costs money! It ties up working capital and affects cash flow. The money could have
been invested elsewhere
• Inventory takes up space
• Firms need to hire people to take care of inventory
• The goal in inventory management is to minimise inventory holding while maintaining a desired
customer service level.
- Cost vs service trade-off!
Inventory locations throughout the supply chain
Inventory turnover
• A concept used to measure a firm’s performance in inventory management
, Compares annual sales with the amount of average inventory held throughout the year
The higher
the turnover, the better a firm is doing in keeping its inventory costs down
Most firms achieve turnover of about 10
See problem 9.1 p169
• Inventory used as a buffer between processes along the supply chain
• Inventory holding costs are traded-off with other economical advantages
2. The economic order quantity (EOQ) model
Inventory build-up and depletion
• Costs associated with inventory can be classified in two broad categories
1. Costs associated with procuring/purchasing the inventory (see chapter 8)
2. Costs associated with actually holding the inventory
• Questions:
1) What should the order quantity (Q) be?
2) What should the safety stock (SS) be?
3) What should the reorder point be (ROP) be?
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