March 27, 2015

Inventory Control - Review Notes for Chase et al. Book Chapter

Inventory is the stock of any item or resource used in an organization.

Inventory can exist as raw materials, finished products, components parts, supplies, and work-in process.

Organizations keep inventory for a number of reasons including to maintain independence of operations, to meet variation in product demand, to allow flexibility in production scheduling, to provide a safeguard for variation in raw material delivery time, and to take advantage of economic purchase order size.

Costs associated with inventory include holding or carrying costs, setup or ordering costs, and shortage or stockout costs. Inventory management has the responsibility to optimize these costs along with the benefits that accrue due to inventories.

Independent demand items are unrelated to each other and thus needed quantities for these independent items must be determined separately. For dependent demand items, the demand for one item is a direct result of the need for other items. Component parts demand, for example, is dependent on the demand for the final product. If the schedule of finished product delivery is finalized, one can arrive at the demand for component parts in various time buckets.
Inventory planning and ordering systems can be modeled as fixed-order quantity or fixed-time period. In the fixed-order quantity model, the same amount of inventory is replenished in each order. The assumptions include: demand is known, constant, and uniform throughout a period. Lead time is constant and the price per unit and ordering costs are constant. But the model is applied to situations with varying annual as well as periodic demand

In a fixed-time period system, inventory is counted at fixed time intervals and orders are placed on a periodic basis. This model is desirable in situations when vendors make routine visits to customers and take orders for their complete line of products or when buyers want to combine orders to save on transportation costs.
Organizations must make decisions about the amount of safety stock to maintain for protection against stockouts. The safety stock ensures a firm's desired service level will be met.

The quantity-discount inventory model applies when the cost of an item varies with the order size. This model, as in all inventory models, computes an economic order quantity (EOQ) to minimize order costs and holding costs.

ABC analysis is a planning and control technique. The highest dollar volume items, or "A" items, are given the most attention in planning and the most rigorous cycle counting and attention for inventory control.

Because many firms, including services, may have large inventory investments, inventory reductions will lead to reduced costs. The managers of Toyota Motors developed their production planning methods with a view to reduce inventory and found that it required cutting set up times. Hence reduction in set up times was pursued, they reduced 8 hours of set up time to 8 minutes and further to three minutes. They also found that they needed to reduce defects and hence took up quality improvement activity in production processes. The succeeded in achieving low inventories that gave them savings in costs associated with inventory and also reduced their quality costs and set up costs. Overall they got lower cost of production hence became globally competitive.

Two examples where inventory control is used on in service companies are a department store and an automobile service agency.

Chapter Outline of
Richard B. Chase, F. Robert Jacobs, Nicholas J. Aquilano, Operations Management for Competitive Advantage, 10/e, McGraw-Hill Higher Education, 2004

Definition of Inventory
Purposes of Inventory
Inventory Costs
Independent versus Dependent Demand
Inventory Systems
Single Period Model
Multi-Period Inventory System
Fixed Order Quantity Models
Establishing Safety Stock Levels
Fixed-Order Quantity Model with Safety Stock
Fixed-Time Period Models
Fixed-Time Period Models with Safety Stock
Price-Break Models
Miscellaneous Systems and Issues
Three Simple Inventory Systems
ABC Inventory Planning
Inventory Accuracy and Cycle Counting
Inventory Control in Services

Case: Hewlett-Packard - Supplying the DeskJet Printer in Europe


Richard B. Chase, F. Robert Jacobs, Nicholas J. Aquilano, Operations Management for Competitive Advantage, 10/e, McGraw-Hill Higher Education, 2004

Originally posted at 2utb2lsm2k7a/ 438

Updated  27 March 2015, 10 Dec 2011


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