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Inventory Management

Caplice

Lecture 4ESD.260 Fall 2003

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Chris Caplice, MIT2MIT Center for Transportation & Logistics ESD.260

Background

Inventory is largest component of logistics $1.44 Trillion in 2002

Used as the metric for a healthy firm Inventory Turnover

Inventory Days of Sale Inventory/Sales Ratio

Inventory / COGS

Source of many programs and initiativesto reduce total inventory investment

VMI, JIT, MRP, DRP, CFRP

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Chris Caplice, MIT3MIT Center for Transportation & Logistics ESD.260

But what has been the result?

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Bottomline

Inventory is not bad. Inventory is good.

Inventory is an important tool which,when correctly used, can reduce totalcost and improve the level of serviceperformance in a logistics system.

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Classification of Inventory

Value added

Cycle Stock versus Safety Stock

Multi-Echelon

Multi-Indentured

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Why hold inventory?

Cover process time

Allow for the uncoupling of processes Economies of scale

Dealing with uncertainty / buffer

Anticipation & Speculation

Minimize control costs

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Fundamental Purpose of Inventory

To Reduce Total System Cost To buffer uncertainties in:

- supply,- demand, and/or

- transportation

the firm carries safety stocks.

To capture scale economies in:

- purchasing,- production, and/or

- transportation

the firm carries cycle stocks.

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Cycle Stock & Safety Stock

CycleStock

CycleStock

CycleStock

Safety Stock

On Hand

Time

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Relevant Costs

What makes a cost relevant?

Components

Purchase Cost

Ordering Cost

Holding Cost

Shortage Cost

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