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Inventory Management

Inventory, in a perfect world, is simply a waste. However, this 'waste' is necessary where in the real world we have to face with lead time in acquiring the asset or material: order processing and delivery time, especially with a fact that some items are critical and the stock out costs are substantial.

Inventory has to be managed in a certain level which is not too high to be excessive but not too low to be shortage.
Cost balancing has to be managed carefully; determining order amounts and timing with the aim to reducing associated costs without sacrificing customer needs.

There are specific costs associated with inventory: acquisition costs; landed costs; carrying or holding costs; ordering costs; back order or stock out and opportunity costs.

Some factors to consider in setting inventory policy are:

  • Customer demand
  • Planning horizon
  • Replenishment lead time
  • Product variety
  • Inventory costs
  • Customer service requirements

Inventory Management

 Objectives of Aggregate Inventory Management (APICS)

Inventory grouping helps inventory specialists in determining the costs and benefits of a particular group of inventory, aggregated by the following patterns:

  • Demand type
  • Final use
  • Relative value to the organization, e.g. ABC inventory analysis
  • Product commodity or SKU type
  • Distribution

Two key performance indicators for inventory:

  • Turn-over ratio; to measure the reduction of inventory costs
  • Service level; to measure achievement of customer service targets related to quality, availability and on-time delivery

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