Flashcards in Inventory Management Deck (6)
What is the dual role of inventory
• Impacts the cost of goods sold
• Supports order fulfilment
What is the twin goals of inventory
Special challenge in keeping inventories at acceptable levels because of the difficulty of forecasting demand and increasing expectations from customers concerning product availability.
Their ability to achieve the twin goals of lower inventory (efficiency) and acceptable customer service levels (effectiveness) is based on a number of factors
Logistics interfaces with an organisation’s other departments; The interface is usually more prominent in the inventory area.
• Marketing - The primary mission of marketing is to identify, create, and help satisfy demand for an organisation’s products/services. Marketing tends to have a favourable view on holding sufficient and/or extra inventory to ensure product availability to meet customer needs.
• Manufacturing - In many organisations, manufacturing operations are measured by how efficiently they can produce each unit of output. This situation typically means that manufacturing operations tend to be optimised when they have long production runs of a single product while minimising the number of changeovers. These long productions runs will result in high inventory levels but low labour and machine costs per unit.
• Finance – Inventories impact both the income statement and balance sheet of an organisation. Inventories create both an asset and liability on the balance sheet as well as a cash flow impact on the income statement. As such, finance usually looks favourably at low inventories to increase inventory turns, reduce liabilities and assets, and increase cash flow to the organisation.
What are the 4 main components of inventory carrying costs
• Capital Costs - capital cost focuses on the cost of capital tied up in inventory and the resulting lost opportunity from not investing that capital elsewhere.
• Storage Space Cost- moving products into and out of inventory, as well as storage costs such as rent, heating, and lighting.
• Inventory service cost -This includes insurance and taxes.
• Inventory risk cost - This is the final major component of inventory carrying cost and reflects the very real possibility that inventory dollar value might decline for reasons beyond an organisation’s control.
Determining the cost of in-transit inventory
First, the capital cost of carrying inventory in transit generally equals that of carrying inventory in a warehouse. If the organisation owns the inventory in transit, the capital cost will be the same.
Second, storage space cost generally will not be relevant to inventory in transit since the transportation service provider typically includes equipment (space) and necessary loading and handling costs within its overall transportation price.
Third, while taxes generally are not relevant to inventory service costs, the need for insurance requires special analysis.
Fourth, obsolescence or deterioration costs are lesser risks for inventory in transit because the transportation service typically takes only a short time. Also, the fact that inventory is moving to the next node in the supply chain assumes that there is a demand for that inventory, lessening the probability that it will not be sold.