Inventory

DSME 2030

Operations Management

Inventory Control

Part I

Sean Zhou

CUHK Business School

CUHK

DSME 2030

Page 1

Definition of Inventory

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

organization and can include: raw materials, finished

products, component parts, supplies, and work-inprocess

 Inventory system is the set of policies and controls that

monitor levels of inventory and determine what levels

should be maintained, when stock should be

replenished, and how large orders should be

DSME 2030

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Why Hold Inventory?

 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

 To take advantage of economic purchase-order size

DSME 2030

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Why Manage Inventory?

 We can visualize inventory as stacks of money sitting

on forklifts, on shelves, and in trucks and planes while

in transit

 For many businesses, inventory is the largest asset

on the balance sheet at any given time

 It is a good idea to try to get the inventory down as far

as possible

DSME 2030

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Source: http://www.census.gov/mtis/

DSME 2030

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Inventory Management at Corporate Level:

Inventory Turnover and Days-of-Supply

 At the corporate level, the management is oftentimes

concerned with inventory performances, which have

been covered in the chapter of Production Process

 Inventory turn (turnover ratio): how many times the

average inventory is sold and replaced in a year

Inventory turn = Throughput/Inventory

 Days-of-supply (inventory days): the number of sales

days covered by the average inventory

Days-of-supply = 365/Inventory turns

DSME 2030

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Inventory Management at Item Level:

ABC Classification

ABC classification is a way to determine what items in

inventory are important and thus deserve close scrutiny

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