Principles of Inventory Management
Purpose and Function of Inventory–
Advanced Topics
Session 3
POM: Concepts and Applications
Session 3-1
APICSCONFIDENTIAL
CONFIDENTIALAND
ANDPROPRIETARY
PROPRIETARY
©©APICS
Purpose and Function of Inventory
Overview
Operations
Management
Foundations
Mid-Term
Exam
Session 3A-2
Fundamentals
of Inventory
Management
Lean
InventoryTheory and
Practice
Purpose and
Function of
Inventory
Fundamentals
of Purchasing
Inventory
Replenishment
Management
Sourcing
Strategies
PO
Management
and
Performance
Measurement
© APICS CONFIDENTIAL AND PROPRIETARY
Additional
Inventory
Replenishment
Techniques and
Inventory
Performance
Final Exam
Agenda
• Measuring inventory throughput
• Cost of preventing a stockout
• Capacity associated costs
• Estimating inventory values
• Calculating order costs
• Inventory valuation models
Session 3A-3
© APICS CONFIDENTIAL AND PROPRIETARY
Measuring Inventory Throughput
Little’s Law:
Critical principle for measuring inventory
throughput. Throughput is the rate at which
product is received into and is sold out of stock.
Expressed as:
I (inventory) = D (throughput rate) * T(flow time)
Session 3A-4
© APICS CONFIDENTIAL AND PROPRIETARY
Cost of Preventing a Stockout
Concept: What would it cost to prevent a stockout to
maintain a desired customer service level (CSL)?
Formula:
(Carrying cost x unit cost) x standard lot / (1-CSL) x
average demand per year.
Session 3A-5
© APICS CONFIDENTIAL AND PROPRIETARY
Capacity Associated Costs
I. Forecast
II. Component
January
February
March
April
May
June
2,000
2,200
2,400
2,200
2,100
2,100
III. Capacity Variables
Period
# Workforce
On hand
January
February
March
April
May
June
Overtime
50
50
50
50
50
50
Ending Inventory
1,000
1,000
800
400
200
100
0
0
0
0
0
0
0
January
February
March
April...