Supply Chain Management

Chapter 8 : Inventory Management

Role of Inventory in a Supply Chain

Decoupling Balancing Supply and Demand
Buffer Uncertainties

Inventory Related Definitions
Cost of Carrying Inventory

Basic Inventory Management Decisions

Determining the Order Point
Determining Lot Size

Inventory Decisions in a Supply Chain

Cycle Inventory Decisions

Fixed Costs
Quantity Discounts
Trade Promotions

Safety Inventory Decisions

Calculating Safety Inventory Under Demand Uncertainty
Calculating Safety Inventory Under Lead Time Uncertainty

Chapter Summary

Inventory forms a major part of a firm's assets. Proper inventory management helps a firm minimize inventory costs and maximize profits. In this chapter, we discussed the importance of inventory and its functions. We studied the concepts associated with inventory management and examined the costs involved in carrying inventory.

The key inventory carrying cost components are capital cost, insurance, obsolescence, and storage. We also studied basic inventory management principles. The two key decisions in inventory management are determining 'when to order' and 'how much to order'. The two key inventory decisions in supply chain management are cycle inventory decisions and safety inventory decisions.

Three factors affect the cycle inventory decisions: Fixed ordering costs, quantity discounts and trade promotions. Safety inventory is required to protect a firm under conditions of uncertainty of demand and lead time. We studied the impact of demand uncertainty and lead time uncertainty and also the joint impact of these two variables on inventory policy.

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