INVENTORY MANAGEMENT IN ENTREPRENEURS POINT OF VIEW

A.A. MOHAMED FAISAL

Definitions
Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.

Types of Inventory
Work in process
Vendors

Raw Materials Work in process

Work in process

Finished Customer goods

Entrepreneurs why To Hold Inventory

Improve customer service Economies of purchasing Economies of production Transportation savings Hedge against future Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) To maintain independence of supply chain

 Reducing ordering costs Achieving efficient production run Avoiding loss

Entrepreneur why To NOT Hold Inventory

Carrying cost
Financially calculable

Takes up valuable factory space

Especially for in-process inventory

Inventory covers up problems

That are best exposed and solved

Nature of inventory
Speed Quality Flexibility cost

Inventory Measures
Weeks of Supply
Ford: 3.51 weeks Sears: 9.2 weeks

Inventory Turnover (Turns)

Ford: 14.8 turns Sears: 5.7 turns GM: 8 turns Toyota: 35 turns

Inventory Costs
Procurement costs Carrying costs Out-of-stock costs

Procurement Costs
Order processing Shipping Handling Purchasing cost: c(x)= $100 + $5x Mfg. cost: c(x)=$1,000 + $10x

Carrying Costs
Capital (opportunity) costs Inventory risk costs Space costs Inventory service costs

Out-of-Stock Costs
Lost sales cost Back-order cost

Two Forms of Demand

Dependent
Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory

Independent

Inventory Hides Entrepreneurs Problems

Bad Design

Lengthy Setups
Inefficient Layout

Poor Quality Machine Breakdown Unreliable Supplier

Inventory Management Systems

Functions of Inventory Management
Track inventory How much to order When to order

Motives for holding inventories

Transaction motive Precautionary motive Speculative motive

Transaction motive: Avoid bottle neck in it pdn & sales Pdn not interrupted
Precautionary motive: Motive to have cushion against unpredicted business Avoid demand for finished goods at a time

Speculative motive Take the advantage of fluctuation If the rm price is increase rather the entrepreneurs would like to hold more inventories than required at lower prices.

Models of inventory management

EOQ ABC Inventory turn over ratio

Economic Order Quantity (EOQ) Models

EOQ
optimal order quantity that will minimize total inventory costs

Basic EOQ model Production quantity model

ABC Classification
Class A
5 15 % of units 70 80 % of value

Class B
30 % of units 15 % of value

Class C
50 60 % of units 5 10 % of