Case: Hewlett-Packard—Supplying the DeskJet Printer in EuropeKEY POINTS
Inventory is the stock of any item or resource used in an organization. Inventory can exist as raw materials, finished products, components parts, supplies, and work-in process. Organizations keep inventory for a number of reasons including 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, and to take advantage of economic purchase order size. Costs associated with inventory include holding or carrying costs, setup or ordering costs, and shortage or stockout costs.
Independent demand items are unrelated to each other and thus needed quantities for these independent items must be determined separately. For dependent demand items, the demand for one item is a direct result of the need for other items. Component parts demand, for example, is dependent on the demand for the final product.
Inventory systems can be modeled as fixed-order quantity or fixed-time period. In the fixed-order quantity model, the same amount of inventory is replenished in each order period. Necessary assumptions include: demand is known, constant, and uniform throughout a period. Lead time is constant and the price per unit and ordering costs are constant.
In a fixed-time period system, inventory is counted at fixed time intervals and orders are placed on a periodic basis. This model is desirable in situations when vendors make routine visits to customers and take orders for their complete line of products or when buyers want to combine orders to save on transportation costs.
Organizations must make decisions about the amount of safety stock to maintain for protection against stockouts. The safety stock ensures a firm's desired service level will be met. The quantity-discount inventory model applies when the cost of an item varies with the order size. This model, as in all inventory models, computes an economic order quantity (EOQ) to minimize order costs and holding costs.
ABC analysis is a control technique. The highest dollar volume items, or "A" items, are given the most rigorous cycle counting and attention for inventory control.
Because many firms, including services, may have large inventory investments, inventory reductions will also lead to improved quality and performance in addition to reduced costs. Two examples of inventory control in services are included and profile a department store and an automobile service agency.