Inventory Management
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Inventory Theory
“Sorry, we’re out of that item.” How often have you heard that during shopping trips? In many of these cases, what you have encountered are stores that aren’t doing a very good job of managing their inventories (stocks of goods being held for future use or sale). They aren’t placing orders to replenish inventories soon enough to avoid shortages. These stores could benefit from the kinds of techniques of scientific inventory management that are described in this chapter.
It isn’t just retail stores that must manage inventories. In fact, inventories pervade the business world. Maintaining inventories is necessary for any company dealing with physical products, including manufacturers, wholesalers, and retailers. For example, manufacturers need inventories of the materials required to make their products. They also need inventories of the finished products awaiting shipment. Similarly, both wholesalers and retailers need to maintain inventories of goods to be available for purchase by customers.
The total value of all inventory—including finished goods, partially finished goods, and raw materials—in the United States is more than a trillion dollars. This is more than
$4,000 each for every man, woman, and child in the country.
The costs associated with storing (“carrying”) inventory are also very large, perhaps a quarter of the value of the inventory. Therefore, the costs being incurred for the storage of inventory in the United States run into the hundreds of billions of dollars annually. Reducing storage costs by avoiding unnecessarily large inventories can enhance any firm’s competitiveness. Some Japanese companies were pioneers in introducing the just-in-time inventory system—a system that emphasizes planning and scheduling so that the needed materials arrive “just-in-time” for their use. Huge savings are thereby achieved by reducing inventory levels to a bare minimum.
Many companies in other parts of the world also have
Inventory Theory
“Sorry, we’re out of that item.” How often have you heard that during shopping trips? In many of these cases, what you have encountered are stores that aren’t doing a very good job of managing their inventories (stocks of goods being held for future use or sale). They aren’t placing orders to replenish inventories soon enough to avoid shortages. These stores could benefit from the kinds of techniques of scientific inventory management that are described in this chapter.
It isn’t just retail stores that must manage inventories. In fact, inventories pervade the business world. Maintaining inventories is necessary for any company dealing with physical products, including manufacturers, wholesalers, and retailers. For example, manufacturers need inventories of the materials required to make their products. They also need inventories of the finished products awaiting shipment. Similarly, both wholesalers and retailers need to maintain inventories of goods to be available for purchase by customers.
The total value of all inventory—including finished goods, partially finished goods, and raw materials—in the United States is more than a trillion dollars. This is more than
$4,000 each for every man, woman, and child in the country.
The costs associated with storing (“carrying”) inventory are also very large, perhaps a quarter of the value of the inventory. Therefore, the costs being incurred for the storage of inventory in the United States run into the hundreds of billions of dollars annually. Reducing storage costs by avoiding unnecessarily large inventories can enhance any firm’s competitiveness. Some Japanese companies were pioneers in introducing the just-in-time inventory system—a system that emphasizes planning and scheduling so that the needed materials arrive “just-in-time” for their use. Huge savings are thereby achieved by reducing inventory levels to a bare minimum.
Many companies in other parts of the world also have
References: 1. Axsäter, S.: Inventory Control, Kluwer Academic Publishers, Boston, 2000. 2. Hillier, F. S., M. S. Hillier, and G. J. Lieberman: Introduction to Management Science, A Modeling and Case Studies Approach with Spreadsheets, Irwin/McGraw-Hill, Burr Ridge, IL, 2000, chaps 3. Liu, B., and A. O. Esogbue: Decision Criteria and Optimal Inventory Processes, Kluwer Academic Publishers, Boston, 1999. 4. Nahmias, S.: “Perishable Inventory Theory: A Review,” Operations Research, 30: 680–708, 1982. 5. Nahmias, S.: Production and Operations Analysis, 3d ed., Irwin/McGraw-Hill, Burr Ridge, IL, 1997. 6. Sherbrooke, C. C.: Optimal Inventory Modeling of Systems: Multi-Echelon Techniques, Wiley, New York, 1992. 7. Silver, E., D. Pyke, and R. Peterson: Inventory Management and Production Planning and Scheduling, 3d ed., Wiley, New York, 1998. 8. Tayur, S., R. Ganeshan, and M. Magazine (eds.): Quantitative Models for Supply Chain Management, Kluwer Academic Publishers, Boston, 1998.