Page 220 - DMGT551_RETAIL_BUSINESS_ENVIRONMENT

Unit 11: Physical Distribution and Inventory Management

than the machines in front of or behind it. Yet, if one walks through the plant it may seem that Notes
all machines are running smoothly at the same time. It also could be possible that while passing
through the plant, one notices several machines are under repair or are undergoing some form
of preventive maintenance. Even so, this does not seem to interrupt the flow of work-in-process
through the system. The reason for this is the existence of an inventory of parts between machines,
a decoupling inventory that serves as a shock absorber, cushioning the system against production
irregularities. As such it “decouples” or disengages the plant’s dependence upon the sequential
requirements of the system (i.e., one machine feeds parts to the next machine).

Cycle Inventory

Those who are familiar with the concept of Economic Order Quantity (EOQ) know that the EOQ
is an attempt to balance inventory holding or carrying costs with the costs incurred from ordering
or setting up machinery. When large quantities are ordered or produced, inventory holding
costs are increased, but ordering/setup costs decrease. Conversely, when lot sizes decrease,
inventory holding/carrying costs decrease, but the cost of ordering/setup increases since more
orders/setups are required to meet demand. When the two costs are equal (holding/carrying
costs and ordering/setup costs) the total cost (the sum of the two costs) is minimized. Cycle
inventories, sometimes called lot-size inventories, result from this process. Usually, excess
material is ordered and, consequently, held in inventory in an effort to reach this minimization
point. Hence, cycle inventory results from ordering in batches or lot sizes rather than ordering
material strictly as needed.

MRO Goods Inventory

Maintenance, repair, and operating supplies, or MRO goods, are items that are used to support
and maintain the production process and its infrastructure. These goods are usually consumed
as a result of the production process but are not directly a part of the finished product. Examples
of MRO goods include oils, lubricants, coolants, janitorial supplies, uniforms, gloves, packing
material, tools, nuts, bolts, screws, shim stock, and key stock.

Did u know? Even office supplies such as staples, pens and pencils, copier paper, and toner
are considered part of MRO goods inventory.
11.6 Inventory and Customer Service

Besides providing the customer with the required product, customer satisfaction demands the
delivery to be at the right place and right time. The challenge is to provide the time and place
utility at a competitive cost. This problem boils down to maintaining the right level of inventory
in the warehouse.
Inventory management is influenced by the nature of demand, including whether demand is
derived or independent. A derived demand arises from the production of another product.
Independent demand arises from demand for an end product. End products are found throughout
a supply chain. By definition, an independent demand is uncertain, meaning that extra units or
safety stock must be carried to guard against stock outs. Managing this uncertainty is the key to
reducing inventory levels and meeting customer expectations. Supply chain coordination can
decrease the uncertainty of intermediate product demand, thereby reducing inventory costs.

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