Types of Inventories
•• Components (sub-assemblies)
•• Work-in-process: waiting in the system for processing
•or being processed (JIT reduces WIP to a minimum).
•• Finished goods (products): also known as end items.
Reasons for holding Inventories
[B] [LEFT]• Economies of Scale: savings in large orders
•• Uncertainty in delivery lead times: lost customers
•• Speculation: changing costs over time
•• Transportation: large investments in pipelines
•• Smoothing: dealing with demand variations
•• Inventory Control costs: increase with lower levels of inventory.
Characteristics of Inventory Systems
•• May Be Known or Uncertain (random)
•• Rate may be constant or variable
•• Lead Times (τ):
•• Time that elapses from placement of order until it’s arrival.
•Internally, it’s the time required to produce an item.
•• Review Time:
•• Is system reviewed periodically or is system state known at
•• Excess demand:
•• Is either back-ordered or lost Inventory Costs
[B] [LEFT]Holding Costs (h):
•• Costs proportional to the quantity of inventory physically
•• Includes: Physical Cost of Space, Taxes and Insurance, Breakage
•Spoilage and Deterioration , and Opportunity Cost of alternative
•• Convenient to express holding cost in terms of dollars
•per unit per year.
•• If c is the dollar value of the inventory unit, and I is the
•annual interest rate, then h = Ic.