Chapter 9: Inventory Management

Performance of Inventory Mgmt. (1 of 3)

• Fill rate: Ability to meet demand without stockout
• Ex: A company failed to satisfy 10 orders out of 1000 orders in a year because of inventory shortage.
• Fill rate =100%-1%=99%
• Fill rate is a direct indicator for customer service level at the retail market.

• Customer service level

• Inventory

• 100%

• A company needs to hold a large inventory for high customer service.

• Think why retailers like E-mart keep a large inventories at their stores.

Performance of Inventory Mgmt. (2 of 3)

• Inventory turnover : ratio of average inventory on-hand and level of sales
• = Cost of goods sold / Average inventory at cost

• Ex: If an annual cost of goods sold is $500M and average inventory is $80M, what is inventory turnover?
• Inventory turns = $500/$80 = 6.25 turns

• Advantages of high turn over:
• ‘Fresh’ inventory from high sales
• Reduced risk or mark down from obsolescence
• Reduced total carrying costs
• Lower asset investment and higher productivity

• Dangers of high turnover:
• Stockouts may mean lower sales
• Increased costs from missing quantity requirements
• Increased ordering costs

Performance of Inventory Mgmt. (3 of 3)

• Days of Supply: length of time operations can be supported with inventory on-hand
• Days of supply = Inventory on-hand / Daily demand

• Ex: If inventory is 2M and daily demand is 25,000 day
• Days of supply = 2M/25,000 = 80 days
• - This indicates the company can satisfy demand for 80 days with the current inventory.

• Inventory Turnover rate

• Days of Supply

• An inverse Relationship between Inventory Turnover and Days of Supply

• vs