Classification of inventory is very critical.
It is probably easy for us to classify inventory in context to how it is created. Although, it is almost impossible for an inventory manager to physically classify an inventory. But conceptually it is very important for him to know as in what phase the inventory lies at a particular point in time to reduce the overheads involved.
Cycle Inventory
The portion of total inventory that varies directly with lot size is called cycle inventory. Determining how frequently to order, and in what quantity, is called lot sizing. Following principles apply.
1- The lot size, typically termed as Q, varies directly with the elapsed time between orders. If a lot is ordered every five weeks, the average lot size must equal five weeks' demand.
2- The longer the time between orders for a given item, the greater the cycle inventory must be.
To calculate average cycle inventory, once an order or lot is received, cycle inventory drops to 0 (minimum). However, at the time of placing an order, cycle inventory is at its maximum. Average cycle inventory is the average of above mentioned two extreme states of ordering.
Average Cycle Inventory = (Q + 0)/2
When the demand rate is constant and uniform, you can take help of above formula. But, if you are unsure of growing demand, you can check if Q (lot size) multiplied by 1.5 satisfies your demand needs.
In case of uncertain growing demand, Average Cycle Inventory = ((Qx1.5) + 0)/2
Safety Stock Inventory
Safety stock inventory protects against uncertainties in demand, lead time, and supply. Safety stocks are desirable when suppliers fail to deliver the desired quantity on the specified date with acceptable quality or when manufactured items have significant amounts of scrap or rework. Safety stock inventory ensures that operations are not disrupted.
Anticipation Inventory
Inventory used to absorb uneven rates of demand or supply, which businesses often face, is referred to as anticipation inventory. Uneven future demands are always anticipated up to certain extent. And due to anticipation, managers always have an account of anticipation inventory. Specially in case of seasonal demands.
Pipeline Inventory
Pipeline inventory consists of items for which orders have been placed but not yet received in warehouse.
It can be calculated as follows:
Pipeline Inventory = Demand during Lead time (DL) x Lead Time (L)
It is probably easy for us to classify inventory in context to how it is created. Although, it is almost impossible for an inventory manager to physically classify an inventory. But conceptually it is very important for him to know as in what phase the inventory lies at a particular point in time to reduce the overheads involved.
Cycle Inventory
The portion of total inventory that varies directly with lot size is called cycle inventory. Determining how frequently to order, and in what quantity, is called lot sizing. Following principles apply.
1- The lot size, typically termed as Q, varies directly with the elapsed time between orders. If a lot is ordered every five weeks, the average lot size must equal five weeks' demand.
2- The longer the time between orders for a given item, the greater the cycle inventory must be.
To calculate average cycle inventory, once an order or lot is received, cycle inventory drops to 0 (minimum). However, at the time of placing an order, cycle inventory is at its maximum. Average cycle inventory is the average of above mentioned two extreme states of ordering.
Average Cycle Inventory = (Q + 0)/2
When the demand rate is constant and uniform, you can take help of above formula. But, if you are unsure of growing demand, you can check if Q (lot size) multiplied by 1.5 satisfies your demand needs.
In case of uncertain growing demand, Average Cycle Inventory = ((Qx1.5) + 0)/2
Safety Stock Inventory
Safety stock inventory protects against uncertainties in demand, lead time, and supply. Safety stocks are desirable when suppliers fail to deliver the desired quantity on the specified date with acceptable quality or when manufactured items have significant amounts of scrap or rework. Safety stock inventory ensures that operations are not disrupted.
Anticipation Inventory
Inventory used to absorb uneven rates of demand or supply, which businesses often face, is referred to as anticipation inventory. Uneven future demands are always anticipated up to certain extent. And due to anticipation, managers always have an account of anticipation inventory. Specially in case of seasonal demands.
Pipeline Inventory
Pipeline inventory consists of items for which orders have been placed but not yet received in warehouse.
It can be calculated as follows:
Pipeline Inventory = Demand during Lead time (DL) x Lead Time (L)
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