Chap 24 - Inventory management
7/8/23 15:43
Reasons for holding inventory:
• Raw materials and components
○ Purchased from outside suppliers
○ Held in storage until needed for production
○ Can be sent out to production line quickly
○ Businesses can meet increases in demand by increasing the rate of production quickly
• Work in progress
○ During the time it takes to convert raw materials into finished goods
○ Value of work in progress depends on the length of time needed to complete production
○ Batch production tends to have high work in progress levels
• Finished goods
○ Held in storage until needed to be dispatched to consumers
○ Can be displayed to increase potential sales
○ Also held to deal with sudden increase in demand
○ Will also stockpile to supply anticipated increase in demand
Inventory management:
Problems of not having effective inventory management:
• There may be insufficient inventory to meet changes in demand
• Out of date or obsolete inventories may be held if an effective rotation system is not used
• Inventory wastage may occur due to mishandling or incorrect storage conditions
• High inventory levels have high storage costs thus high opportunity cost
• Poor management in supply purchasing can result in late deliveries, low supplier discounts or deliveries too large
for warehouse to cope with
Costs of holding inventory:
• Opportunity cost
• Storage costs
• Risk of wastage or obsolescence
Benefits of holding inventory:
• Reduces risks of lost sales
• Allows for continuous production
• Avoids the need for special orders from suppliers
• Large orders of new supplies reduce costs
Optimum order size:
• Purchasing the right level of inventory is not easy
• PM must ensure right quality and right quantity of supplies are available
• Ordering huge quantities to gain economies of scale can be tempting - low ordering and administration costs as
well as 0 inventory for continuous production
• Special orders would be unnecessary
• However this comes with costs
• Inventory holding costs will be higher
• Opportunity costs will also be high
• Obsolescence
• Optimum order size varies from business to business
Inventory control charts:
• Widely used to monitor a firm's inventory position
• Mentions number of goods held, inventory deliveries, buffer levels and maximum inventory
• Help IM decide the appropriate time and order quantity
• Also allows for analysis of unusual events
• Key features of inventory control chart:
○ Buffer inventories
○ Maximum inventory level
○ Re-order quantity
○ Lead time
○ Reorder levels
The importance of supply chain management:
• Operational efficiency can be improved by managing the supply chain with the aim of reducing costs and
improving customer service
• Supply chain management is a management function
• Supply chain management aims to reduce the amount of time it takes to turn raw materials into finished goods
available for sale
• They do this by:
○ Establishing excellent communication with suppliers
○ Improving transport systems
○ Speeding up new product development process to improve the competitiveness of the business
○ Speeding up the production process with technology and flexible workforces
○ Minimizing waste to cut costs
Benefits of effective supply chain management:
• Improves customer service
• Reduces operating costs
• Improves profitability
Just-in-time inventory:
• Aims to achieve zero buffer inventories
• Components and other supplies arrive just as they are needed
• Finished goods are sent to customers as soon as they are completed
Comparing JIT with just-in-case inventory management:
• Traditional inventory management focuses on never running out of inventory by holding buffer
• This is called JIC inventory management
• JIT is more common nowadays as it relies on efficiency
Conditions for JIT to operate successfully:
• Excellent supplier relationships
• Production employees must be multi-skilled and flexible
• Equipment and machinery must be flexible
• Accurate demand forecasts
• IT equipment is needed for JIT
• Excellent employee-employer relationships
• Quality must be everyone's priority
JIT evaluation:
• JIT is an important step for the shift towards lean production
• JIT however may not be suitable for all businesses at all times
○ Costs of production being halted may be more than costs of storing inventory
○ Small businesses may not be able to finance JIT
○ Inflation may make it beneficial to hold inventory
○ Tertiary sector businesses need buffer inventory - they cannot run out
