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Chapter 13 - Inventory Management - Coggle Diagram
Chapter 13 - Inventory Management
Managing inventory
Inventory management deals with the way various types of inventory are held and their levels are controlled (stock or stocks)
Purpose of inventory
Inventory is the raw materials, work in progress and finished products held by a business
There must be enough inventory to enable production to take place, but if there is too much, costs are incurred
Raw materials: Essential for the production transformation process, held so that sudden orders can be started with out time wasting
Work in progress: Goods that are partly finished but are not ready for sale
Finished products: Goods ready for sale, businesses hold them as buffer stock so that customers can be supplied immediately
Costs and benefits of holding inventory
All inventory comes from resources used in production, that have to be paid for
Inventory doesn't generate any revenue to recover these costs until it is sold
Holding too much inventory results in unnecessary expense, and too little means loss of customers
Essential for the transformation process, and a business has to balance the conflicting costs and benefits
Costs
Rent for space or interest on money borrowed for storage costs
Costs of maintaining storage
Insurance and security
Losses due to inventory becoming outdated
Inventory damages
Occupies space that could be used for other purposes
Benefits
Ability to meet demand
Ensures uninterrupted production
Gaining discounts (bulk material orders)
Reducing inflation effects
Managing inventory
Inventory is a key part of the transformation process, managing must be linked to other functional areas
Saes determine how much production is needed, as inventory must be ordered, and employee number set
Production process determining inventory levels
IT systems enable functions to be interrelated in the most efficient way
Buffer inventory is the minimum inventory that prevents variation in supply, production or demand stopping production or sales
Interpretation of inventory control charts
The Buffer inventory model uses inventory control charts that enable sufficient inventory to meet demand
Inventory is used over time, this model assumes this occurs evenly, assumes a minimum inventory to be held
In order for this to be maintained, inventory must be reordered, at the reorder level, which will be before the buffer level is reached
Time taken from ordering to delivery is called lead time
This ensures that inventory never falls below the buffer level, and reordering is triggered when the reorder level is reached
Inventory control methods
Holding some buffer inventory will enable a business to continue production; there are costs of holding it
A business must decide the appropriate level for its operations
Having high inventory ensures it never runs out, managing levels are easy but expensive to hold
Having low inventories ensures small holding costs, high inventory management costs
Inventory rotation (ensures old inventory used before the new inventory)
IT systems of inventory control (includes Electronic Point Of Sale (EPOS) which links sales to stock levels)
Setting buffer inventory and using an inventory control chart will be appropriate for both
Importance of supply chain management
Supply chains are complex
Essential that every link in the chain works, and production isn't held up by a delay in the arrival of one part
Just-in-time
Purpose of Just-In-Time and Just-In-Case inventory management
Just in time (JIT)
Raw materials are ordered only when needed for production, efficient production methods minimise work in progress, and finished goods are supplied immediately to customers
Successful JIT requires a low reorder level, low order quantity, short lead time, reliable suppliers, accurate forecasts of customer demand
Result is small bugger inventory levels, lead time, order quantities and reorder levels
This applies to raw materials and finished goods
Cost of holding inventory will be small
JIT relies on finding reliable suppliers and integrated processes, linking demand, production process and supply chain
Difficult to reduce inventory to zero, but JIT limits inventory costs
JIT production operates with as low a buffer level as possible
Just in case (JIC)
Involves a company keeping high levels of inventory so it doesn't run out of stock in times of high, unpredictable demand
