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MGT613 - Production / Operations Management - Lecture Handout 31

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Learning Objectives

Our discussion on Inventory Management would be complete only when we are able to learn and understand the types of Inventories and objectives of Inventory Control. This would ensure that we are able to understand the major reasons for holding inventories. We would be able to differentiate between independent and dependent demand. We will also learn the requirements of an effective inventory management system. We will review both periodic as well as perpetual Inventory systems. We will discuss in detail the ABC approach with a suitable example. Since our discussion would extend over three lectures we will also discuss the objectives of inventory management, describe the basic EOQ model, Economic Run Size, Quantity Discount Model with solved examples.

Types of Inventories

The five common types of inventories are:

  1. Raw materials & purchased parts.
  2. Partially completed goods called work in progress.
  3. Finished-goods inventories:
    • (manufacturing firms) or
    • merchandise, (retail stores)
  4. Goods-in-transit to warehouses or customers.
  5. Replacement parts, tools, & supplies.

Objective of Inventory Control

To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds. Operations Managers are well aware of the fact that customer services with respect to Inventory takes into account both the internal customers as well as external customers.

  1. Level of customer service.
  2. Costs of ordering and carrying inventory.

Functions of Inventory

A manufacturing organization has one or more of the following functions of inventory in mind when it tries to set up a pragmatic and effective inventory management system.

  1. To meet anticipated demand.
  2. To smooth production requirements.
  3. To decouple operations.
  4. To protect against stock-outs.
  5. To take advantage of quantity discounts.
  6. To permit operations.
  7. To help hedge against price increases.
  8. To take advantage of order cycles.

Requirements of Effective Inventory Control

Management has two basic functions concerning Inventory.

  1. To make decisions about how much and when to order.
  2. To establish a system of keeping track of items in an inventory.

Effective Inventory Management

An Inventory Management System would be called Effective if it is able to fulfill the following requirements.

  1. A system to keep track of inventory.
  2. A reliable forecast of demand.
  3. Knowledge of lead times.
  4. Reasonable estimates of:
    • Holding costs
    • Ordering costs
    • Shortage costs
  5. A classification system.

Inventory Counting Systems

There are two famous types of Inventory Counting Systems

  1. Periodic System
  2. Perpetual Inventory System( CONTINUAL)

Periodic System: Physical count of items made at periodic intervals.
Perpetual Inventory System( CONTINUAL): System that keeps track of removals from inventory continuously, thus monitoring current levels of each item. Perpetual Inventory Systems can be simple or complex, the two common perpetual Inventory systems found in Pakistan are the:

  • Two-Bin System - Two containers of inventory; reorder when the first is empty.
  • Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached.