Inventory refers to goods
and materials not currently in use but available for sale or production. Each
department within a business relies on various materials and supplies to
function effectively. This concept of inventory encompasses raw materials, components
ready to be assembled into final products, spare parts (MRO) kept in storage
and completed goods. These items are visible and quantifiable, allowing the
company to assess their value and manage associated holding costs effectively.
The financial value of inventory appears on a company's balance sheet as a
liability and needs to be managed to maximise the returns on capital tied up in
inventory.
The Concepts and Principles
of Inventory Management
Very few businesses can
instantaneously fulfil customer orders for goods or materials upon receipt.
Maintaining a certain stock level is essential to meet demand without
overstocking. Striking a balance between depleting inventory and holding
excessive amounts is crucial. Successful companies achieve this equilibrium
primarily through effective inventory management practices. However, "run
out" can be misleading; a well-organised manufacturing business seldom
lacks stock due to its proficient inventory oversight.
Materials and products are
consistently moving through various production, assembly, and distribution
stages, while in-stock levels are sustained through systematic replenishment
strategies. By managing and controlling these inventory levels, businesses can
meet critical trading objectives, such as satisfying customer demand and
optimising the return on invested capital. All types of companies, including
manufacturers, wholesalers, and retailers, rely on inventory management, which
involves several fundamental steps:
- Identifying the need for
stock.
- Determining what and how much to
purchase or produce.
- Maintaining appropriate inventory
levels.
- Ensuring that items remain in
a sellable or usable condition.
To increase the
understanding of inventory management, examining the key concepts and
principles, the primary roles of finished product inventories, and the effects
of variability on stock levels is essential. This understanding integrates
these elements to provide insights into inventory management strategies. It
guides managers on the actions required to oversee their finished product
inventories and the methodologies to implement them effectively. Inventory
management encompasses the policies and strategies businesses employ to
optimise the components of their products. It includes the physical supplies
stored on-site, in storage facilities, or warehouses.
The main functions of
finished product inventories can be categorised into decoupling, smoothing, and
cycle stock, each playing a vital role in ensuring operational efficiency and
responsiveness to market demands. Inventory management encompasses several
critical concerns that necessitate the implementation of various strategies.
One key aspect is variability of demand, which refers to the extent to which
components differ in terms of their demand relative to a given level of
business. This metric is essential for managers to evaluate, as it can arise
from numerous sources. Variability can disrupt a business's seamless operation,
influencing the advantages and disadvantages of maintaining a specific inventory
level while retaining a level of inventory service within reasonable lead times.
The level of
variability directly affects the quantity of inventory organisations must
retain. Optimising inventory management aims to reduce variability, thereby
maximising the benefits of readily available inventory. Accurate data
collection is crucial for assessing the degree of variability present within
the inventory. By understanding this variability, companies can develop
effective action plans to mitigate its impact, ensuring a more efficient and
streamlined inventory management process.
The Definition and
Importance of Inventory Management
Inventory Management
highlights the essential role of inventory in business operations, focusing on
procuring and processing materials for production and managing goods at various
stages. There are two main types of inventory: purchase inventory, which helps
businesses acquire materials in bulk, providing a buffer against fluctuating
demand; and work-in-progress and finished goods inventory, which ensure smooth
workflow and availability for consumers, enabling responsiveness to changing
demand.
These inventory types serve
a functional purpose as they help bridge the gap between individual suppliers'
longer supply times and the immediate demand they fulfil. However, maintaining
stock also involves financial implications, as it ties up capital resources.
This necessitates acquiring the necessary funds and expenses for land, labour,
and management associated with storage and handling. Elevated inventory levels
can result in book value depreciation, especially if the stock's market value
falls below its historical cost, alongside incurring significant warehousing
and security costs.
Consequently, adequate cash
and inventory management aims to deliver the required service levels while
minimising associated costs. Inventory management can be defined as the
organised process of locating, recording, and supplying inventory to mitigate the
risk of stock shortages while simultaneously reducing the overall costs of
holding inventory. This strategic approach ensures that businesses can maintain
operational efficiency and meet customer demands without incurring unnecessary
expenses.
Forecasting demand involves
analysing the challenges associated with predicting when customer needs will
arise and the quantities that will be required. This analysis establishes the
minimum production volume necessary to meet demand and the maximum inventory
levels that can be maintained. Effective forecasting is crucial for reducing
business costs, as inventories are estimated to account for 25 per cent of businesses'
direct operating costs. Various expenses associated with inventory management
can be factored into this analysis.
In today's investment
climate, it is estimated that typical cash usage ranges from £5 to £10 for
every £100 of capital invested. The primary challenge for large retail chains
is ensuring that shelves are stocked efficiently while minimising overall costs.
However, the solutions to these inventory challenges are often intricate.
Factors such as the repercussions of stock-outs, including lost sales, future
sales opportunities, replenishment costs, and the allocation of shelf space,
play a significant role in determining strategies for reducing excess
inventory.
While the relationship
between inventory costs and demand may not always be straightforward, the
percentage cost of carrying inventory is anticipated to remain low. Conversely,
the cost associated with lost sales can be significantly higher, particularly
for expensive and bulky items like large home appliances. In these cases, it is
advisable to limit stock shortages to 0.5 per cent of the time, translating to
approximately 52 instances per year, based on a typical daily demand of 10.5
appliances.
Key Concepts and
Terminology
A solid grasp of the key
terms and definitions related to inventory management is essential for
comprehending the challenges and topics addressed when studying the issues and
requirements of managing inventory and establishing the conceptual foundation
for its empirical analysis. Numerous authors introduce their terminology,
creating a perplexing mix of concepts. Terms like demand sources, demand
states, and demand distributions are intended to clarify subtle differences,
but they can sometimes complicate understanding rather than enhance it. The
main definitions are:
- Stock: Inventory items held exclusively
for consumption or use in producing goods and services.
- Cycle Stock: Stock held to satisfy an expected
average level of demand during the replenishment lead time for an order.
- Safety Stock: Stocks held above cycle stock
levels to buffer against demand and/or supply uncertainty costs.
- Pipeline Stock: Stocks in transit between
facilities.
- Anticipation Stock: Stock created as a deliberate
anticipation of observed supply chain swings caused, for example, by
seasonality or promotional activity.
- Multi-stage Stock: The total inventory across the
supply chain at different supply points.
- Work-in-Progress: The stages of inventory in the
production process, which are typically time-related.
- Process Time: The time it takes to produce an
item once the initial process has commenced.
- Setup Time: The time to prepare a machine or
facility to produce an item.
- Batch Size: The number of items produced
after the initial setup.
- Throughput Time: The time between an item entering
and leaving the production process.
- Demand: The quantity of an item required
at a particular point in time. Demand may be dependent, independent, or
dependent and may become independent after the occurrence of a specific
event.
Inventories represent the
collection of an organisation's inputs and outputs, strategically maintained to
support production processes or fulfil consumer demand for goods and services.
The decisions surrounding inventory management, often called policies, dictate
how these inventories are utilised in conjunction with various operations
within a production or service framework. Numerous classifications and
descriptions of inventory management strategies exist, typically tailored to
manufacturing or specific service contexts.
For this analysis, a more
focused classification was deemed necessary. This classification would be
applicable across general scenarios while exploring the interconnections and
trade-offs among inventory, maintenance, production, and capacity-building activities
within a service and maintenance framework. This distinction is crucial, as
spare materials can serve multiple functions beyond mere supply, and enhancing
organisational efficiency involves more than simply minimising inventory
investment.
Traditional narratives
surrounding inventory management often provide a superficial overview of
commonly accepted practices, rationalising them based on their visibility in
real-world applications. Such explanations fail to present a comprehensive,
principled approach to inventory management, which is essential for
understanding its complexities. The tendency to adapt public and private sector
engineering challenges for academic evaluation can lead to a fragmented
portrayal of inventory management, often reduced to simplistic formulas that do
not capture the full scope of the discipline.
The reliance on these models
and techniques may not always align with the overarching goals of service or
maintenance policies, potentially overlooking critical components and
trade-offs in practical operating environments. A deeper understanding of inventory
management requires a nuanced perspective, considering the intricate
relationships between various operational elements. By addressing these
complexities, organisations can better navigate inventory management challenges
and enhance their effectiveness in service and maintenance.
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