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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