Meaning, concept and definition of Inventory:
Inventory is stores of goods and stocks. In manufacturing, items in inventory are called stock keeping items, held at a stock [storage] point. Stock keeping items usually are raw materials, work-in progress, finished products and supplies. It is the stock of any item or resource used in an organization.
Inventory control is activities that maintain stock keeping items at desired levels. In manufacturing, since the focus is on a physical product, inventory control focuses on material control. In the service sector, since the focus is on a service [often consumed as generated], inventory control focuses less on materials ...view middle of the document...
5) To take advantage of economic purchase order size.
The fundamental reason for carrying inventories is that it is physically impossible and economically impractical for each stock item to arrive exactly where it is needed exactly when it is needed. Even if it were physically possible for a supplier to deliver raw materials every few hours, it could still be prohibitively expensive. The manufacturer must therefore keep extra supplies of raw material inventory to use when they are needed in the conversion process. Other reasons for carrying inventories are as follows:
• Return on investment and turnover Inventory should be viewed as an investment and should compete for funds with other investment opportunities. If you have studied finance, you have been introduced to the concept of the marginal efficiency of capital. This concept holds that a firm should invest in those opportunities where return is greater than capital costs to borrow. Both manufacturing and service firms are interested in return on investment, alternatively called return on assets, employed, return on assets is the ration of profits to assets. With a little thought we realize:
Profit/Assets=profit/sales x sales /assets
The ratio of profits to sales is markup and the ratio of sales to assets is turnover. Now we see that one way to improve return on investment is to increase turnover. We want to sell those assets that are in inventory over and over again in a reasonable time frame. One way to do this is to keep the assets in inventory low, thus improving the chance of high inventory turnover.
• Buffer stock When demand is unusually variable, some protection is needed against the prospects of high stock out costs. Inventory can be used to “buffer” against such uncertainties. Likewise, lead time, the time between ordering and receiving goods, is not always constant. Buffer stocks can be used to protect against stock outs from uncertain demand during lead time.
• Decoupling Inventories are also useful when they decouple operation-that is, when they break operations apart so that one operation’s supply is independent of another’s supply. This decoupling serves two purposes. First, decoupling operations means that breakdowns, material shortages, or other production fluctuations at one stage of operation do not cause later stages of operation to shut down. A second purpose of decoupling through inventories is that tone organizational unit can schedule its operations independently of other. In automobile manufacturing, for example, engine buildup can be scheduled separately from seat assembly, and each can be decoupled from final automobile assembly operations through in-process inventories.
• Production Smoothing Inventories can also help to level production. When we examined aggregate planning and scheduling, we noted that products can be built during slack demand periods and used in peak demand periods. Thus high costs of...