WHAT DO YOU THINK?

INVENTORY
MANAGEMENT

What are the disadvantages and

advantages of keeping inventory?

What types of inventory can kept?

What types of costs are incurred when inventory is

carried?
 INTRODUCTION

• Inventory can generally be defined as a stockpile of goods.

• Type of business determines type of inventory held.

• A distinction must be made between inventory and

capacity for the good management of the organization.

• Inventory can be one of the most expensive assets of an

organization (up to 50% of the total investment in some
instances).

• The reason for the sharp increase in inventory holding

costs is the faster rate of obsolescence of products due
to the rapid progress of new technology.

• A balance must be found between stock holding and

customer satisfaction.
NATURE AND IMPORTANCE OF
HOLDING STOCK
Reasons for holding inventory:

• In order to decouple the production process,

• There is an insecure supply of raw materials,
• To distance an organization from an uncertain
demand,
• To facilitate the availability of a wide variety of
products for the customer,
• To take advantage of supplier discounts if certain
order quantities are placed,
• To avoid price increases,
• Items are in transit,
• To smooth the production requirements,
• To prevent stock-outs from occurring,
• To take advantage of ordering cycles.
OBJECTIVE FUNCTION OF
INVENTORY CONTROL
Two types of stock holding:

• Overstocking
• Understocking

Therefore inventory management concerns itself

with:
1. Satisfaction of customers

2. The management of the inventory costs

These two areas of concern must be addressed

to achieve:
• The timing of placing orders.
• The size of each order placed.
OBJECTIVE FUNCTION OF
INVENTORY CONTROL CONT.
Performance measurements have been developed
to assist operations managers in managing
inventories better. A number of mathematical
models are available to assist in this regard.

Customer satisfaction is the most

important measurement and can be
measured as follows:

• Number of items that are on back order.

• Number of complaints received from
customers.
• Number of times an organization turns its
stock.
INVENTORY TYPES

• Inventory of raw materials.

• Work in progress inventory (WIP).
• Maintenance, repair and operating
inventory.
• Finished goods inventory.

The classification of types of inventory is arbitrary.

CONTROL AND TURNOVER OF INVENTORY

• Organisations can use turnover of inventory to

measure the efficiency of their inventory
systems.

• The lower the turnover of inventory, the poorer

the performance of the inventory policies will
be.
 REQUIREMENTS FOR EFFECTIVE INVENTORY
MANAGEMENT

Two basic functions that management must

perform regarding inventory are:

1. To keep track of the entire inventory held by

an organization.

2. To decide how much to order and when the

orders should be placed.

Costs incurred when inventory is

carried

• Holding cost
• Ordering cost
• Shortage cost
ADVANTAGES AND DISADVANTAGES OF
HOLDING STOCK