 Inventory can be defined as a stock of commodity which has got some economic value,

but withdrawal of which requires an authorization.

 Implications of the definition:

i. A detailed, itemized list, report, or record of things in one’s possession especially a periodic
survey of all goods and materials in stock.
ii. The process of making such a list, report, or record.
iii. The items listed in such a report or record.
iv. The quantity of goods and materials on hand, stock, or in pipeline.
v. An evaluation or a survey, as of abilities, assets, or resources.
vi. To make an itemized report or record.
vii. To include in an itemized report or record.
 The amount of raw materials, work in process and finished goods being held for sale at
a given time is inventory.

 Inventory = cumulative supply – cumulative demand

 “Black Box”

 Mathematical Equation: I(t) = S(0;t) – D(0;t)

 I= inventory
 S=Cumulative Supply
 D=Cumulative Demand
 t= time
 S(0;t)= cumulative supply up to time t
 D(0;t)= cumulative demand up to time t
 Inventory can be negative as well,

 i.e. I(t)< 0

 If consumers are willing to order without receiving product, then we can allow demand
to exceed supply.

 Then I(t) can become negative, -I(t) represents the total quantity on back order.

 In simple terms, positive inventory is a pile of goods that are waiting for orders and a
negative inventory as a pile of orders that are waiting for goods.
 Managing inventory has become very important due to following factors.

 Resource availability (finance and space) has forced management to consider how best to lower
the levels of inventory.

 The changes in manufacturing philosophy, concepts like JIT and lean manufacturing have reduced
the need for inventory.

 The realization by many companies that a greater ROI can be obtained by developing the core
business, rather than in working capitals such as inventory and debtors, who’s returns are far less.

 The developments on the front of information technology (IT), which provides a potential tool to
reduce the inventory. The better the information lower is the need for inventory, Information
systems such as POS, ERO can significantly reduce the inventory.
 The inventories can be categorized based on the reason for existing in a supply chain system.

 Cycle Stock: If the demand and the supply lead time are known, this inventory is only necessary to
service the regular demand. Ex: Retailers on-hand inventory

 In transit inventories: More the distance between the production and the consumption centers
and larger the channel, the greater will be the level of in transit inventories. Ex: Finished goods
being shipped from plant to distribution center

 Safety Stock: It is held over the levels of cycle stock because of unpredictability in demand and
lead-time. Ex:

 Speculative Stock: This stock is often kept because of unpredictability in consumption or supply
due to extraneous reasons such as suppliers strikes, transportation strikes, natural calamities, etc
 Seasonal Stock: This stock involves the accumulation of inventory prior to a particular
season to meet the market demand. Ex: Ganapati decoration items, umbrellas, Walkers
way

 Dead/Obsolete Stock: Specifically non-moving items whose future demand are almost
non-existent. Ex: Expired, Old chargers.

 The inventory types mix will vary among different business.

 For example: a retailer selling commodity items will have a different inventory mix to
that of a fashion retailer targeting teenagers.
 The primary motive behind carrying inventory in a supply chain is to eventuate a
balanced transaction between supply and demand.

 We can have a balanced transaction only when we have full information on supply
and demand side.

 Depending upon the combination of the state of nature, the size and location of
inventory are normally decided.
 Supply Demand

Full Information Full Information

Partial Information Partial Information

No Information No Information

 Inventory in a given location in a particular supply chain acts as a balancing

mechanism to meet the fluctuations resulting in either supply or demand side or both.
 Operations managers often deliberately create supply/demand imbalances.

 Short – run demand often exceeds the capacity of the supply process.

 To meet this demand, manufacturers begin building inventories months in advance.

 By doing this they ensure cumulative output is sufficient to meet cumulative demand.
 A second reason for deliberately creating imbalances is to take advantage of changes
(either real or anticipated) in the cost of materials or products.

 For example, grocery chains will “forward buy” large quantities of consumer products
when manufacturers offer trade discounts.

 Supply and demand imbalances also occur when the input and output of some portion
of the supply chain are separated by time and/or distance.

 For example, we are supplying an overseas market from a domestic distribution center.
 Assume we use container ships and total one-way transportation time is 7 weeks.

 We start up operations, begin shipping the product to our overseas market at a rate of
4000 units per week and hold our breath! What happens.

 In week 8, our overseas partners would receive products shipped in week 1, in the 9th
week products shipped on week 2, etc.

 Out put is the input delayed by 7 weeks: D(0;t) = S(0;t-7). Hence, I(t)= S(0;t)- S(0;t-7) ie.
the inventory “on the ocean” is simply the cumulative shipments made over the weeks
 In any business analysis-involving inventory, physical inventory levels must be
converted to inventory costs.

 Inventory costs can be classified into direct and indirect costs.

 Direct costs include: capital costs, storage space costs, service costs and risk
costs.

 Indirect costs include: business risk due to lost sales and loss of customers,
opportunity cost due to inability to invest in alternatives, infrastructure costs
such as facilities, transportation and other services.
 Capital Costs: