Operations Management: Inventory Management

After completing this topic, you should be able to

• match types of inventory with their description

• identify key characteristics and challenges of inventory management in service organizations

• match inventory valuation methods with their descriptions

• classify examples of inventory costs as being procurement, holding, or stock-out costs

• calculate the economic order quantity and the reorder point in a given inventory management

• scenario identify key characteristics of ABC analysis, MRP, ERP, and JIT

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FAQs

The Operations Management Training Program includes a number of eight sections also presented as individual courses for your convenience.

The program includes, the following topics:

1. Operations Management and the Organization

2. Product and Service Management

3. Operations and Supply Chain Management

4. Inventory Management

5. Forecasting and Capacity Planning

6. Operations Scheduling

7. Management of Quality

8. Facilities Planning and Management

Inventory includes a company's raw materials, work in progress, and finished goods. It can be categorized as safety stock, seasonal stock, and in transit stock. An effective inventory management policy enables a company to reduce costs and waste, and align its supplies with customer demand.

Inventory enables you to produce goods for sale or provide a service. In a manufacturing business, it comprises the goods you have for sale, and the raw materials needed to make those goods. In a service business, it comprises the supplies and materials needed to provide the service. Because inventory is such an essential component of your business, you must manage it correctly.

Different organizations require different types of inventory. For example, a call center doesn't have the same inventory as a car factory. Additionally, inventory within an organization can be broken down into different categories. It might be categorized according to what it is, or it might be categorized according to its function.

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Understanding Inventory Management

Inventory management is primarily applied in the manufacturing sector. However, the services sector also needs inventory in order to meet its goals, and this inventory must also be managed effectively. Managing inventory in a service organization brings with it a number of unique challenges.

Companies must know the value of their inventory in order to calculate the cost of goods sold. You can use four methods to value inventory: FIFO, LIFO, average cost, and specific cost.

Use this to identify the different types of inventory costs.

Companies must know the value of their inventory. This enables them to calculate the cost of the goods that they've sold. They can then compare the cost of goods sold with the sales revenue from those goods. And then they calculate whether their company has made a profit or loss.

Inventory valuation is important because it enables a company to work out its cost of goods sold. It also provides an ending inventory figure for the company's balance sheet. However, it's not enough to know only the value of its inventory. It must know how much it costs to buy and hold that inventory. When the company knows the inventory costs, it's better able to take steps to keep these costs under control.

The Value and Cost of Inventory

As inventory is used up, you have to reorder supplies in order to meet customer demand. Effective inventory management involves knowing the right quantity of supplies to order at the right time.

One of the major challenges for any company is making sure that it has enough inventory in storage to meet customer demand. As inventory is used up, the company has to order more supplies. However, if it orders too many supplies, it will end up with excess inventory costs. The company must have an effective inventory management strategy in place in order to ensure the inventory life-cycle runs smoothly.

To manage your inventory, you must always know how many supplies you need to order so that you can continue to satisfy customers. You'll also want to ensure that the cost of procuring and holding this inventory is kept to a minimum. Knowing the right levels to order requires experience and a thorough understanding of customer demand. You may sometimes have to rely on instinct. However, you can also try to calculate the levels mathematically.

Knowing how much inventory to order is one major goal of inventory management. Another goal is knowing when to order it. If you don't order new supplies on time, you may find yourself unable to meet customer orders. However, if you order new supplies too soon, you may end up with too much inventory in storage. This then increases your holding costs. So you need to know the optimal time to reorder.

Inventory and Economic Order Quantity

Inventory management tools enable inventory managers to ensure that inventory supplies are aligned with real production needs and customer demands.

Use this to review the different types of inventory management tools.

Inventory management uses a number of tools in order to ensure that there are enough supplies available for a company to conduct business. These tools enable the company to make sure it has the raw materials necessary to build its products.

Customer demand isn't always predictable. As customer demand changes, inventory requirements also change. The second inventory management tool is material requirements planning, or MRP. It enables you to ensure that you have all the necessary supplies to meet your production needs. By listing the materials needed to create your products, you can take steps to get those materials to your production line when you need them.

MRP and MRP II are still used by some companies. However, they've been made largely obsolete by the development of the third inventory management tool, enterprise resource planning, or ERP. The ERP tool goes beyond simple material planning and aims to integrate inventory management with other organizational management strategies. This helps to improve communication between supply chain efforts and other internal and external operations.

Use this activity to calculate the EOQ and ROP in your organization.

MRP and ERP are push systems. They're based on predicted customer demand, rather than actual demand. Supplies are ordered based on long-term production schedules, and then pushed into the system in order to meet the schedule. The fourth inventory management tool is just-in-time, or JIT. It's a pull system. Supplies aren't ordered until there's a definite customer demand for the products. It aims to keep inventory at a minimum by working closely with customers and suppliers.

Inventory Management Tools

The  course on Inventory Management is part of the Operations Management Training Program which includes a number of eight sections also presented as individual courses for your convenience.

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