Operations Management

Chapter 8 : Fundamentals of Inventory Control

Purpose of Inventories
Smooth production
better service to customers
protection against business uncertainties
Take advantage of quantity discount
Inventory Costs
Purchase costs
Carrying Costs
Ordering Costs
Stock-Out Costs
Inventory Systems
Fixed Order Quantity System
Fixed Order Period System
Economic Order Quantity Model
Reorder Point
Optimal Order Quantity

Chapter Summary

The term 'inventory' refers to the materials that possess economic value, and are stored by a firm for future use. Inadequate inventory hampers the production process, and also affects the sales. Therefore, firms maintain adequate level of inventory to improve its operating efficiency and safeguard them from business uncertainties and help them provide better customer service.

Firms should ascertain the exact inventory requirements as excessive inventories lock up the working capital and yield no immediate returns. On the other hand shortage in inventory level would lead to stockout costs. Operations managers need to control the inventory levels for each of the items in the inventory list by determining when and how much stock to replenish.

Two inventory systems are fixed order quantity system and fixed order period system. In fixed order quantity system, the ordered inventory remains same but the timing of the orders varies with requirement. In fixed period model, the time period between two orders is same but the order quantity varies.

Economic order quantity model is used to determine the optimal order quantity that minimizes both inventory ordering and holding costs. In real business situations, the actual performance does not always match the planned performance. Hence, managers monitor output periodically, compare the actual output with planned output, and take necessary corrective action, in order to improve the efficiency of inventory control system.

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