KABALE UNIVERSITY

FACULTY DEPARTMENT PROGRAM COURSE UNIT : : : : ARTS AND SOCIAL SCIENCES POST GRADUATE STUDIES MASTER OF BUSINESS STUDIES OPERATION MANAGEMENT

Course Work Submitted by: TUBIRORE ERIC

Lecturer: Mr./Mrs AGABA MOSES KABALE, 25th May 2012

Question:
The Role of Inventory in Operating Management Introduction Inventory means a list of goods and materials to the goods and material available in stock by a business. Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting.

The reasons for keeping stock

There are three basic reasons for keeping an inventory:

Time - The time lags present in the supply chain, from supplier to user at every stage,
requires that you maintain certain amounts of inventory to use in this lead time. However, in practice, inventory is to be maintained for consumption during 'variations in lead time'. Lead time itself can be addressed by ordering that many days in advance.

Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand,

supply and movements of goods.

Economies of scale - Ideal condition of "one unit at a time at a place where a user
needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory. All these stock reasons can apply to any owner or product

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that
are assembled into the purchasable item. Therefore, any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory.

Stockout means running out of the inventory of an SKU. "New old stock" (sometimes abbreviated NOS) is a term used in business to
refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time.

Inventory examples
While accountants often discuss inventory in terms of goods for sale, organizations manufacturers, service-providers and not-for-profits - also have inventories (fixtures, furniture, supplies, etc.) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them. While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into: Raw materials - materials and components scheduled for use in making a product. Work in process, WIP - materials and components that have begun their transformation to finished goods. Finished goods - goods ready for sale to customers. Goods for resale - returned goods that are salable.

The Role of Inventory in Supply Chain

Inventory exist s in the supply chain because of a mismatch between supply and demand. This mismatch is intentional at a steel manufacturer where it is economical to manufacture in large lots that are then stored for future sales. The mismatch is also intentional at a retail store where inventory is held in anticipation of future demand. An important role that inventory plays in the supply chain is to increase the amount of demand that can be satisfied by having product ready and available when the customer wants it. Another significant role inventory plays is to reduce cost by exploiting any economics of scale that may exist during both production and distribution.

Inventory is spread throughout the supply chain from raw materials to work in process to finished goods those suppliers, manufacturers, distributors, and retailers hold. Inventory is a major source of cost in a supply chain and it has a huge impact on responsiveness. If we think of the responsiveness spectrum, the location and quantity of inventory can move the supply chain from one end of the spectrum to the other. For example, an apparel supply chain with high inventory levels at the retail stage has a high level of responsiveness because a customer can walk into a store and walk out with the shirt they were looking for. In contrast, an apparel supply chain with little inventory would be very unresponsive. A customer wanting a shirt would have to order it and wait several weeks or even months for it to be manufactured, depending on how little inventory existed in the supply chain.

Inventory also has a significant impact on the material flow time in a supply chain. Material flow time is the time that elapses between the points at which material enters the supply chain to the point at which it exist. Another important area where inventory has a significant impact is throughput. For a supply chain, throughput is the rate at which sales occur. If inventory is represented by I, flow time by T, and throughput by D, the thee can be related using Little's law as follows:

I = DT

References 1. Wikipedia http://en.wikipedia.org/wiki/Inventory 2. Inventory Management by Allbusiness.com http://www.allbusiness.com/inventory-management/49733311.html#axzz1wWr8YiQQ 3. 4. 5.