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Inventory refers to stocks of anything necessary to do business. Inventory is a list of

goods and materials, or those goods and materials themselves, held available in stock by a
Reasons for maintaining inventory
1. Anticipation Inventory or Seasonal Inventory: Inventory are often built in anticipation
of future demand, planned promotional programs, seasonal demand fluctuations, plant
shutdowns, vacations, etc.
2. Fluctuation Inventory or Safety Stock: Inventory is sometimes carried to protect
against unpredictable or unexpected variations in demand.
3. Lot-Size Inventory or Cycle Stock: Inventory is frequently bought or produced in
excess of what is immediately needed in order to take advantage of lower unit costs or
quantity discounts.
4. Transportation or Pipeline Inventory: Inventory is used to fill the pipeline as products
are in transit in the distribution network.
5. Speculative or Hedge Inventory: Inventory can be carried to protect against some
future event, such as a scarcity in supply, price increase, disruption in supply, strike, etc.
6. Maintenance, Repair, and Operating (MRO) Inventory: Inventories of some items
(such as maintenance supplies, spare parts, lubricants, cleaning compounds, and office
supplies) are used to support general operations and maintenance.
Types of Inventory or Components of Inventory
Raw materials: The purchased items or extracted materials that are transformed into
components or products.
Components: Parts or subassemblies used in building the final product.
Work-in-process (WIP): Any item that is in some stage of completion in the manufacturing
Finished goods: Completed products that will be delivered to customers.
Distribution inventory: Finished goods and spare parts that are at various points in the
distribution system.
Maintenance, repair, and operational (MRO) inventory (often called supplies): Items that
are used in manufacturing but do not become part of the finished product.
Inventory costs
In making any decisions that affects inventory size, the following costs must be
1. Holding (or carrying) costs: The costs for storage facilities, handling, insurance,
pilferage, breakage, depreciation, taxes and opportunity cost of capital. High holding
costs tend to favor low inventory levels and frequent replenishment. It includes:
a. Capital costs – Compares inventory investment vs other capital investments
b. Storage space costs – cost of moving goods into and out of inventory (rent,
utilities and space)
c. Inventory service costs – insurance & taxes
d. Inventory risk costs – cost of obsolescence, damage, re-location or theft.
2. Ordering costs: It refers to the managerial and clerical costs to prepare the purchase or
production order. Ordering costs include all the details, such as counting items and
calculating order quantities. The costs associated with maintaining the system needed to
track orders are also included in ordering cost. It comprises of:-
a. Order costs – preparing and processing the order request, selecting a supplier,
checking stock, payment and reviewing inventory levels
b. Setup costs – modifying the manufacturing process to make different goods.
(Personnel and Capital equipment costs)
Procurement is the acquisition of goods and / or services at the best possible total cost of
ownership, in the right quantity and quality, at the right time, in the right place for the direct
benefit or use of governments, corporations, or individuals, generally via a contract.
Simple procurement may involve nothing more than repeat purchasing. Complex
procurement could involve finding long term partners or even 'co-destiny' suppliers that might
fundamentally commit one organisation to another. Almost all purchasing decisions include
factors like delivery and handling, marginal benefit, and price fluctuations. Procurement
generally involves making buying decisions under conditions of scarcity.
Procurement Types
Based on the consumption purposes of the acquired goods and services, procurement activities
are often split into two distinct categories. The first category being direct, production-related
procurement and the second being indirect, non-production-related procurement.
Direct procurement occurs in manufacturing settings only. It encompasses all items that are
part of finished products, such as raw material, components and parts. Direct procurement, which
is the focus in supply chain management, directly affects the production process of
manufacturing firms.

Indirect Procurement
Features Maintenance, Repair &
Raw Material & Capital Good and
Operating (MRO)
Production Goods Services
Quantity Large Low Low
Frequency High Relatively high Low
Value Industry specific Low High
Nature Operational Clerical Strategic
Crude oil in Machinery,
Examples Lubricants, spare parts
petroleum industry computers

Indirect procurement activities concern “operating resources” that a company purchases to

enable its operations. It comprises a wide variety of goods and services, from standardised low
value items like office supplies and machine lubricants to complex and costly products and
services like heavy equipment and consulting services.
Procurement Systems
Another common procurement issue is the 'timing' of purchases. Just In Time is a system
(commonly used by Japanese companies but widely adopted by many global manufacturers from
the 1990s onwards) of timing the purchases of consumables so as to keep inventory costs low.
Shared Services
In order to achieve greater economies of scale, an organization’s procurement functions may be
joined into shared services. This combines several small procurement agents into one centralized
procurement system.
Procurement Steps
Procurement life cycle in modern businesses usually consists of seven steps:
• Information Gathering: If the potential customer does not already have an established
relationship with sales/ marketing functions of suppliers of needed products and services
(P/S), it is necessary to search for suppliers who can satisfy the requirements.
• Supplier Contact: When one or more suitable suppliers have been identified, Requests
for Quotation (RFQ), Requests for Proposals (RFP), Requests for Information (RFI) or
Requests for Tender (RFT) may be advertised, or direct contact may be made with the
• Background Review: References for product/service quality are consulted, and any
requirements for follow-up services including installation, maintenance, and warranty are
investigated. Samples of the P/S being considered may be examined, or trials undertaken.
• Negotiation: Negotiations are undertaken, and price, availability, and customisation
possibilities are established. Delivery schedules are negotiated, and a contract to acquire the
P/S is completed.
• Fulfillment: Supplier preparation, shipment, delivery, and payment for the P/S are
completed, based on contract terms. Installation and training may also be included.
• Consumption, Maintenance and Disposal: During this phase the company evaluates the
performance of the P/S and any accompanying service support, as they are consumed.
• Renewal: When the P/S has been consumed and/or disposed of, the contract expires, or
the product or service is to be re-ordered, company experience with the P/S is reviewed. If
the P/S is to be re-ordered, the company determines whether to consider other suppliers or to
continue with the same supplier.
E-procurement (Electronic Procurement) also known as supplier exchange is either the
business-to-business or Business-to-Consumer purchase and sale of supplies and services
through the Internet as well as other information and networking systems, such as electronic data
interchange (EDI) and Enterprise Resource Planning (ERP). Typically, e-procurement Web sites
allow qualified and registered users to look for buyers or sellers of goods and services.
Depending on the approach, buyers or sellers may specify costs or invite bids. E-procurement
software may make it possible to automate some buying and selling. Ongoing purchases may
qualify customers for volume discounts or special offers. Companies participating expect to be
able to control parts inventories more effectively, reduce purchasing agent overhead, and
improve manufacturing cycles.There are six main types of e-procurement:
• Web-based ERP (Electronic Resource Planning): Creating and approving purchasing
requisitions, placing purchase orders and receiving goods and services by using a software
system based on Internet technology.
• e-MRO (Maintenance, Repair and Operating): The same as web-based ERP except
that the goods and services ordered are non-product related MRO supplies.
• e-sourcing: Identifying new suppliers for a specific category of purchasing requirements
using Internet technology.
• e-tendering: Sending requests for information and prices to suppliers and receiving the
responses of suppliers using Internet technology.
• e-reverse auctioning: Using Internet technology to buy goods and services from a
number of known or unknown suppliers.
• e-informing: Gathering and distributing purchasing information both from and to internal
and external parties using Internet technology.
Advantages and Disadvantages
Advantages include getting the right product, from the right supplier, at the right time, for
the right price and the right quantity. In reality e - Procurement has the advantage of taking
supply chain management to the next level, providing real time information to the vendor as to
the status of a customer's needs. For example, a vendor may have an agreement with a customer
to automatically ship materials when the customer's stock level reaches a low point, thus
bypassing the need for the customer to ask for it.
A major disadvantage to this type of agreement could be that the vendor has the power to
take advantage of the customer by knowing more information about the customer than they
would have if the customer was in a normal supply chain management structure.