Page 181 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes 9.1 Functions of Inventory

Though inventory is an idle resource, it is almost essential to keep some inventory in order to
promote smooth and efficient running of business. To maintain independence of operations, a
supply of materials at a work center allows that center flexibility in operations.
Consider the case—an enterprise that does not have any inventory. Clearly, as soon as the
enterprise receives a sales order, it will have to order for raw materials to complete the order.
This will keep the customers waiting. It is quite possible that sales may be lost. The enterprise
may also have to pay a high price for various other reasons.
Another aspect relates to the costs for making each new production set up. Independence of
workstations is desirable in intermittent processes and on assembly lines as well. As the time
that it takes to do identical operations varies from one unit to the next, inventory allows
management to reduce the number of setups. This results in better performance.
Consider the case of seasonal items. Any fluctuation in demand can be met if possible, by either
changing the rate of production or with inventories. However, if the fluctuation in demand is
met by changing the rate of production, one has to take into account the different costs.

The cost of increasing production and employment level involves employment and training,
additional staff and service activities, added shifts, and overtime costs. On the other hand, the
cost of decreasing production and employment level involves unemployment compensation
costs, other employee costs, staff, clerical and services activities, and idle time costs. By maintaining
inventories, the average output can be fairly stable. The use of seasonal inventories can often
give a better balance of these costs.

Inventory can be used, among other things, to promote sales by reducing customer’s waiting
time, improve work performance by reducing the number of setups, or protect employment
levels by minimizing the cost of changing the rate of production.

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Caution It is required to maintain inventories in order to enhance stability of production
and employment levels.
If the demand for the product is known precisely, it may be possible (though not necessarily
economical) to produce the product to exactly meet the demand. However, in the real world this
does not happen and inventories become essential. Inventories also permit production planning
for smoother flow and lower cost operation through larger lot-size production. They allow a
buffer when delays occur. These delays can be for a variety of reasons—a normal variation in
shipping time, a shortage of material at the vendor’s plant, an unexpected strike in any part of
the supply chain, a lost order, a natural catastrophe like a hurricane or floods, or perhaps a
shipment of incorrect or defective materials.
Broadly speaking, some other functions of inventories are:
1. To protect against unpredictable variations (fluctuations) in demand and supply.

2. To take advantage of price discounts by bulk purchases.
3. To take advantage of batches and longer production run.
4. To provide flexibility to allow changes in production plans in view of changes in demands,
etc. and
5. To facilitate intermittent production.

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