Page 188 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Unit 9: Inventory Model and Safety Stocks

All these techniques are used to focus management attention in deciding on the degree of Notes
control necessary for different items in the inventory. However, it should be kept in mind
that changes in the business environment, e.g., customer demand patterns or material
costs, can cause material item classifications to change. This, in turn, can affect key ‘planning
and scheduling’ decisions.
Self Assessment

Fill in the blanks:
7. The ABC classification is based on focusing efforts where the ……………… is highest
8. The VED Classification is based on the ……………… of the inventory item.
9. In VED Classification ‘V’ stands for ……………… .

9.4 Inventory Control

Recent industry reports show that inventory costs as a per cent of total logistics costs are
increasing. Despite this rise, many organizations have not taken full advantage of ways to lower
inventory costs. There are a number of proven strategies that will provide payoff in the inventory
area, both in customer service and in financial terms.
Some of these strategies involve having fewer inventories while others involve owning less of
the inventory. ERP and information technology solutions have been able to provide solutions,
not only for inventory management but also for aggregate planning, material requirement
planning and operations scheduling.
Regardless of which technique or solution one employs, proactive inventory management
practices make a measurable difference in operations. In this supplement, we will cover some of
the important inventory models and their characteristics, which are used in many of these ERP
solutions.

9.4.1 Inventory Metrics

Managing inventory at manufacturing and service companies is critically important. Too much
or too little, or the wrong inventory, all have detrimental impacts on operational and financial
results.
Inventory represents a tremendous capital investment and also is an idle resource. Companies
that can operate with lesser inventory are considered to operate more efficiently. Inventory
measures reflect, in part, the success in structuring supplier relationships to optimize inventory
at the buying company. Several aggregate performance measures can be used to judge how well
a company is utilizing its inventory resources.

Average Inventory Investment

The rupee value of a company’s average level of inventory is one of the most common measures
of inventory. The information is easily available and it is easy to interpret. It represents the
average investment of the company. However, it does not take into account the differences
between companies.

Example: A larger company will generally have more inventory than a smaller company,
though it could be using its inventory more efficiently. This makes it difficult for the company
to make comparisons with other companies.

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