Page 236 - DMGT501_OPERATIONS_MANAGEMENT

Operations Management

Notes 2. Work-in-process (WIP) Inventory: This constitutes semi-finished parts, components, sub-
assemblies or modules that have been inducted into the production process but not yet
finished.

3. Finished Goods Inventory: Finished product or end-items.
4. Replacement Parts Inventory: Maintenance Parts meant to replace other parts in machinery
or equipment, either the company’s own or that of its customers.
5. Supplies Inventory: Parts or materials used to support the production process, but not
usually a component of the product.
6. Transportation (pipeline) Inventory: Items that are in the distribution system but are in the
process of being shipped from suppliers or to customers.

Manufacturing inventory is typically classified into raw materials, finished products, component

parts, supplies, and work-in-process. In services, inventory generally refers to the tangible goods
to be sold and the supplies necessary to administer the service.
In simple terms, inventory is an idle resource of an enterprise comprising physical stock of goods
that is kept by an enterprise for future purposes.

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 a 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 set ups. 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 set ups, or protect employment
levels by minimizing the cost of changing the rate of production. Therefore, it is desirable 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

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