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Unit 9: Inventory Planning and Control

shipping time, a shortage of material at the vendor’s plant, an unexpected strike in any part of the Notes

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.
Only when considered in the light of all quality, customer service and economic factors – from the

viewpoints of purchasing, manufacturing, sales and finance – does the whole picture of inventory
become clear. No matter what the viewpoint, effective inventory management is essential to
organizational competitiveness.

9.2 Inventory Costs

As inventory is a necessary but idle resource, inventory costs in manufacturing need to be

minimized. The heart of inventory decisions lies in the identification of inventory costs and
optimizing the costs relative to the operations of the organization. Therefore, an analysis
of inventory is useful to determine the level of stocks. The resultant stock keeping decision

specifies:
1. When items should be ordered?
2. How large the order should be?
3. “When” and “how many to deliver?”
It must be remembered that inventory is costly and large amounts of stocks are generally

undesirable. Inventory can have a significant impact on both a company’s productivity and
its delivery time. Large holdings of inventory also cause long cycle times which may not be

desirable as well. What are the costs identified with inventory? The following costs are generally
associated with inventories:
9.2.1 Holding (or Carrying) Costs

It costs money to hold inventory. Such costs are called inventory holding costs or carrying
costs. This broad category includes the costs for storage facilities, handling, insurance, pilferage,
breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital. Obviously, high
holding costs tend to favor low inventory levels and frequent replenishment.

There is a differentiation between fixed and variable costs of holding inventory. Some of the costs

will not change by increase or decrease in inventory levels, while some costs are dependent on
the levels of inventory held.

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