Page 150 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 7: Inventory Management

Objectives Notes

After studying this unit, you will be able to:
 Understand the Definition of Functionality

 Explain the Inventory Costs
 Discuss the Planning Inventory
 Describe the Managing Uncertainly
 Understand the Inventory Management Policies

 Explain the Inventory Management Practices
Introduction

Inventory decisions are high-risk and high-impact from the perspective of logistics operations.
Commitment to a particular inventory assortment and subsequent shipment to a market or
region in anticipation of future sales determine a number of logistics activities. Without proper
inventory assortment, marketing may find that sales are lost and customer satisfaction will
decline. Likewise, inventory planning is critical to manufacturing. Raw material shortages can
shut down a manufacturing line or modify a production schedule, which, in turn, introduces
added expense and potential for finished goods shortages. Just as shortages can disrupt planned
marketing and manufacturing operations, overstocked inventories also create problems.
Overstocks increase cost and reduce profitability through added warehousing, working capital
requirements, deterioration, insurance, taxes, and obsolescence.

7.1 Functionality and Definitions

The ideal inventory process consists of manufacturing a product to a customer’s specifications
once an order is placed. This is called a make-to-order operation and is characteristic of customized
equipment. Such a system does not require stockpiles of materials or finished goods in anticipation
of future sales.

7.1.1 Geographical Specialization

One function of inventory is to allow geographical specialization for individual operating
units. Because of the requirements for factors of production such as power, materials, water, and
labour, the economical location for manufacturing is often a considerable distance from major
markets.

Example: Tires, batteries, transmissions, and springs are significant components in
automobile assembly.
The technology and expertise to produce each of these components are traditionally located in
proximity to material sources in order to minimize transportation. This strategy leads to
geographical separation of production so that each automobile component can be produced
economically. However, geographical separation requires internal inventory transfer to
completely integrate components into final assembly.

Geographical separation also requires inventories to create market assortments. Manufactured
goods from various locations are collected at a single warehouse and then combined as a mixed-
product shipment.

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