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Chapter 12 Inventory planning and control 345
Some disadvantages of holding inventory
Although inventory plays an important role in many operations performance, there are a
number of negative aspects of inventory.
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Inventory ties up money, in the form of working capital, which is therefore unavailable for
other uses, such as reducing borrowings or making investment in productive fixed assets
(we shall expand on the idea of working capital later).
Inventory incurs storage costs (leasing space, maintaining appropriate conditions, etc.).
Inventory may become obsolete as alternatives become available.
Inventory can be damaged, or deteriorate.
Inventory could be lost, or be expensive to retrieve, as it gets hidden amongst other inventory.
Inventory might be hazardous to store (for example flammable solvents, explosives,
chemicals and drugs), requiring special facilities and systems for safe handling.
Inventory uses space that could be used to add value.
Inventory involves administrative and insurance costs.
Raw materials inventory
Components inventory
Work-in-progress
Finished goods inventory
Multi-echelon inventory
The position of inventory
Not only are there several reasons for supply–demand imbalance, there could also be several
points where such imbalance exists between different stages in the operation. Figure 12.4
illustrates different levels of complexity of inventory relationships within an operation.
Perhaps the simplest level is the single-stage inventory system, such as a retail store, which
will have only one stock of goods to manage. An automotive parts distribution operation
will have a central depot and various local distribution points which contain inventories. In
many manufacturers of standard items, there are three types of inventory. The raw material
and components inventories (sometimes called input inventories) receive goods from the
operation’s suppliers; the raw materials and components work their way through the various
stages of the production process but spend considerable amounts of time as work-in-progress
(or work-in-process) (WIP) before finally reaching the finished goods inventory.
A development of this last system is the multi-echelon inventory system. This maps
the relationship of inventories between the various operations within a supply network
(see Chapter 6). In Figure 12.4(d) there are five interconnected sets of inventory systems. The
second-tier supplier’s (yarn producer’s) inventories will feed the first-tier supplier’s (cloth
producer’s) inventories, who will in turn supply the main operation. The products are distributed
to local warehouses from where they are shipped to the final customers. We will
discuss the behaviour and management of such multi-echelon systems in the next chapter.
Day-to-day inventory decisions
At each point in the inventory system, operations managers need to manage the day-to-day
tasks of running the system. Orders will be received from internal or external customers;
these will be dispatched and demand will gradually deplete the inventory. Orders will need
to be placed for replenishment of the stocks; deliveries will arrive and require storing. In
managing the system, operations managers are involved in three major types of decision:
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How much to order. Every time a replenishment order is placed, how big should it be
(sometimes called the volume decision)?
When to order. At what point in time, or at what level of stock, should the replenishment
order be placed (sometimes called the timing decision)?
How to control the system. What procedures and routines should be installed to help make
these decisions? Should different priorities be allocated to different stock items? How
should stock information be stored?