Inventory is defined as any stored resource that is used to satisfy a current or future need
Many things come to make up inventory a few examples of what make up inventory are finished goods, raw materials, and work-in-progress. When it comes to a company’s most important and often times most expensive assets you discover inventory makes up as much as 50% of a company’s total invested capital (Render, Stair & Hanna, 2012). This paper will take a look at the importance of inventory control and some inventory control models and the importance they play in the success and or failure of a company.
Inventory is important in the day to day operations of every major business and many nonbusiness organizations like government. Nearly all organizations have some type of control system or inventory planning method. You may ask why is inventory control so important, this is because “The principal goal of inventory managing is always to strike a balance amongst the contending specifications for attaining ideal inventory ranges”. Many different entities in society use inventory control these organizations can range from schools, nearly every type of business, and even state and federal governments.
Taking a look at how organizations control inventory is equal to investigating how organizations achieve objectives by supplying services and goods to customers. “Inventory is the common thread that ties all the functions and departments” of a company together (Render, Stair & Hanna, 2012). Inventory control and planning can really be broken down in to four areas: planning on what inventory to stock and acquire, forecasting parts/product demand, controlling inventory levels and feed measurements to revise plans and forecasts.
Looking at inventory control and the planning system is essential when it comes to inventory control. Without control it would be impossible to maintain efficient levels of inventory within an organization. Now let’s take a more in depth look at the importance of inventory control. There are five functions that are used to add flexibility to operations of a company. The first function of the importance of inventory control is the decoupling function. The decoupling functions is basically defined as that you have to have enough inventory to act as buffer in your processes. You cannot have delays or be held up.
A shortage in one step can prevent your ability to move on to another step in your process, this is because of a shortage of inventory in your process hurt your company. “If however you have some stored inventory between processes it could act as a buffer” (Render, Stair & Hanna, 2012). The second function to explore when it comes to the importance of inventory control is the storing of resources. What comes to mind when you first think of storing resources? Most people would think of resources that are scarce during certain times of the year, or items that can only be obtained during a certain time of the year.
A good example is crabs. If you have ever seen the show Deadliest Catch on the Discovery channel, you might have learned that crabbing season is from October to January. A four month period accounts for almost all of the Alaskan king crabs caught. This means that companies have to store enough products after the season is over to have enough resources for the rest of the year. Another way to look at storing resources is how resources can be stored as in work process. An example is bicycle tires, if you have 200 bicycles finished and an additional 100 tires in inventory.
You actually have 500 tires in inventory. 100 tires are stored by themselves and 400 tires are stored on finished bicycles. The third function of the importance of inventory control is irregular supply and demand. “When the supply or demand for an inventory item is irregular, storing certain amounts in inventory can be important” (Render, Stair & Hanna, 2012). An example of this can be broken down in the following way. If you sell pumpkin flavored items around Halloween you need to make sure you have enough pumpkin related products to meet the customer’s needs.
This means you may have to produce large amounts of pumpkin related goods in the summer even though you actually do not need it at the moment. You do this because you will need the product around Halloween. As you can see events are not regular in the standard sense, this is how irregular supplies and demand work. The fourth function of the importance of inventory control is Quantity Discounts. Companies are always looking to save money anywhere they can. Many suppliers when you place a large order will offer discounts.
If you relate it, to normal day to day life look at it like buying in bulk. You can get a six pack of toilet paper for $2. 99 or you can get a twelve pack of toilet paper for $4. 99. A company may only need a few of a certain item at the moment, but will buy a little more than needed for the future so they can save money y during the present. A company may take some risk when it comes to quantity discounts because of the possibility of products going bad if not used in time, theft, or additional costs related to insurance or storage.
The fifth function of the importance of inventory control is avoiding stockouts and shortages. This function can be broken down pretty easily, if a company is always out of something consumers will be less likely to trust that company in the future. Customers like to have their needs satisfied, if they feel like they cannot have the appropriate level of service then they will try something else. Now that you know the importance of inventory control, it is important to learn how decisions are made when it comes inventory.
Even though there are millions of products in our society “there are only two fundamental decisions that have you have to make when controlling inventory: How much to order and when to order” (Render, Stair & Hanna, 2012). There are several different types of modeling techniques used in day to day operations of companies. When taking a look at inventory control models there are objectives that need to be addressed “A major objective of all inventory models is to minimize inventory costs” (Render, Stair & Hanna, 2012).
There are four areas that are significant when it comes to inventory costs: the cost of ordering, the cost of carrying or holding, the cost of stockout and the costs of the items. In the text we used for this class we learned a vast amount about the Economic Order Quantity (EOQ). “ EOQ is one the oldest and most commonly known inventory control techniques. Research on its use dates back to a 1915 publication by Ford W. Harris. This technique is still used by a large number of organizations today. (Render, Stair & Hanna, 2012). To use the EOQ there are few assumptions that are made. “Demand is known and constant. Lead time is known and constant. Receipt of inventory is instantaneous. Quantity discounts are not possible. The only variable costs: set-up or placing an order, and holding or storing inventory over time. Stockouts can be completely avoided if orders are placed at the appropriate time” (Render, Stair & Hanna, 2012). If one of these assumptions are not met than the EOQ model needs to be adjusted.
One really interesting and good thing about the EOQ is that you can determine a reorder point (ROP) using an EOQ. A simplified definition of the reorder point is that you make an order at a certain point so you have enough supplies on hand. You get this by “multiplying the daily demand times the lead time days” (Render, Stair & Hanna, 2012). Another type of model to use in when looking at the importance of inventory control, is called the quantity discount model. When using the EOQ model we made some assumptions. One of those is that no discounts were available.
If discounts were available then we would use a quantity discount model. “The overall objective of the discount model is to minimize total inventory costs, which now include actual materials costs” (Render, Stair & Hanna, 2012). Just like the EOQ model the overall objective is to minimize costs. The last model I will cover is the Single-Period Inventory Models. These model is laymen’s terms are used when goods have an expiration date or good bad after a certain time. A marginal analysis approach can be used by taking a look at marginal profit and marginal loss.
Profit is basically when one additional unit is stocked and sold. Profit loss is one additional unit is stocked and not sold. When it comes to inventory there are many in depth events that need to be addressed. This is because of the importance inventory plays in the day to day operations of so many organizations. This paper covered the importance of inventory control as well as some of the methods used to model and predict. This will help and assist in making sure inventory is maximized to produce the largest profit and the most success.