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Understanding Inventory Management Systems

Rutuja P. Valte's assignment discusses inventory types and inventory management systems. It defines inventory and its role in supply chain management. It describes the main types of inventories - raw materials, work-in-progress, and finished goods. It also discusses overhaul/MRO inventory. The assignment then explains the continuous review (Q) system and periodic review (P) system for inventory management. Finally, it provides details on the Kanban system, describing its core principles of starting with the current process, pursuing incremental change, respecting roles and responsibilities, and encouraging leadership at all levels.

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11 views3 pages

Understanding Inventory Management Systems

Rutuja P. Valte's assignment discusses inventory types and inventory management systems. It defines inventory and its role in supply chain management. It describes the main types of inventories - raw materials, work-in-progress, and finished goods. It also discusses overhaul/MRO inventory. The assignment then explains the continuous review (Q) system and periodic review (P) system for inventory management. Finally, it provides details on the Kanban system, describing its core principles of starting with the current process, pursuing incremental change, respecting roles and responsibilities, and encouraging leadership at all levels.

Uploaded by

Rutuja Valte
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Name: Rutuja P.

Valte
Roll No.: 45
Subject: IMSC
MBA, Operations –A

Assignment 1
[Link] is Inventory? Explain its role in Supply Chain Management. Discuss different
types of inventories by giving suitable example of each type.
Ans.
The word inventory is commonly used to describe the goods and materials that a business
holds for the ultimate purpose of resale. Inventories are materials stored, waiting for processing, or
experiencing processing. Inventory is an accounting term that refers to goods that are in various
stages of being made ready for sale
Inventory is generally the largest current asset – items expected to sell within the next year –
a company has. Inventory is spread throughout the supply chain from raw materials to work in
process to finished goods those suppliers, manufacturers, distributors, and retailers hold. •
Inventory is a major source of cost in a supply chain and it has a huge impact on responsiveness.
If we think of the responsiveness spectrum, the location and quantity of inventory can move the
supply chain from one end of the spectrum to the other.

1. Raw Materials
• Materials that are needed to turn your inventory into a finished product are raw materials.
• For example, leather to make belts for your company would fall under this category. Or if
you sell artificial flowers for your interior design business, the cotton used would be
considered raw materials.

2. Work-In-Progress
• Inventory that is being worked on is Work-In-Progress (WIP), just like the name sounds.
From a cost perspective, WIP includes raw materials, labor, and overhead cost. If you sell
medical equipment, the packaging would be considered WIP.
• That’s because the medicine cannot be sold to the consumer until it is stored in proper
packaging. It’s literally a work-in-progress.

3. Finished Goods
• Maybe the most straight-forward of all inventory types is finished goods inventory. That
inventory you have listed for sale those are finished goods. Any product that is ready to be
sold to your customers falls under this category.
4. Overhaul / MRO
• Overhaul / MRO Also known as Maintenance, Repair, and Operating Supplies, MRO
inventory is all about the small details. It is inventory that is required to assemble and sell
the finished product but is not built into the product itself.
• For example, gloves to handle the packaging of a product would be considered MRO. Basic
office supplies such as pens, highlighters, and paper would also be in this category.

Q.2. Explain in detail, a. Continuous review (Q) system and b. Periodic review (P) system
Ans.
a. Continuous Review (also called Fixed Quantity or Q system):
• Inventory is reviewed continuously and when inventory drops to a certain (prefixed)
reorder level, a fixed quantity is ordered. This model is generally used for high volume,
valuable, or important items.
• Continuous review systems generally order the same quantity of items in each order. The
order frequency varies in continuous systems because the inventory is monitored and
orders are placed when items reach a particular level.
• Provide real-time updates of inventory counts. Make easier to know when to order. Provide
accurate accounting.

b. Periodic Review (also called as P system):


• Inventory is reviewed at (prefixed) periodic intervals irrespective of the levels to which
inventory drops; an order is placed to bring up the inventory to the maximum level. This is
used for moderate volume items.
• With periodic review systems, products are ordered at the same time each period. The
number of items ordered is determined based on quantity levels at the end of each period.
There is no set reorder level for periodic review systems.
• An advantage of the periodic review system is that inventory is counted only at specific
time intervals. You do not need to monitor the inventory level between review periods.
This system also makes sense when you order several different items from a supplier.

Q.3. Write a detail note on “KANBAN” system.


Ans.
Kanban (literally signboard or billboard in Japanese) is a scheduling system for lean and
justin-time (JIT) production. Kanban is a system to control the logistical chain from a production
point of view, and is an inventory control system.
• Kanban was developed by Taiichi Ohno, an industrial engineer at Toyota, as a system to
improve and maintain a high level of production.
• Problem areas are highlighted by reducing the number of Kanban in circulation.
• The Kanban Method is as an approach to incremental, evolutionary process and systems
change for organizations. It uses a work-in-progress limited pull system as the core
mechanism to expose system operation (or process) problems and stimulate collaboration
to continuously improve the system.
• Visualization is an important aspect of Kanban as it allows understanding the work and the
workflow.
The 4 Kanban Core Principles:
1. Start With What You Do Now
• Kanban’s flexibility allows it to be overlaid on existing workflows, systems, and processes
without disrupting what is already successfully being done; naturally, it will highlight
issues that need to be addressed and help assess and plan changes, so their implementation
is as non-disruptive as possible.

2. Agree to Pursue Incremental, Evolutionary Change


• The Kanban methodology is designed to meet minimal resistance. It encourages continuous
small incremental and evolutionary changes to the current process.
• In general, sweeping changes are discouraged because they usually encounter resistance
due to fear or uncertainty. 3. Respect the Current Process, Roles & Responsibilities
• Kanban recognizes that existing processes, roles, responsibilities, and titles have value and
are, generally, worth preserving.
• The Kanban method does not prohibit change, but neither does it prescribe it as a
“panacea”. It is designed to promote and encourage incremental, logical changes without
triggering fear of change itself.

3. Respect the Current Process, Roles & Responsibilities


• Kanban recognizes that existing processes, roles, responsibilities, and titles have value and
are, generally, worth preserving. The Kanban method does not prohibit change, but neither
does it prescribe it as a “panacea”.
• It is designed to promote and encourage incremental, logical changes without triggering
fear of change itself.

4. Encourage Acts of Leadership at All Levels


• This is the newest Kanban principle. It reminds you that leadership comes from people's
everyday acts on the front line of their teams.
• Everyone must foster a continuous improvement mind set (Kaizen) to reach optimal
performance on a team/department/company level. This can’t be a management level
activity.

Common questions

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The continuous review system involves monitoring inventory levels constantly and ordering a fixed quantity when inventory drops to a pre-set reorder level. It's suitable for high volume or valuable items. In contrast, the periodic review system involves reviewing inventory at set intervals and ordering the amount needed to reach a maximum level, irrespective of current inventory levels. This system is suited for moderate volume items and does not require constant inventory monitoring between review periods .

The Kanban system is based on four core principles: starting with current practices, pursuing incremental and evolutionary change, respecting current processes and roles, and encouraging leadership at all levels. These principles facilitate production efficiency by allowing for continuous improvement without causing disruption. Kanban highlights problem areas by limiting work-in-progress, fostering collaboration, and encouraging a mindset of continuous improvement to optimize team performance .

Kanban offers advantages such as enhanced visibility into workflows, which aids in identifying bottlenecks, fostering a culture of continuous improvement, and reducing inventory waste through a just-in-time approach. This system promotes flexibility and responsiveness by allowing existing processes to evolve incrementally, minimizing disruption and encouraging efficiency at every level of the organization .

Excessive inventory ties up capital, increases storage costs, and leads to potential waste due to obsolescence or spoilage. Effective inventory management, through systems like Kanban or continuous review, can mitigate these risks by optimizing stock levels to ensure adequate availability without overstocking, thus balancing costs with service level requirements while maintaining supply chain responsiveness .

Kanban promotes innovation and improvement by encouraging incremental and evolutionary change rather than drastic overhauls. This reduces resistance and allows for systematic identification and resolution of bottlenecks. By visualizing workflows and limiting work-in-progress, teams can innovate within current processes and gradually enhance operational efficiency, fostering a culture of continuous improvement and leadership at all levels .

The periodic review system simplifies ordering processes by allowing businesses to order inventory at regular intervals, rather than continuously monitoring levels. This reduces the need for constant inventory checks and makes it easier to plan and consolidate orders, especially when dealing with suppliers who provide multiple items, thus simplifying logistics and potentially reducing transportation costs .

Inventory is crucial in supply chain management as it acts as a major source of cost affecting the responsiveness of the supply chain. It includes raw materials, which are necessary for producing finished goods, work-in-progress inventory that is in the stages of being processed, finished goods that are ready for sale, and MRO (Maintenance, Repair, and Operating supplies) which are not part of the finished product but essential for its assembly and sale .

MRO inventory, while not part of the finished product, includes essential items like tools, equipment, and supplies necessary for maintaining operations and assembling products. Without adequate MRO inventory, production efficiency can suffer, leading to increased downtime and operational delays, thereby impacting the timely delivery and quality of finished products .

Raw materials are the initial inputs required to manufacture products, and their availability directly impacts the start and continuity of the production process. Work-in-progress (WIP) inventory includes items that are being converted to finished goods. Insufficient raw materials or inefficiencies in processing WIP can lead to production delays, increased costs, and decreased supply chain responsiveness .

The continuous review system ensures accuracy in inventory accounting by providing real-time updates of inventory counts due to constant monitoring. By placing orders at precise reorder levels, businesses maintain accurate records of stock levels, thereby minimizing errors in inventory tracking and financial statements compared to systems that do not require continuous oversight, such as periodic review systems .

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