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Inventory Management
LOGS315
Chapter 1:
Stocks and Inventories
Introduction:
• Stocks are the materials that are stored by an organization until they
are needed.
• An inventory is a list of the items kept in stock.
• An item is a distinct product that is kept in stock: it is one entry in the
inventory.
• A unit is the standard size or quantity of an item.
• Every organization holds stock, and we are not just talking about the
stocks of raw materials and work in progress that are held by
manufacturers.
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Stock Cycle:
• Overall stock consists of numbers of units held of each item.
• The stock level of each item follows a cycle that falls to meet
customer demand and rises with replenishment from suppliers.
• Customers are anyone (or thing) that reduces stock levels, while
suppliers are anyone (or thing) that increases stocks.
• The main purpose of holding stock is to give a cushion between
supply and demand.
• There are many reasons why such a cushion is needed, often – but
not necessarily – related to variability or uncertainty.
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Inventory Management:
• As materials move through the stock cycle, there are many different
arrangements for purchasing, storage and delivery.
• One common feature, however, is that holding stock is surprisingly
expensive.
• A rule of thumb says that the cost of holding stock is about 20 per cent of
its value a year. If you keep $500 of food in a freezer, it costs about $100 a
year.
• Inventory management (stock management, etc.) is a broad term that
includes all decisions related to the stocks.
• It makes decisions for policies, activities and procedures to make sure the
right amount of each item is held in stock at any time.
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Types of Stocks:
• For convenience, we often talk about stocks of:
raw materials: which have arrived from suppliers and are kept until needed
for operations;
work in progress: which are units currently being worked on;
finished goods, which are waiting to be shipped to customers.
• We can define two additional types as:
spare parts: for machinery, equipment, etc.,
Consumables: such as oil, paper, cleaners, etc.
• These are needed to support operations, but they do not form a part
of the final product.
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Types of Stocks:
• This is the usual convention, but there are several alternatives.
• Another classification of stock describes its overall purpose:
Cycle stock: is the normal stock used during operations.
Safety stock: is a reserve of materials that is held for emergencies.
Seasonal stock: is used to maintain stable operations through seasonal
variations in demand.
Pipeline stock: is currently being moved from one location to another.
Other stock: consists of all the stocks that are held for some other reason.
• To put it simply, without stocks, organizations could not work. The
important question, then, is not whether to hold stocks, but how to
manage the stocks that must be held.
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Stocks in the supply chain:
• A supply chain consists of the series of activities and organizations that
materials move through on their journey from initial suppliers to final
customers.
• Logistics or supply chain management is the function with overall
responsibility for the movement of materials, and inventory management
is often seen as one activity within logistics.
• There are several important trends in logistics that directly affect inventory
management. These include the increasing co-operation between
organizations within a supply chain, e-business, outsourcing non-core
activities, TQM, improved customer service, etc.
• These often cause specific trends within inventory management, such as
the growth of JIT, cross-docking and postponement.
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