MAHARISHI UNIVERSITY OF INFORMATION TECHNOLOGY

Maharishi School of Business Management

LECTURE NOTES

UNIT 4 NOTES
Programme: BBA Semester: III
Course Name: Production and Operation Management Course Code: BBA 302
Session: 2025-26 Unit: Ⅳ

Inventory Management
Inventory management is the systematic process of ordering, storing, tracking, and controlling the amount of
stock a company has on hand. This includes raw materials, work-in-progress, and finished goods. The goal is
to have the right amount of inventory in the right place at the right time, to meet customer demand without
incurring excessive costs.

Need for Inventory:

1. Meet Customer Demand: Without sufficient inventory, a business can't fulfill orders, leading to lost
sales and dissatisfied customers.
o Example: A popular electronics store needs to stock enough of the latest smartphone model to
meet anticipated Black Friday demand.
2. Smooth Production Operations: Inventory of raw materials and work-in-progress ensures that
production lines don't stop due to shortages.
o Example: An automobile manufacturer keeps a steady supply of engine parts and chassis
components to maintain continuous assembly line operation.
3. Buffer Against Uncertainty: Inventory acts as a buffer against unexpected fluctuations in demand or
supply.
o Example: A grocery store might keep extra canned goods in stock to prepare for potential
supply chain disruptions caused by a severe weather event.
4. Economies of Scale: Buying in larger quantities can often lead to lower per-unit costs due to bulk
discounts.
 o Example: A restaurant chain purchases a large shipment of cooking oil at a discounted rate,
storing the excess for future use.
5. Hedge Against Price Increases: Purchasing more inventory when prices are low can protect against
future price hikes.
o Example: A construction company buys a large quantity of steel when market prices are
favorable, anticipating an increase in the coming months.
6. Transit and Handling: Some inventory is simply in transit between locations or being handled within
a warehouse.
o Example: A fashion retailer has a container ship full of clothes en route from a manufacturing
plant in Asia to its distribution center in Europe.

Types of Inventory:

1. Raw Materials: These are the basic inputs used in the production process that have not yet undergone
any transformation.
o Example: For a bakery, flour, sugar, eggs, and butter are raw materials.
2. Work-in-Process (WIP): These are partially completed goods that are still in the production process.
They are no longer raw materials but are not yet finished products.
o Example: For an apparel company, fabric that has been cut and sewn into shirt panels but not
yet assembled into a complete shirt is WIP.
3. Finished Goods: These are products that have completed the manufacturing process and are ready for
sale to customers.
o Example: For an electronics company, fully assembled and packaged laptops ready to be
shipped to retailers are finished goods.
4. Maintenance, Repair, and Operating (MRO) Supplies: These are items used to support the
production process and maintain equipment, but they do not become part of the finished product.
o Example: Lubricants for machinery, spare parts for equipment, cleaning supplies, and office
supplies in a factory.
5. Transit Inventory (Pipeline Inventory): This refers to inventory that is currently being transported
from one location to another.
o Example: A shipment of coffee beans being transported from a farm in Brazil to a roasting
facility in the United States.
6. Buffer/Safety Stock: This is extra inventory held to guard against uncertainties in demand or supply.
o Example: An online retailer keeps an extra 10% of its most popular items in stock to cover
unexpected surges in orders or delays from suppliers.
7. Anticipation Stock: Inventory held to meet expected future demand, often due to seasonal
fluctuations or planned promotions.
o Example: A toy manufacturer builds up a large inventory of toys in the months leading up to
the holiday season.
 8. Decoupling Inventory: Inventory held between different stages of a production process to allow each
stage to operate independently.
o Example: In a furniture factory, if the cutting department works faster than the sanding
department, a small inventory of cut wood might accumulate between the two stages.

Inventory Control: Meaning, Objectives, and Functions

Meaning:
Inventory control refers to the process of managing and overseeing a company's inventory—raw materials,
work-in-progress, and finished goods—to ensure that the right amount of stock is available at the right time,
while minimizing holding costs and avoiding stockouts. It's a critical aspect of supply chain management that
balances the need to meet customer demand with the costs associated with carrying inventory.

Objectives:
The primary objectives of inventory control are:

1. To ensure uninterrupted production/sales: By maintaining adequate stock levels, inventory control

prevents disruptions in production due to a lack of raw materials or lost sales due to insufficient
finished goods.
2. To minimize inventory investment: Holding inventory incurs costs (storage, insurance,
obsolescence, capital tied up). Effective inventory control aims to reduce these costs as much as
possible without compromising service levels.
3. To reduce carrying costs: This includes costs related to warehousing, handling, insurance, taxes, and
the opportunity cost of capital.
4. To prevent stockouts and backorders: Ensuring that products are available when customers want
them is crucial for customer satisfaction and maintaining a good reputation.
5. To avoid excess inventory and obsolescence: Overstocking can lead to products becoming outdated,
damaged, or expiring, resulting in financial losses.
6. To take advantage of quantity discounts: Purchasing larger quantities can sometimes lead to lower
per-unit costs, which inventory control considers.
7. To optimize operational efficiency: Smooth inventory flow supports efficient production schedules
and distribution.

Functions:
The key functions of inventory control include:

1. Forecasting Demand: Estimating future demand for products to plan inventory levels.
2. Setting Stock Levels: Determining optimal reorder points, safety stock, and maximum stock levels.
3. Monitoring Inventory: Keeping track of inventory movement, including receipts, issues, and returns.
4. Ordering and Replenishment: Placing orders for new stock when levels fall to the reorder point.
5. Storage and Handling: Managing the physical storage, movement, and protection of inventory.
 6. Inventory Valuation: Assigning monetary value to inventory for financial reporting.
7. Performance Measurement: Analyzing inventory turnover, stockout rates, and carrying costs to
assess effectiveness.
Models of Inventory Control

Inventory control systems help businesses manage their stock efficiently. Two common models are the Fixed
Quantity System and the Fixed Period System.

1. Fixed Quantity System (Q-System / Reorder Point System)

In a Fixed Quantity System, also known as a Reorder Point System, a new order for a fixed quantity of an
item is placed whenever the inventory level drops to a predetermined reorder point (ROP). The time between
orders can vary depending on demand.

How it works:

 Continuous Monitoring: Inventory levels are continuously monitored.

 Reorder Point (ROP): A specific inventory level is set as the trigger for placing an order.
 Fixed Order Quantity (EOQ): The quantity ordered is always the same, often calculated using the
Economic Order Quantity (EOQ) model to minimize total inventory costs.
 Variable Order Interval: The time between placing orders varies depending on how quickly
inventory is consumed.

Example:
Imagine a stationery shop selling pens.

 Fixed Order Quantity (EOQ): 500 pens

 Reorder Point (ROP): 100 pens
 Lead Time: 5 days (time from ordering to receiving)
 Daily Demand: 10 pens

The shop continuously tracks its pen inventory. When the stock of pens drops to 100, an order for 500 pens is
immediately placed. This ensures that even during the 5-day lead time, there will be enough pens to meet the
demand (5 days * 10 pens/day = 50 pens consumed, leaving 50 pens as safety stock). The next order will be
placed whenever the inventory again hits 100, which might be sooner or later depending on actual sales.

The Fixed Period System, also known as the Periodic Review System or P-System, is a model of inventory
control where inventory levels are reviewed at regular, predetermined intervals. At each review, an order is
placed to bring the inventory position (on-hand inventory plus on-order inventory) up to a target level.

Key Characteristics:
  Fixed Review Period (P): The time between inventory reviews is constant. For example, inventory
might be checked every week, every month, or every quarter.
 Variable Order Quantity: The amount ordered at each review varies. It depends on the actual usage
during the review period and the current inventory level.
 Target Inventory Level (M or R): This is the desired maximum inventory level. The order quantity
is calculated to replenish the inventory up to this target.
 Safety Stock: Because demand during the review period and lead time can fluctuate, safety stock is
incorporated into the target inventory level to prevent stockouts.

Visualizing the Fixed Period System:

 Imagine a tank of water that you want to keep filled to a certain level. You check the tank every
Friday. If it's half empty, you fill it up. If it's only a quarter empty, you add less water. The "checking
every Friday" is the fixed period, and the "amount of water you add" is the variable order quantity.

Advantages:

 Economical for Ordering: Multiple items can be ordered from the same supplier at the same time,
consolidating orders and potentially reducing ordering and shipping costs.
 Administrative Simplicity: Since reviews are on a fixed schedule, it's easier to plan and manage the
review process.
 Good for Less Critical Items: Often used for items where continuous monitoring isn't justified due to
lower cost or less critical impact on operations.

Disadvantages:

 Higher Safety Stock: Because inventory is only checked periodically, there's a longer period of
uncertainty (the review period + lead time) during which a stockout could occur. This usually
necessitates higher safety stock levels compared to continuous review systems, leading to higher
holding costs.
 Risk of Stockouts Between Reviews: If demand is unexpectedly high shortly after a review,
inventory could deplete before the next review, leading to a stockout.
 Less Responsive to Demand Changes: The system is less responsive to sudden spikes or drops in
demand between review periods.

When to Use It:

The Fixed Period System is generally suitable for:

 Items that are ordered together from the same vendor.

 Items with relatively stable demand.
 Items with lower unit costs where the cost of continuous monitoring is not justified.
 Situations where ordering costs are a significant concern.