Inventory management

• Since there are no spare inventories, the business must ensure that each component and product is right the first time.
• All businesses hold inventory, retailers hold inventory of goods on display, and manufactures hold inventory in three forms: Materials and components, Raw materials, Work in progress, Finished goods.
• Some products have been produced, however they are not finished, they then become held as inventory.
• Finished goods are mainly held by retailers.
• Effective stock management is needed otherwise the business might incur problems.
• If there is a lack of effective management of stock, then this might mean that the business would not have an inventory rotation system, thus some inventory may become obsolete, or out of date.
• Stock wastage may occur if the stock is not held in certain storage conditions.
• High levels of stock can mean that the business would encounter high costs in terms of holding them.
• Opportunity cost is a cost of holding high levels of inventory as the business's working capital is tied up.
• Storage costs are a cost of holding high inventory as it can be expensive in terms of storage costs and the inventory would need to be properly stored in particular conditions, for example it may need to be refrigerated.
• Employees need to guard and transport goods, not to mention the fact that insurance over the inventories needs to be held in case of a fire or a flood.
• If the inventories are not sold as fast as expected, then there is danger of them becoming outdated and obsolete, this would lower the value of such inventories.
• Reduces the risk of lost sales as it allows for continuous production.
• If the business runs out of raw materials, they can use the ones that are holding as stock, therefore eliminating the need for the production process to come to a halt.
• If materials and components run out then a business not holding inventories would have to stop.
• This can mean that labour is left with no tasks to complete and the business would have to leave expensive machinery idle.
• The business would encounter the costs of lost output as well as the costs of wasted resources, all of which can be eliminated by simply holding inventories.
• Avoids the need of special orders from suppliers as the business can use the inventories that are holding as stock.
• If a business runs out of inventory, then an urgent order may need to be placed if the business wishes to continue the production process.
• Large orders of new supplies reduce costs as the business can gain benefit from buying in Bulk.
• If the business runs out of raw materials, the production process may not have to stop as workers do not have to be idle and machinery does not have to be stopped.
• JIT requires employees to be more responsible for their work and for suppliers to be reliable.
• Lost sales could occur if a firm is unable to supply customers ‘from stock’, this could lead to sales being lost to firms that hold higher stock levels.
• JIT may not be suitable for all businesses at all times due to conditions such as small businesses not being able to finance the expensive IT systems needed to operate JIT, tertiary sector businesses such as hotels needing to hold buffer inventory inorder to avoid running out, and holding zero inventories potentially affecting customer service expectations.
• Buffer inventory is the minimum point at which a new order of stock must be placed to avoid unforeseeable inconvenience.
• Supply chain management improves profitability by reducing wasted time, improving inventory management, and creating a low cost but efficient supply chain.
• Conditions for JIT to run smoothly include excellent relationships with suppliers, multiskilled production staff, flexible equipment and machinery, accurate demand forecasts, and the latest IT equipment.
• Supply chain management reduces operating costs by cutting purchasing and inventory costs.
• Globalisation inflation could make holding inventories of raw materials more beneficial.
• Excellent employee-employer relationships are essential for JIT to operate smoothly.
• If the business decides to buy higher levels of inventory (buying in bulk), then their transportational costs would be low, however the costs of holding inventory would be higher.
• Effective supply chain management improves customer service by delivering products more quickly and of the appropriate quality.
• With higher inventory levels, there is an increase of costs tied up in capital.
• Holding inventory costs can include handling costs, transport costs, storage costs, and cost of tied up capital.
• If the business decides to buy lower levels of inventory, they would benefit from lower costs in terms of storage of the inventory, however their transportational costs would increase due to the constant need of transporting materials.
• JIT aims to achieve zero buffer inventory, with finished goods delivered to customers as soon as they are completed.
• Just in time inventory management involves the materials the business needs for production arriving just before the production process takes place.
• JIT contrasts traditional methods of holding inventory which focus on never running out of inventory by holding high buffer inventory levels, referred to as JIC inventory management.
• Advantages and Disadvantages of JIT inventory control include improved customer service, reduced operating costs, and improved profitability.
• Supply chain management aims to reduce time by establishing excellent communication with supplier companies, improving transport systems, speeding up the new product development process, and minimising waste of all productions to cut costs.