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Study guide
This chapter is relatively unusual in so much as it takes more of a quantitative approach to its topic. While not avoiding quantitative models where they are appropriate, the general approach of this book is to deal with operations management from a general management point of view. Here we include some quantitative models of how inventory is managed mainly to demonstrate that some parts of the inventory decision can be quantified. In practice, most of these decision models will be embedded within an operations routine stock control computer system. However, whilst working through them remember that it is the underlying principles behind the models which are more important than the mathematics on which the models are based.
The disadvantages of inventory include, It is expensive. Keeping inventory means the company has to fund the gap between paying for the stock to be produced and getting revenue in by selling it. This is known as working capital. There is also the cost of keeping the stock in warehouses or containers. Items can deteriorate while they are being kept. Clearly this is significant for the food industry whose products have a limited life. However, it is also an issue for any other company because stock could be accidentally damaged while it is being stored. Products can become obsolescent while they are being stored. Fashion may change or commercial rivals may introduce better products. Stock is confusing. Large piles of inventory around the place need to be managed. They need to be counted, looked after and so on.
In some organisations stock may increase in value while it is being kept. For example the two photographs on page 378 give examples of the value-adding characteristic of stock. In the first one wine is being matured. When it is first harvested the wine is of relatively low value. Keeping it in special casks under the right conditions enhances its value considerably. Similarly the computer monitors illustrated are increasing in value in so much as the ones which are likely to fail early in their life are being identified. They will therefore not be shipped to customers and fail in use, which could damage the companys reputation. Another example is where a company deliberately purchases more stock than it needs because it feels the availability of the material or the price of the material is likely to change. Of course this is risky. Many companies have suffered severely by speculative purchasing of this type to avoid price increases only to see the prices drop.
How should we measure our inventory planning performance? What activities should we evaluate more thoroughly? Where does variance occur in my network? Why does it occur? Where should we focus improvement efforts? What is the cost penalty of particular decisions, such as changing product flow paths or adding new stocking locations? How can I modify operational processes to keep variance to a minimum? How much of our planning variance is due to controllable factors? How much is due to uncontrollable factors like service requirements or fuel costs? Are we interpreting performance measurement results correctly? How can I identify and capture opportunities to reduce inventory costs? Which system is best suited for my organization?