What other terms can you think of when talking about Procurement and Inventory Management?

What do you think are the reasons for holding inventory?

Reasons for Holding Inventory Formulation of an inventory requires an understanding of the role of inventory in manufacturing and marketing. Inventory severs five purposes within the firm: It enables firm to achieve economics of scale It balances supply and demand It provides protection from uncertainties in demand order cycle It acts as a buffer between critical interfaces within the supply chain

Economics of scale Inventory is required if a firm is to realize economics of scale in purchasing, transportation and manufacturing. For example, raw material inventory is necessary if the manufacturer is to take advantage of the per-unit price reductions associated with volume purchases. The reasons for holding finished goods inventory are similar to reason for holding raw material. Transportation economies are possible with large volume shipments, in order to take advantage of these economical rates.

Balancing supply and demand Seasonal supply and/or demand may make it necessary for a firm to hold inventory. In case of building chocolates, the seasonal inventories may be stored in a freezer. This may be done because the raw material would be available only at certain times during the year. Doing this would make it necessary to manufacture finished products in excess of current demand and hold them in inventory, unless raw material can be purchased from parts of the world with different seasons

Production form uncertainties Inventory is also held as protection form uncertainties. Raw material inventories in excess of those required to support production can result from speculative purchases made because management expects either a future price increase of a strike. Finished goods inventory can be used as a means of improving customer service levels by reducing the likelihood of a stock out due to unanticipated demand or variability in lead time.

Categories of Inventory Raw Material Work in Progress (WIP) Finished Goods Inventory (FGI) Spare Parts Cycle and Safety Inventory

Raw Material Raw Materials (Components, subassemblies) are purchased from a supplier and used for the products Purchasing Production Raw Material Supply Company

Work in Progress Inventory between production systems Work in Progress Inventory is necessary because of -Batching -Queuing -Moving -Waiting for batch or to match -Processing -…… Production step 1 Production step n Last Production step WIP Company

Finished Goods Inventory Inventory between company and customer Finished Goods Inventory is necessary because of -Variations in customer demand -Forecast Errors -Seasonality -Batch Production Last Production Step Distribution FGI

Spare Parts Spare parts support the production process and are not used as direct input to products Last Production Step Production Step 1 Prodcution Step n WIP Spare Parts Spare parts inventory is necessary because of -Service -Purchasing lead times -…