Inventory means the stock of raw materials, work-in-process (WIP), finished goods and spares kept by an organization. Inventory is necessary to ensure smooth production and customer service, but it also blocks money and increases cost. Therefore, the goal of inventory management is to maintain optimum inventory—neither excess nor shortage.
Inventory management decisions answer:
Inventory is the stock of materials and goods kept to meet production and demand.
Types:
Main objectives:
Costs incurred per order:
Costs for keeping stock:
Costs of running out of stock:
Inventory decisions try to balance these costs.
EOQ is the order quantity that minimizes total inventory cost (ordering + carrying).
Assumptions (basic EOQ model):
EOQ formula: Where:
Reorder level is the stock level at which a new order should be placed so that stock arrives before inventory becomes zero.
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Production management means planning, organising, directing and controlling of production activities. Production management deals with converting raw materials into finished goods or products. It brings together the 6M's i.e. men, money, machines, materials, methods and markets to satisfy the wants of the people.
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Inventory means the stock of raw materials, work-in-process (WIP), finished goods and spares kept by an organization. Inventory is necessary to ensure smooth production and customer service, but it also blocks money and increases cost. Therefore, the goal of inventory management is to maintain optimum inventory—neither excess nor shortage.
Inventory management decisions answer:
Inventory is the stock of materials and goods kept to meet production and demand.
Types:
Main objectives:
Costs incurred per order:
Costs for keeping stock:
Costs of running out of stock:
Inventory decisions try to balance these costs.
EOQ is the order quantity that minimizes total inventory cost (ordering + carrying).
Assumptions (basic EOQ model):
EOQ formula: Where:
Reorder level is the stock level at which a new order should be placed so that stock arrives before inventory becomes zero.
Basic idea:
Safety stock is extra stock kept to handle uncertainty in demand/lead time.
These levels help store control and avoid excess carrying cost.
ABC analysis classifies items based on annual consumption value:
Idea: “Important few, trivial many” (Pareto principle).
VED analysis classifies items based on criticality (often for spares):
Combining ABC and VED gives a matrix to decide control priority:
This helps focus control on items that are both expensive and critical.
Continuous review gives better control but needs more monitoring; periodic review is simpler but may require higher safety stock.
JIT is a system where materials arrive “just in time” for production, and finished goods are produced “just in time” for demand—aiming for minimum inventory.
Features:
Benefits:
Limitations:
Decide EOQ (how much) + Decide reorder point (when) → Maintain safety stock → Avoid stock-out + reduce total cost
From this topic
Objectives of inventory management (any four):
Thus, inventory management balances availability with cost control.
Inventory costs:
Hence, EOQ and reorder decisions aim to balance these costs.
Meaning: JIT aims to receive materials and produce goods just when needed, keeping inventory at minimum.
Table:
Conclusion: JIT improves efficiency but requires strong coordination, quality and reliability across the supply chain.