The ordinary dictionary meaning of inventory is 'a list of goods an estate contains'. Inventory is usually referred to that physical stock of items a business house or an industrial organization keeps in hand for efficient, smooth and uninterrupted functioning. It may consist of:
1. Raw materials
3. Maintenance materials
4. Processed and semi-processed materials
5. Oils, fuels and lubricants
6. Finished and semi-finished goods
They may be either in solid, liquid or gaseous form, required for future use, mainly in the production process as in the case of finished goods for re-sale. In any case, it is an idle resource having an economic value awaiting conversion, consumption or re-sale.
THE NEED FOR INVENTORY
Inventories are held primarily for some transaction. 'Today's inventory is tomorrow's production'. In case of production inventory, generally there is a time-lag between the recognition of the need and fulfillment of that need. This time-lag; which is technically called 'lead-time', is due to the time required for ordering, processing and time needed by the vendor for actual delivery of the materials. Consequently, lead-time greatly influences holding of the volume of inventory. Had it been so that materials were readily available right on placing orders, there would have been no need for holding inventory.
Inventory control refers to a planned method of purchasing and storing the materials at the lowest possible cost without affecting the production and distribution schedule.
In simplest language, inventory control may be said to be a planned method whereby investment in inventories held in stock is maintained in such a manner that it ensures proper and smooth flow of materials needed for production operations as 'well sales, while at the same time, the total costs of investment in inventories is kept at a minimum. From the above definition it follows that a comprehensive inventory control system must be closely coordinated with other planning and control activities, such as, (planning, capital budgeting, sales forecasting, including production planning, production scheduling and control. This impinges on a wide range of operations, operating decisions and policies for production, sales and finance. The finance controller of a company regards inventory as a necessary evil, since it drains off cash which could he used elsewhere to earn some profits. The marketing manager always wants enough of ready stock of finished goods inventories in order to give better customer service to ensure the company's goodwill and would not like to see a sales opportunity lost for want of saleable ready stock. The production manager does not want an out-of stock condition for which production might be held up. It will, therefore, he seen that everyone- has some objectives which arc connecting in nature. The basic problem is, therefore, to strike a balance between operating efficiency and the costs of investment and other associated costs with large inventories, with the object to keep the basic conflicts at the minimum while optimizing the inventory holding.
Some of the techniques which will follow include methods of fixing purchase quantities, setting of order points and safety stocks. The decisions as to which item to make when and to keep inventories in balance requires application of a wide range of techniques from simple graphical methods to more sophisticated and complex quantitative techniques. Many of these techniques employ concepts and tools of mathematical and statistical methods and make use of various control theories from engineering and other fields. They are primarily aimed at helping to make better decisions and getting people involved and follow a wise policy. As such, they are far from academic exercises only. However, making decisions more intelligently and making actions follow these decisions is not...