Inventories

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MANAGEMENT OF INVENTORIES

Inventory management – involves the control of the assets that are used in the production process or produced to be sold in the normal course of the firm’s operations. It can also refer to assets that are bought and sold in a trading concern business.

Purpose of inventory – To uncouple the operations of the firm – that is, to make each function of the business independent of each function – so that delays or shutdowns in one area do not affect the production and sale of the final product.

TYPES OF INVENTORY:

1. Raw materials inventory – consists of basic materials purchased from other firms to be used in the firms production operations.

2. Work-in-process inventory – consists of partially finished goods requiring additional work before they become finished goods.

3. Finished Goods Inventory - consists of goods on which the production has been completed but are not yet sold.

INVENTORY MANAGEMENT TECHNIQUES:

To control the investment in inventory, management must solve two problems:

1. Order Quantity Problem

- Involves determining the optimal order size for an inventory item given its expected usage, carrying cost, and ordering costs. - Economic Ordering Quantity (EOQ) model that attempts to determine the size that will minimize total inventory costs.

2. Order Point Problem

- Inventory held to accommodate any unusually large and unexpected usage. - How much safety stock to hold
- Factors to determine appropriate order point
a. The procurement or delivery-time stock
b. Desired safety stock

Just-in-time inventory control system

- Keeping inventory to a minimum and relying on suppliers to furnish supplies “just in time.” - Long-term relationship with suppliers is critical for the suppliers to deliver high quality parts and materials.

TOTAL QUALITY MANAGEMENT

- Company-wide approach to quality....
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