Inventory Management
For many business owners inventory is one of the most visible and tangible aspects of doing business. Inventory refers to stocks of anything necessary to do business. Various forms of inventory are represented by the stock of resourcs (raw materials, fuel, components, spare parts supplies) used in an organisation, work in progress and finished sale to distributors or final users. These stocks represent a large portion of the business investment and must be well managed in order to maximise profits. Successful inventory management involves balancing the costs of inventory with its benefits. The costs of having inventory include direct costs of storage, insurance, taxes and ties up capital, which may lead to a severe crisis. Good inventory management improves customer service, increases sales and profits. If inventories are not controlled they are unreliable, inefficient and costly.
Managers often try to keep high inventory levels. There are obviously advantages of having a large inventory of raw materials and component parts. It gives you protection against many negative factors, such as price rises and delays in the delivery of raw materials due to shortages, strikes, lost orders, incorrect or defective shipments, and so on. You can also take advantage of quantity discounts in purchasing. Having a large inventory of finished goods allows you to quickly react to changes in product demand and to be more flexible in product scheduling. There is no risk of losing customers or that new competitors will enter the market.
On the other hand, keeping a large inventory involves various additional costs: storage requires warehousing facilities, handling goods involves labour costs and unsold goods have to be insured. All this money could be more profitably spent in other ways. Furthermore, there is always a risk of obsolescence, especially for high-tech products, and the risk of theft or breakage. If an inventory of finished goods gets too large, it may be necessary to reduce prices to stimulate demand.
All disadvantages of large inventories led to the development of the just-in-time (JIT) production system (see Reading IV), which does away with inventories. This approach has had a major impact on the development of inventory management.
Concept check
What does the intention to manufacture a new product imply? Define ‘production facility’.
What is meant under ‘site selection’? Why are mistakes in this process very expensive?
What factors should be taken into account when making a decision on the selection of the site for a new plant? Fill in the chart below and comment on your considerations.
Give a definition for ‘production capacity’. What terms do experts use to discuss different kinds of production capacity?
Compare the possibilities which a large and an insufficient capacity may offer for a company.
What is the difference between an excess and a spare capacity?
What factors influence the production capacity in a plant or a factory? Fill in the table below and explain why maximum capacity of a plant is not its ideal capacity.
External considerations |
… considerations |
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1) … |
|
2)… |
… |
… |
What do specialists mean by facilities? What are advantages and disadvantages of having large facilities? Fill in the table below, use your own ideas as well and comment on your choice.
Advantages |
Disadvantages |
|
1) … |
2) … |
2) … |
… |
… |
What does the term ‘inventory’ refer to?
Translate the words and word combinations in the box from the text above.
business investment |
direct costs |
to increase sales and working capital |
to maximse profit |
to tie up capital |
unreliable |
to balance the cost of inventory with its benefits |
to improve customer service |
inefficient and costly |
Then use them in your answers to the questions below.
What does inventory management imply?
Why are inventory management and control so important for any manufacturing company?
Use such linking words as firstly, moreover, in addition, also, not only .. but also, however, on the other hand, my conclusion is.
What are advantages and disadvantages of having a large inventory? Fill in the table below to summarise your ideas.
Pros |
Cons |
1) … |
1) … |
2) … |
2) … |
… |
… |
READING IV