OBJECTIVES OF INVENTORIES
Inventory is as old as man. The primitive manâ€™s inventory consisted of a few tools; as a shepherd, man had to tend his flocks and herds; later he had his granaries and warehouses; today with industrialization, his inventories cover a very wide range. As man has progressed and his needs and activities have multiplied the range of inventory has become larger and more diversified.
As of today, inventories include, among others, raw materials, part-finished goods, finished goods and operating and operating supplies. Each of these serves specific purposes. The raw materials inventories are held for later conversion into semi-finished or finished goods. Raw material inventories must exist because generally it is not always economically feasible either to purchase or to schedule the delivery of raw materials as they are needed in the production process.
Since manufacturing or processing always takes time, there is need for finished goods inventory. In some industries, materials must be processed in lots or batches. In other industries the flow of material may be steady, with the product existing simultaneously in several stages of completion. In still other types of manufacturing it is desirable, from economic considerations, to process or schedule material in lots.
The nature of the product, the nature of customer demand and the nature of the manufacturing process determine, to a considerable extent, the need for finished goods inventories. If the customer is wiling to wait for the product to be manufactured, there is no need for finished goods inventories. Sometimes, the nature of the product prohibits expensive finished goods inventories. Fresh fruits, vegetables and some other foods have limited storage life, so the extensive inventories of these products are not desirable. If the material must be processed in lots or batches, finished goods inventories will usually exist.
Operating supplies inventories do not directly go into the product. But they exist to facilitate smooth operation of the manufacturing process.
In general, inventory facilitates transit and handling. Materials may be transported thousands of kilometers before they are incorporated into an end product. All the time materials are in transit, which may be a period of several months. During this transit, materials constitute someoneâ€™s inventory.
Furthermore, inventories serve to isolate the supplier, the producer and the consumer. Inventories permit the procurement of raw materials in economic lot-sizes as well as processing of these raw materials into finished goods in the most economical quantities. Raw material inventories isolate the supplier of raw materials from the user of these raw materials. Finished goods inventories isolate the user from the producer of the goods. In process the inventories isolate the departments within the plant.
Isolating, also called decoupling, of producer from supplier, one production department from another and consumer from producer is necessary for two reasons. First is to reduce dependencies of one another, and second, to enable each organization schedule its operations independently of another.
Yet another purpose of holding inventories is to reduce material handling costs. In some manufacturing and service operations, material handling cost can be reduced by accumulating parts between operations. This is particularly true of intermittent systems since they involve less automation of material handling than do continuous systems. Parts can be accumulated and inventoried in tote boxes or baskets and transported by hand-jack dollies or fork-lift trucks much more economically than they can be carried by hand. In continuous manufacturing, automated material handling systems, rather than larger work-in-process inventories, are designed to reduce overall handling costs.
Another reason for holding inventories is to obtain a reasonable utilization of people and equipment.
Finally, inventories are held to facilitate product display and service to customers, batching in production in order to take advantage of longer production runs and provide flexibility in production scheduling.