Inventory in operations


Historical perspective

The management and control of inventory is a problem common to all organizations in any sector of the economy. The problems of inventory do not confine themselves to profit making business firms. The same types of problems are encountered by social and non-profit organizations too. Inventories are common to besides industries—agriculture, wholesalers, retailers, hospitals, temples, churches, prisons, zoos, universities and national, state and local governments.

Inventory problems have been encountered by every society, but it was not until the 20th century that analytical techniques were developed to study them. The initial impetus for analysis expectedly came from the manufacturing sector. It was not until after World War II that a concerted effort on risk and uncertainty aspects of inventory was made. In theory, inventory is an area of organizational operation that is well developed. In practice, it is very backward. This gap will narrow as educational institutions integrate materials management into their course structures.

Meaning and Definition

The term inventory has been defined by several authors. The more popular of them are: ‘the term inventory includes materials—raw, in process, finished packaging, spares and others stoked in order to meet an unexpected demand or distribution in the future.

Another definition of inventory is that it ‘can be used to refer to the stock on hand at a particular time of raw materials, goods-in-process of manufacture, finished products, merchandise purchased for resale, and the like, tangible assets which can be seen , measured and counted… In connection with financial statement and accounting records, the reference may be to the amount assigned to the stock of goods owned by an enterprise at a particular time’ .

Yet another definition is that the term inventory includes the following categories of items:

1. Production Inventories: Raw materials, parts and components which enter the firm’s product in the production process. These may consist of two general types: (a) special items manufactured to company specifications, and (b) standard industrial items purchased ‘off the shelf’.

2. MRO Inventories: Maintenance, repair, and operating supplies which are consumed in the production process, but, which do not become part of the product. (e.g. lubricating oil, soap, machine repair parts).

3. In-process Inventories: Semi-finished products found at various stages in the production operation.

4. Finished Goods Inventories: Completed products ready for shipment.

Merchandise meant for resale is not included in the above classification of inventories. The exclusion of merchandise is justified on the ground that a manufacturing establishment does not buy anything for resale in the same condition. It buys raw materials and other items for their conversion into finished products. A trading concern, however, buys finished goods for resale. The present study is concerned with industrial establishments and not with trading concerns.