A large portion of the operations manager’s job consists of inventory management. Inventory is the goods the organization keeps on hand for use in the production process. Most organization have three types of inventory: finished goods prior to shipment, work in process and raw materials.
Finished goods inventory includes items that have passed through the entire production process but have not been yield sold. This is highly visible inventory. The new cars parked in the storage lot of an automobile factory are finished goods inventory as are the Motors, Contactors, Cables, Yarn spindles with full yarn etc. Finished goods inventory is expensive because the organization has invested labour and others costs to make the finished product.
Work in process inventory includes the materials moving through the stages of the production process that are not completed products. Work in process inventory in an automobile plant includes engines, wheel and tire assemblies and dashboards waiting to be installed. In a fast food restaurant the French fries in the fryer and hamburgers on the grill are work in process inventory.
Raw materials inventory includes the basic inputs to the organization’s production process. This inventory is cheapest because the organization has not yet invested labour in it. Steel, wire, glass, and paint are raw materials inventory for an auto plant. Meat patties, buns, and raw potatoes are the raw materials inventory in a fast food restaurant.
Inventory management is important to organizations, because inventory sitting idly on the shop floor or in the warehouse costs money. Many years ago, a firm’s wealth was measured by its inventory. Today, inventory is recognized as an unproductive asset in cost conscious firms. Money not tied up in inventory can be used in other productive ventures. Keeping inventory low is especially important for high tech firms, because so many of their products lose value quickly, as they are replaced by more innovative and lower cost models. For example, the value of a completed personal computer falls rapidly even if shelf space for PCs were free, a company would lose money on its PC inventory.
Managers at retail giants such as Wal-Mart, Toys ‘R’ Us, The Home Depot, and Best Buy understand that efficient inventory management is essential to their ability to keep prices low and attract more customers. State of the art, integrated e-business systems, allow tight inventory control an enable the retailers to eliminate excess inventory. Their suppliers have refined their delivery systems so that the stores receive only the products needed to meet customer purchases.
Many companies recognize the critical role of inventory management in organizational success. The example of rocks and water describes the current thinking about the importance of inventory. Water is the inventory in the organization. The higher the water, the less managers have to worry about the rocks, which represent problems. In operations management, these problems apply to scheduling, facilities layout, product or service design, and quality. When the water level goes down, managers, see the rocks and must deal with them. When inventories are reduced the problems of a poorly designed and managed operations process also are revealed. The problem then must be solved. When inventory can be kept at an absolute minimum operations management is considered excellent.
Over the past few years, the scenario has become even more complex. The opening up of global borders and the easing of trade barriers has encouraged retailers to source from competitive markets. While this is advantageous to the retailer, inability to control the costs involved in transportation warehousing and the shipping of material to the end consumer will affect the profitability of the business.
It can be seen the rise of a large number of operational and quality management and control initiatives like JIT (Just in Time), TQM (Total quality Management), ZI(Zero inventory), ECR (Efficient Consumer Response) and VMI (Vendor managed Inventory). All these have now seen integrated within the domain of the Supply chain management process.
The above is talking of controlling inventory under normal circumstances. But the Supply Chain Manager has to consider other things as well in procurement. Seasonal, Imported, Long lead time for manufacturing, Bulk supply on contract and discount basis, Limited sources and transit time.
Seasonal is to bargain best prices which will offset higher inventory. Limited sources specify accuracy required. Bulk supply also has limited sources but there is a contract between the buyer and seller. The discounts in the long term benefits the buyer on price and also ensure quality from supplier.