As mentioned earlier, inventory is a necessary evil. Necessary, because it aims at absorbing the uncertainties of demand and supply by `decoupling’ the demand and supply sub-systems Thus an organization maybe carrying inventory for the following reasons:
- Demand and lead time uncertainties necessitate building of safety stock (buffer stocks) so as to enable various sub-systems to operate somewhat in a decoupled manner. It is obvious that the larger the uncertainty of demand and supply; the larger will have to be the amount of buffer stock to be carried for a prescribed service level.
- Time lag in deliveries also necessitates building of inventories. If the replenishment lead times are positive then stocks are needed for system operation.
- Cycle stocks may be maintained to get the economics of scale so that total system cost due to ordering, carrying inventory and backlogging are minimized. Technological requirements of batch processing also build up cycle stocks.
- Stocks may build up as pipeline inventory or work-in-process inventory due to 28finiteness of production and transportation rates. This includes materials actually being worked on or moving between work centers or being in transit to distribution Inventory Management centers and customers.
- When the demand is seasonal, it may become economical to build inventory during periods of low demand to ease the strain of peak period demand.
- Inventory may also be built up for other reasons such as: quantity discounts being offered by suppliers, discount sales, anticipated increase in material price, possibility of future non-availability etc.
Different functional managers of an organization may view the inventory from different viewpoints leading to conflicting objectives. This calls for an integrated systems approach to planning of inventories so that these conflicting objectives can be scrutinized to enable the system to operate at minimum total inventory related costs-both explicit such as purchase price, as well as implicit such as carrying, shortage, and transportation and inspection costs. Concepts and techniques useful in analysis these problems to arrive at sound policy decisions are the focal point of presentation in this unit.
