A physical resource that a firm holds in stock with the intent of selling it
or transforming it into a more valuable state.
A set of policies and controls that monitors levels of inventory and
determines what levels should be maintained, when stock should be
replenished, and how large orders should be
Functions of Inventory
1. To separate various parts of the production process
2. To decouple the firm from fluctuations in demand and
provide a stock of goods that will provide a selection for
3. To take advantage of quantity discounts
4. To hedge against inflation
Types of Inventory
Purchased but not processed
Undergone some change but not completed
A function of cycle time for a product
Necessary to keep machinery and processes productive
Completed product awaiting shipment
The Material Flow Cycle
Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
How inventory items can be classified?
How accurate inventory records can be maintained?
• Improve customer service
• Transportation savings
• Hedge against future
• Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.)
• To maintain independence of supply chain
Why hold inventory?
Cycle stock Safety stock
1. Cycle Stock :
Because of the economies of scale involved in production and transportation
it makes sense to produce and transport goods in batches. The is called as cycle stock.
2. Safety stock :
It is a safeguard against the uncertainties of demand and supply.
3.Pipe line stock:
Since production and transportation activities take certain finite time, firms
need to carry pipeline or in transit stock. Pipeline stock consist of good usually being
worked upon (WIP) or being moved from one location to another in the chain ( In transit
4. Decoupling Stock:
Since it is not possible to carry out supply chain operation with just one
decision maker, the entire supply chain is usually divided into various decision making
unit, the demarcation of decision making unit take place at both organizational and
departmental boundaries, so it is not uncommon for organizational to hold large
inventories at organizational as well as departmental level. This becomes decoupling
inventories. So that flexibility at each level can be made
5. Dead Stock:
It refers to that part of the stock , that remain dormant or non moved over a
long period of time .
6. Anticipation Stock :
It consist of stock accumulated in advance of expected peak in sales or to take
care of some special event that does not occur on regular basis.
It is of two types
1. Seasonal Stock
2. Speculation Stock