Module 4_Session 3_operations management

1. Inventory Management &
Quality Methodologies
Module 4

2. Inventory Control Strategies
The Pull Strategy:
• In a pull strategy, businesses purchase or manufacture products based on
customers’ orders and deliver products within the delivery time. Here, the aim is
to ensure product supply for customer demand.
• By using a pull strategy in inventory management, businesses can reduce the risk
of overproduction, minimize inventory holding costs, and increase customer
satisfaction by ensuring that products are available when customers need them.
• This approach requires a high level of coordination between all parties in the
supply chain, including suppliers, manufacturers, and distributors, to ensure that
inventory is produced and delivered in a timely and efficient manner.

3. Inventory Control Strategies
The Push Strategy
A push strategy ensures inventory is based on predictive demand forecasting. Forecast expected
demands according to demand forecasting rules, including historical data analysis, seasonality,
trends, and factors that can affect future direction.
Under a push strategy, businesses try to maximize their production efficiency and economies of
scale by producing large quantities of inventory and pushing it out to the market. This approach
assumes that there will be demand for the products and that customers will buy them.
Push strategy can be useful for businesses that deal with fast-moving consumer goods, such as food
and beverages, and seasonal products, where demand is predictable. However, it can also lead to
overproduction and a surplus of unsold inventory, which can result in wastage and financial losses.

4. Pull Vs Push Strategy
Aspect Pull Strategy Push Strategy
Inventory Management
Inventory is ordered as per
customer demand
Inventory is ordered in anticipation
of customer demand
Production
Production is based on customer
orders
Production is based on sales
forecasts and inventory levels
Flexibility
Allows for quick changes in
production and inventory based on
changing customer demand
Less flexible as inventory is already
ordered and produced in
anticipation of demand
Costs
Lower inventory holding costs as
inventory is only ordered as per
demand
Higher inventory holding costs as
inventory is ordered in anticipation
of demand
Customer Service
Improved customer service as
inventory is available as per
customer demand
May face stockouts or overstocking
situations, which can affect
customer service

6. Inventory Control Techniques
ABC Analysis
• ABC analysis in inventory control classifies stocks based on their
importance, price, and sales volume. These criteria determine the number
of items a company will bring to the market.
• Just as its name suggests, it consists of the following categories:
• A class – expensive, high-class items with tight controls and small
inventories
• B class – average-priced, mid-priority items with medium sales volume
and stocks
• C class – low-value, low-cost items with high sales and huge inventories
• Applying the ABC analysis of inventory control allows businesses to
minimize the costs of carrying products while maximizing their stock
returns.

7. Advantages of Implementing the ABC Method of Inventory
Control
• This method helps businesses to maintain control over the
costly items which have large amounts of capital invested in
them.
• It provides a method to the madness of keeping track of all the
inventory. Not only does it reduce unnecessary staff expenses
but more importantly it ensures optimum levels of stock is
maintained at all times.
• The ABC method makes sure that the stock turnover ratio is
maintained at a comparatively higher level through a systematic
control of inventories.
• The storage expenses are cut down considerably with this tool.
• There is provision to have enough C category stocks to be

8. Disadvantages of using the ABC Analysis
• For this method to work and render successful results, there
must be proper standardization in place for materials in the
store.
• It requires a good system of coding of materials already in
operation for this analysis to work.
• Since this analysis takes into consideration the monetary value
of the items, it ignores other factors that may be more important
for the business. Hence, this distinction is vital.

9. Example of ABC Analysis
• Susan, who is engaged in the retail sale of handbags. Last year she decided to expand her
product offering by including more varieties of handbags in her inventory. Consequently,
she purchased 30 different types of handbags instead of just 10. However, later she
realized the demand for the products is seasonal, and she had invested a lot. Hence, she
decided to implement the ABC analysis in her business model to streamline the inventory.
• So, Susan classified the inventory into category A, B, and C, primarily based on their
selling price and demand as mentioned below:
• Category A: The handbags that are either highly in demand, generate the
maximum revenue, or are trending in the current season were classified under this
category of items.
• Category B: The handbags that are essential to the company, but not as much as those in
category A. The demand for these handbags is probably slightly seasonal and not across
the entire year. So, during the season, the sales of these items are expected to shoot up.
Hence, this set of handbags can’t be neglected, hence category B.
• Category C: In this category, all those handbags that are not of high value to the company
are included. The possible reasons may be a color combination, pattern, etc. Hence, these

10. Inventory Control Techniques
LIFO and FIFO
Both inventory control techniques organize how inventory
items move in and out of the warehouse based on their arrival
date. Priority will depend on the type of products available
in the storage facility.
Using the LIFO method, the warehouse puts out the most recent
batch of items to the customers first. Doing so prevents
products from going bad when delivered to the market.
But with the FIFO technique, the warehouse prioritizes older
stocks for processing and shipping. This way, they can keep
the products fresh when the customer receives them.

11. What is LIFO?
• LIFO, or last-in, first-out, is a method for managing inventory and calculating the
cost of goods sold (COGS). In this approach, businesses assume the most recent
inventory sells first. This means that older stock continues to sit for long periods
before the company sells it. As long as the product doesn't become obsolete, this
method works for a variety of goods.
• The LIFO method often requires complex calculations at the end of a fiscal cycle.
When a business sells new stock immediately, it's worth more than inventory that
the business hasn't sold yet. With LIFO, inventory costs are higher, reflecting a
lower profit. Items typically inventoried as LIFO are:
• Companies that use the last in, first out method gain a tax advantage because the
method assumes the most recently acquired inventory is what is sold. As inflation
continues to rise, LIFO produces a higher cost of goods sold and a lower balance
of leftover inventory. The higher cost of goods sold results in a smaller tax liability
because of the lower net income due to LIFO.

12. What is FIFO?
• FIFO, or first-in, first-out, is another way of valuing inventory and calculating
profits from goods. FIFO uses the principle that when a company acquires certain
items first, it also sells those items first. The FIFO process is a straightforward way
to track the flow of inventory, sales profits and the cost of producing and storing
goods.
• Businesses use FIFO to simplify accounting on a balance sheet. Under FIFO, a
company can value the COGS closer to the current market price. Inventory costs
are lower so that companies can assume higher profits. These are some of the
products typically processed in a FIFO inventory:
• Dry grocery goods
• Dairy
• Health care products
• Alcohol
• Technology that may become obsolete
• Horticulture

13. Examples
• In January, Brian's Plant Shop purchases 50 rose bushes for Rs. 15 each and
100 small palm trees for Rs. 25 each. In March, the shop purchases 125
more rose bushes for Rs. 20 per bush and 25 more palm trees for Rs. 30
per tree. It sells 50 roses and 25 palms during the first quarter of the year,
totaling 75 plants.
• If Brian's Plant Shop uses LIFO, it calculates its COGS based on the price of
the plants purchased in March. Its valuations don't include the plants
purchased in January since it hasn't sold the older goods yet. The shop
performs the following calculations:
• COGS = (50 roses x Rs. 20) + (25 palm trees x Rs. 30) = Rs.1,000 + Rs.
= Rs.1,750
• In the LIFO outcome, the cost of inventory is higher, resulting in lower profits but
less taxable income.

14. Examples
• If Brian's Plant Shop uses FIFO, it calculates its COGS based on the price of
the plants purchased in January instead. Its valuations don't include the
plants purchased in March since it hasn't sold those goods. Here are the
shop's calculations:
• COGS = (50 roses x Rs.15) + (25 palm trees x Rs.25) = Rs. 750 + Rs.
Rs. 1,375
• In the FIFO outcome, the cost of inventory is lower, resulting in higher
profits but more taxable income.

15. Inventory Control Techniques
Batch Tracking
Batch tracking is also a great way of organizing stock items
in a warehouse facility. In this method, goods of the same
production date and materials are grouped together. Doing
this helps warehouse managers keep track of the following
information:
1. Where the items come from
2. Where the goods are heading
3. When the items might expire

16. Inventory Control Techniques
Just-in-Time [JIT]
Just-in-time also known as JIT is an inventory management
method whereby labour, material and goods (to be used in
manufacturing) are re-filled or scheduled to arrive exactly
when needed in the manufacturing process.
JIT approach has the capacity, when adequately applied to the
organisation, to improve the competitiveness of the
organisation in the market significantly by minimizing wastes
and improving production efficiency and product quality.

17. Inventory Control Techniques
Safety Stock
Safety stock involves having an additional set of goods on hand as a preventive
measure for the market’s volatility. The amount should be over the average
demand or use of the product.
It acts as a safety net, should customer demand go above the projected amount. It
also covers them for any uncertainty in supply performance, such as shipping
delays.
Safety stock is typically used when the actual demand exceeds a sales forecast, or
if production output is less than planned. In manufacturing, it is important to have
raw materials and work-in-progress components on hand to reduce lost labour
time. In retail, safety stock is primarily held to avoid the risk of stock-outs and the
potential for lost sales and customer dissatisfaction.