Unit 8: Inventory
In a manufacturing context, inventory includes raw materials, work that is in process, and finished goods. Running out of a necessary component in the middle of production can be very costly for a manufacturer. The goal of inventory management is to balance the cost of ordering and storing material with the cost of not having that material available when it is needed. Effective inventory management combines elements of accounting, sales, and operations management. Certain aspects of this unit will feel like a review of accounting, but we will be discussing accounting from the perspective of the operation manager. There are a number of strategies for managing inventory. Because direct costs can be calculated based on the length of time an inventory is in storage, accountants and operations managers try to prevent inventory from "sitting around".
An example of one of the most successful implementers of inventory management is Walmart. Walmart uses vendor-managed inventory, meaning that its merchandise does not sit in a Walmart warehouse. Instead, it stays with the manufacturer until Walmart learns from its stores that more is needed. This keeps Walmart from having to pay to store all of the products it sells. In this unit, we will consider how demand influences the operations manager's choice of inventory management system. We will also examine models for determining how much inventory to order and when to order it.
Completing this unit should take you approximately 3 hours.
Upon successful completion of this unit, you will be able to:
- explain the relationship between demand planning and inventory control;
- describe the three general classifications of inventory;
- explain the inventory management models that help plan the timing and volume of inventory orders;
- apply the EOQ Model to calculate inventory order volume; and
- calculate the reorder point to prevent a stock-out from occurring.
- explain the relationship between demand planning and inventory control;
8.1: Inventory Management, Types of Inventory, and Inventory Decisions
Read this section for a look at the role of inventory management in the marketing and manufacturing processes. Explore the connections between inventory control and demand planning. Be sure to view each video clip within the reading. Tackle the review questions at the end of the chapter to see how well you can apply many of the concepts you have learned about throughout the course.
Read this chapter on Inventory Management. Be sure to reference the useful glossary terms at the bottom of each section. The language of inventory management can sometimes be confusing. This reading helps you to better understand how to reference inventory principles and use language appropriately.
Read pages 202–204. Pay close attention to the inventory flow diagram. This diagram is important because it describes how different information from different areas are crucial to the development of a sound operations plan. Planning is a primary element of management. As an operations manager, it is crucial that information from other functional areas are incorporated into operations plan.
8.2: Inventory Control
Read this section, which will help you understand how companies keep and manage inventory. There are basic reasons for keeping inventory on hand. The important part is that these reasons are evaluated for the needs of each organization and an inventory management system is created that allows for the highest level of efficiency possible.
- Read this description of EOQ, which will help you understand the fundamental function of this equation. EOQ is important because it helps minimize the total holding and ordering costs related to inventory. Pay close attention to when this applies in the production process.
Read this summary. Pay close attention to the types of inventory control and the EOQ model. This source is useful because of the detailed information provided related to the function of inventories, reasons for inventory management, and types of inventory control that is useful.
Unit 8 Activity and Assessment
In this activity, you will continue working on your operations management plan. This final part of your operations management plan requires that you identify the critical factors involved in inventory control systems. After developing this final portion of your plan, compile all of the parts you have work on in the activities for Units 1-9 to develop one comprehensive business plan.
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.