Operations & Supply Chain Management Notes | Inventory Planning and Control | MBA Study Material

4.1 Inventory Planning and Control: Continuous and Intermittent demand System, concept of inventory, need for inventory, types of inventory - seasonal, decoupling, cyclic, pipeline, safety. Implications for Inventory Control Methods.

Concept of Inventory

Inventory generally refers to the materials in stock.

• Inventory constitutes Supplies, Raw Materials, in Process goods, components, finished goods including the man power.

• Inventories are processed to add values further in to it.

• Inventory denotes the idle resources which can be put to  some future use.

• Every unit of inventory is called as  Stock  Keeping Unit  (SKU)

Inventory ties up capital, and capital is required for

handling, storage space, deterioration, sometimes

obsolete, requires insurance (loss/expiry), incurs taxes,

can be stolen or gets lost.

• The primary function of inventory is buffering and

decoupling (intermediate stocks).

Dominance of Materials cost in total cost of 

Manufacturing (50-60%)

• Inventory cost is nothing but the cost of current assets

• Higher the inventory is higher the total cost to company

• Higher the inventory is, lower the ROI will be to company

• Lower level of inventory causes shortages, costs to the 

company due to loss of demand vs. supply

Inventory is nothing but MONEY

Need of Inventory

Every organization has;

- Book entry of Inventory details

- Actual inventory in Hand details

• Organizations must reconcile this both entries often, or 

else miss calculation of inventory may affect greatly

Avoid loss of sales

• Gaining quantity discounts

• Reducing order costs

• Reducing risk of production shortages

• Gaining from seasonal reduction in price

Continuous & Intermittent Demand System

Continuous Demand : Demand for the product which is 

quite consistent over the period and does not demand

too much customization.

For Ex: Sugar, Edible Oil, Petrol etc.

• Intermittent Demand : Demand which is not consistent 

over a period is called intermittent demand.

For Ex: Food Items in Restaurant, Grocery items, Racing 

Bicycles etc.

Types of Inventory 

Transit / Pipeline Inventory:

- Sometimes called transportation stock.

- Pipeline inventories represent materials that are in

transit, such as from a plant to a distribution center or a

customer.

- Pipeline stocks are most prevalent with distribution

inventories of finished goods.

Safety Stocks Inventory:

- Safety stock, also referred to as buffer stock.

- It is used to protect against the possibility of stock-outs

when demand or supplies are subject to uncertainty

or fluctuation.

- It constitutes extra inventory held just in case anticipated

demands exceed those that were forecast or in case a

replenishment order is tardy or in a quantity less than

requested.

Cycle / Lot Size Inventory:

- Cycle stock gets its name from the cyclic reordering

practice associated with most goods.

- It is sometimes referred to as lot-size stock and results

from ordering on quantities that are in excess of current

needs.

This stock gets depleted gradually upon serving

customer orders and replenished cyclically when

supplier orders are received

- Cycle stock is used to take advantage of quantity

discounts, reduce shipping, clerical and setup costs and

where supply rate is lower than the demand rate.

Seasonal / Anticipation Inventory:

• The term anticipation stock is usually applied to

inventory buildups that are produced and accumulated

based on some strategy as preparing for peak season,

planned sales promotional campaign.

• Seasonal product buildup is one of the best examples of

anticipation stock.

• Decouple (Supply and Demand):

- The term, decoupling stock, is sometimes used instead of

safety stock to represent a separation, or buffer, of

product demand from product supply.

- Most often, however, it is used to denote work-in-

process inventories that act as buffers between

successive work operations in a factory, especially in job-

shop production.

- The objective is to prevent idle time in the factory.