Vilnius Gediminas Technical UniversityThe Department of Business Management
Inventory ControlFundamentals
Student: D. Fiodorovaitė Professor: J. Merkevičius
2002, VilniusContents:
Inventory as a current assets……………………………………………………………………3Types of inventory………………………………….………………………………………….3“Why inventories exist?”……………………………………………………………………….4Functions provided by inventories………………….………………………………………….4Control of inventories………………………………………………………………………….5Corporate level control…………………………………………………………………………5Detailed control…………………………………….………………………………………….6Conclusions…………………………………………………………………………………….7
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Inventory as a current assets
The way that an organization uses its funds and then controls and monitors these investments is a critical management function. However, inventory management, although important, is not usually allocated sufficient resources or given adequate attention. While the decisions to use funds for plant and equipment purchases are usually carefully judged and monitored, the effort normally put into controlling inventory is relatively low and usually comes too late. Increases in inventory invariably happen first and a company becomes concerned about controlling them later. There are several reasons for this control:1. Inventory is an inherent part of a company’s operations. Inventory increases when production exceeds sales, or purchases exceed production. Thus it is a consequence of a company’s day-to-day activities.2. Inventory all looks the same and there are normally large but acceptable quantities of it; more of the same is not easy to detect. However, new equipment, no matter how small, draws attention, questions and control.3. The control of inventory investments needs to be going-on. Plant investment on the other hand is a one-off decision and often, therefore, is not so demanding over period of time.4. Inventory control is often not seen as a part of the task of senior executives. It contains no qualities that make it attractive it brings it to attention of top management. It is a task of day-to-day detail seen by most as mundane. As a consequence it is not normally an agenda item for a management meeting. However, the result of companies allocating resources and sufficient effort to the control of inventory has been to achieve low levels of inventory with little adverse effect on the manufacturing efficiency.
5. Companies fail to distinguish between records and controls. Consequently information provided is usually in a form of a record – a statement of the past often for historical, financial purposes. However, companies mistakenly interpret this as control data, while the information obtained expresses the value of inventory in a format required for financial statements.Types of inventory
The types of inventory and amount of inventory that an organization should hold would depend upon several aspects including the products manufactured or services provided, product/service range, type of process and span of process. The principal types are:1. Raw materials, bough-out parts and components to be used in making the products.2. Partly finished WIP items awaiting the next stage in the process.3. Finished goods consisting of products ready for sale.In addition to these, others are used in the process itself or to keep the plant and equipment going. These include supplies, consumables, spare parts, tools, jigs and fixtures. Generally, organizations whose activities are centered around products or manufacturing processes have more tangible inventory systems than do service organizations. However, in those service organizations that are less labor-intensive, inventories may be much more significant. Retail shops, for instance, have substantial inventories essential for their business.
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Why inventories exist?
Why does the organization invest so heavily in inventory? What is the return? Although there are common reasons for holding inventories, there are also advantages that are particularly important and which relate to one type of inventory that another:• Raw materials and bought-out parts inventory will allow the organization to:1. Cater for the variability of supply;2. Take advantage of quantity discounts or market prices;3. Provide strategic stocks of items which could be in short supply due, for instance, to strikes or other supply problems;4. To guard against inflation;5. As a form of investment when price increases are anticipated.
• WIP inventory helps maintain the independence of stages in the process by decoupling the production steps involved. This leads to:1. Greater flexibility in production scheduling especially at times machine breakdown;2. Stabilizing the different outputs rates at each part of process;3. Improving the utilization of plant, processes and labor.• Finished goods inventory with which the organization can:1. Provide off-the-shelf customer service;2.