WEEK 6
1
CHAPTER 13
13.1 - What is inventory?
● Inventory -> describes the accumulations of materials, customers or
information as they flow through processes or networks
(Can occasionally describe transforming resources e.g. rooms in hotels or
cars in a vehicle hire firm)
● Physical inventory (stock) -> the accumulation of physical materials
such as components, parts, finished goods, or physical (paper)
information records
● Queues -> accumulation of customers
● Databases -> stores for accumulations of digital info
-> managing these accumulations: inventory management
All processes, operations and supply networks have inventories
– Because most operations involve flow of materials, customers and/or
information, at some points they are likely to have material and
information inventories and queues of customers waiting for goods or
services
– Inventories are often the result of uneven flows (if rate of supply and
demand differ over time (more supply))
– Inventories of information can either be stored because of: uneven flow
or because the operation needs to use the info to process something in
the future
– In that case: info has turned from a transformed to a transforming
resource, because it is being used to transform other info in the
future
13.2 - Why should there be any inventory?
Benefits of inventory:
. Physical inventory is an insurance against uncertainty
○ Can act as a buffer against unexpected fluctuations in supply and
,2 ○
demand
. Physical inventory can counteract a lack of flexibility
○ Where a wide range of options is offered, unless the operation is
perfectly flexible, stock will be needed to ensure supply when it is
engaged in other activities (=cycle inventory)
. Physical inventory allows operations to take advantage of short-term
opportunities
○ If opportunities arise they need accumulating inventory even if
there’s no immediate demand
. Physical inventory can be used to anticipate future demands
○ Medium-term capacity management may use inventory to cope with
demand capacity; produced ahead and stored until it is needed
(=anticipation inventory)
○ Most commonly used when demand fluctuations are large but
predictable
. Physical inventory can reduce overall costs
○ Holding large inventories may bring savings greater than costs of
holding that inventory
○ May be when bulk-buying gets the lowest possible cost of inputs or
when large order quantities reduce both the number of orders placed
and the associated costs of administration and material handling
(basis of the “economic order quantity” EOQ)
. Physical inventory can increase in value
○ Can become an investment e.g. maximising cash inventory because it
earns interest
. Physical inventory fills the processing ‘“pipeline”
○ “Pipeline” inventory exists because transformed resources cannot be
moved instantaneously between the point of supply and the point of
demand -> the time that stock is allocated (and unavailable to any
customer) to the time it becomes available for the retail store, it is
pipeline inventory
○ Pipeline inventory can be substantial for geographically dispersed
supply networks
. Queues of customers help balance capacity and demand
○ Useful if the main service resource is expensive + when arrival times
are less predictable
○ By waiting a short time after their arrival and creating a queue of
customers, the service always has customers to process
, . Queues of customers enable prioritisation
○ When resources are fixed and customers are entering the system
with different levels of priority, the formation of queues allows the
organisation to serve urgent customers while keeping other less
urgent ones waiting
. Queueing gives customers time to choose
○ Time spent in a queue gives customers time to decide what products/
services they require
. Queues enable efficient use of resources
○ Queue forming makes customers batch together to make efficient use
of operational resources
. Databases provide efficient multi-level access
○ Databases are a relatively cheap way of storing information and
providing many people with access, but there may be restrictions or
different levels of access
. Databases of information allow single data capture
○ No need to capture data at every transaction with a customer or
supplier (checks may be required)
. Databases of information speed the process
○ e.g. Amazon, if you agree, stores address and credit card, making
purchases fast and easy for the customer
Reducing physical inventory (objective of those who manage it while
painting an acceptable level of customer service)
-> the effect of inventory on return of assets
. Inventory governs the operation’s ability to supply its customers - the
absence of inventory means the customers are not satisfied so
possibility of reduced revenue
. Inventory may become obsolete as alternatives become available, they
could be damaged, deteriorate or lost -> increases costs and reduces
revenues
. Inventory incurs storage costs (leasing space, maintaining conditions
etc) -> can be high if items are hazardous (e.g. explosives) or difficult to
store, requiring special facilities (e.g. frozen food)
. Inventory involves administrative or insurance costs -> every time a
delivery is ordered, time and costs are incurred
. Inventory ties up money, in the form of working capital, which is
unavailable for other uses, such as reducing borrowing or making
1
CHAPTER 13
13.1 - What is inventory?
● Inventory -> describes the accumulations of materials, customers or
information as they flow through processes or networks
(Can occasionally describe transforming resources e.g. rooms in hotels or
cars in a vehicle hire firm)
● Physical inventory (stock) -> the accumulation of physical materials
such as components, parts, finished goods, or physical (paper)
information records
● Queues -> accumulation of customers
● Databases -> stores for accumulations of digital info
-> managing these accumulations: inventory management
All processes, operations and supply networks have inventories
– Because most operations involve flow of materials, customers and/or
information, at some points they are likely to have material and
information inventories and queues of customers waiting for goods or
services
– Inventories are often the result of uneven flows (if rate of supply and
demand differ over time (more supply))
– Inventories of information can either be stored because of: uneven flow
or because the operation needs to use the info to process something in
the future
– In that case: info has turned from a transformed to a transforming
resource, because it is being used to transform other info in the
future
13.2 - Why should there be any inventory?
Benefits of inventory:
. Physical inventory is an insurance against uncertainty
○ Can act as a buffer against unexpected fluctuations in supply and
,2 ○
demand
. Physical inventory can counteract a lack of flexibility
○ Where a wide range of options is offered, unless the operation is
perfectly flexible, stock will be needed to ensure supply when it is
engaged in other activities (=cycle inventory)
. Physical inventory allows operations to take advantage of short-term
opportunities
○ If opportunities arise they need accumulating inventory even if
there’s no immediate demand
. Physical inventory can be used to anticipate future demands
○ Medium-term capacity management may use inventory to cope with
demand capacity; produced ahead and stored until it is needed
(=anticipation inventory)
○ Most commonly used when demand fluctuations are large but
predictable
. Physical inventory can reduce overall costs
○ Holding large inventories may bring savings greater than costs of
holding that inventory
○ May be when bulk-buying gets the lowest possible cost of inputs or
when large order quantities reduce both the number of orders placed
and the associated costs of administration and material handling
(basis of the “economic order quantity” EOQ)
. Physical inventory can increase in value
○ Can become an investment e.g. maximising cash inventory because it
earns interest
. Physical inventory fills the processing ‘“pipeline”
○ “Pipeline” inventory exists because transformed resources cannot be
moved instantaneously between the point of supply and the point of
demand -> the time that stock is allocated (and unavailable to any
customer) to the time it becomes available for the retail store, it is
pipeline inventory
○ Pipeline inventory can be substantial for geographically dispersed
supply networks
. Queues of customers help balance capacity and demand
○ Useful if the main service resource is expensive + when arrival times
are less predictable
○ By waiting a short time after their arrival and creating a queue of
customers, the service always has customers to process
, . Queues of customers enable prioritisation
○ When resources are fixed and customers are entering the system
with different levels of priority, the formation of queues allows the
organisation to serve urgent customers while keeping other less
urgent ones waiting
. Queueing gives customers time to choose
○ Time spent in a queue gives customers time to decide what products/
services they require
. Queues enable efficient use of resources
○ Queue forming makes customers batch together to make efficient use
of operational resources
. Databases provide efficient multi-level access
○ Databases are a relatively cheap way of storing information and
providing many people with access, but there may be restrictions or
different levels of access
. Databases of information allow single data capture
○ No need to capture data at every transaction with a customer or
supplier (checks may be required)
. Databases of information speed the process
○ e.g. Amazon, if you agree, stores address and credit card, making
purchases fast and easy for the customer
Reducing physical inventory (objective of those who manage it while
painting an acceptable level of customer service)
-> the effect of inventory on return of assets
. Inventory governs the operation’s ability to supply its customers - the
absence of inventory means the customers are not satisfied so
possibility of reduced revenue
. Inventory may become obsolete as alternatives become available, they
could be damaged, deteriorate or lost -> increases costs and reduces
revenues
. Inventory incurs storage costs (leasing space, maintaining conditions
etc) -> can be high if items are hazardous (e.g. explosives) or difficult to
store, requiring special facilities (e.g. frozen food)
. Inventory involves administrative or insurance costs -> every time a
delivery is ordered, time and costs are incurred
. Inventory ties up money, in the form of working capital, which is
unavailable for other uses, such as reducing borrowing or making
