Whenever a business is set up, the primary concern that is to be taken into consideration is, how long the business would run, what would be the amount of profit associated with that business, and what investment is to be made in regards to that business.

To ensure that this business works in the correct manner, it is important that certain analytical decisions are taken based on details that are available. It is courtesy to these decisions that the business proceeds in a specific manner and the given resources can be correctly utilized by any firm.

Resources with a firm:

Every firm before starting off their business deals are entrusted with a certain amount of resources in their domain. Certain analytical decisions have to be taken in regards to that so that a firm gets maximum benefit, using minimal of those resources.

In case of a business unit, this is termed as inventory.

Understanding the concepts of inventories:

Inventory implies to that list of goods and property, which is associated with a particular business and it is very important to note, how this amount is being spent. Given that this is a fixed amount for any venture, unless additional amount is added to get more of these goods.

Thus, inventory can be stated as that amount of stock on hand that is used by a particular company for carrying on with its production process. It is very important that inventories of physical goods are maintained in a proper manner that is to be required by both government as well as commercial sectors. At times, even the military sector is in need of such inventories to ensure that their total amount does not lessen.

In case of any lack of such inventories, proper replenishment is to be done to help in further production process.

What is inventory control?

Since, from the very beginning it is taken that inventories are fixed for any business institution; it can be taken as a control that is exercised upon the inventories, to maximize its usage. When maximum usage is undertaken, maximum profits are to be derived without compromising on the satisfaction levels of the concerned clients.

Thus, it goes with the business principle of maximum benefit with a limited cost.

Terminology associated with inventories:

Here are some of the terms that are used specifically in regards to inventories. For any student to understand the concepts in the best manner, it is important that these terms are clarified in the best possible manner.

  • What do you mean by Demand?

In this case, the dimension of demand is associated with a quantity that has been placedon order. Demand, in this case, is categorized as per the rate, pattern and size. It so happens that demand varies from period to period, or at timeit is kept constant during a certain time period. It is dependingon information available on the category of demand that it can be segregated.

Deterministic demand: It implies that demand size is well known to the concerned people.

Probabilistic demand: In this case, the demand size is not known by the concerned party. In such a scenario, a probability distribution is to be used for finding out approximate quality.

The rate of demand is equal to the size of demand on a per unit time basis.

  • What do you mean by Lead Time?

This is the time period that is taken into consideration during placement of an order (i.e. the administrative order being taken into consideration) to the time of delivery (i.e. when the order will reach the concerned party).

There are times when this period of lead time is known by the concerned parties. This helps in preparing themselves regarding payment, or further orders. This is known as deterministic model and lack of knowledge of this result in deriving answers by making usage of random variable property.

It is length of lead time that is used for determining inventory levels.

  • What is the concept of Replenishment associated with?

Given that they come randomly or in a flow, this includes that amount of order that has to be received into the inventory. In certain cases, this can both be consistent or random over a certain period.

  • What are the Costs associated with this concept? Determine the various types of costs?

There are a number of costs associated with maintenance and usage of inventories. They are:

Initial Purchase cost which implies amount of money that is spent in regards to buying of goods. When any good is obtained from an external source, there is a specific unit price associated with it. In case of those items that are produced on an internal basis, this cost implies unit production cost that is associated with it.

Revenue cost or Selling price or Salvage cost is associated with that scenario, when a company is lost on its sale and is not able to fulfill its demands. In this case revenue cost that is associated is included in company’s inventory policies.

Setup cost is that amount which is used for setting up of the concerned unit.

Ordering cost is that amount which is to be paid by the concerned party in regards to order that has been placed by an external body.

Stock out cost or Shortage cost implies moments when internal or external aspects are taken into consideration. External shortage is a situation when a consumer’s orders are left incomplete while in case of Internal shortage, certain orders within a particular organization are not completely fulfilled. In case of loss of money or any lack of goodwill, this category of cost is considered.

Storage cost or Holding cost or Inventory cost implies investment in the inventory that is quite in proportion with level of inventory and time associated with it.

  • What are the Constraints associated with inventories?

Quite like every aspect, there are certain specific constraints associated in this case known as space and capital constraints. It is based on these concepts that certain factors are determined as to how to make correct usage of these inventories.

  • What are the Orders associated with this concept?

There are specifically certain orders that are available in regards to this. One has to be concerned while dealing the placed orders.

Economic Order Quantity as the name suggests is that amount that has to be placed in such a manner that quantity that is obtained is optimized as well as total cost associated with buying of inventories is minimized.

Order Cycle refers to that time period which is spentbetweenplacement of 2 orders.

Re-order level is that amount which is taken as a level between the minimum and maximum stock level that is available, and at that point specifically when manufacturing units and activities would begin to replenish their amount of inventory.

  • What is the Time Horizon that has to be taken into consideration?

This is specifically that time period, which can be both finite and infinite, during which this whole usage procedure is concerned.

For any student, having a clear idea of these details is of prime importance. Also, for any business venture, following these details are of prime necessity in case you wish to ensure that your business is reaching the correct dimension.

Necessity of inventories:

There are primary reasons as to why this inventory is needed by most of the business ventures.

  • For a smooth running of business and efficient business administration, it is very important that inventories are required to be in the best of condition.
  • There are a number of charges that are associated with a business institution, and it all comes down to correct usage of inventories. It to a great extent economically considers transportation and other clearing and forwarding charges.
  • With help ofthese inventories, bulk purchasing can be done and therefore it to a great extent helps in economizing the business and garnering maximum profits.
  • The best part of inventories is that; they are suitable for long term plans in any business organization.

However, with every necessity comes a set of associated problems and in case of inventories, it is no less.

Inventory issues:

Problems that are faced by a company in regards to inventories those are available with that company.

Problem 1: Which is that ideal time for placing an order and ensuring that production of that particular good runs in a correct manner?

Problem 2: What is the ideal quantity that is to be produced during a particular time period and what is the time interval which has to be kept for taking an order?

Once answers to these queries are placed, production process can be continued in an ideal manner.

Thus, both for a student who is starting out, as well as for business institutions, a detailed knowledge of these concepts is of prime importance.

 

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