INVENTORY

Inventory management is the management of stock in all of its various forms and is
more often associated with manufacturing organisations. Occasionally the term is also
used to describe transforming resources, such as rooms in hotels or automobiles in a
vehicle hire firm, but here we use the term for the accumulation of resources that flow
through processes, operations or supply network

Inventory, or stock, is the stored accumulation of the transformed resources in an

operation. Sometimes the words ‘stock’ and ‘inventory’ are also used to describe
transforming resources, but the terms stock control and inventory control are nearly
always used in connection with transformed resources.

● Almost all operations keep some kind of inventory, most usually of materials but
also of information and customers (customer inventories are normally called queues).

Inventory occurs in operations because the timing of supply and the timing of demand
do not always match. Inventories are needed, therefore, to smooth the differences
between supply and demand

WHY IS INVENTORY NECESSARY?

No matter what is being stored as inventory or where it is positioned in the operation,
it will be there because there is a difference in the timing or rate of supply and
demand. If the supply of any item occurred exactly when it was demanded, the item
would never be stored.
A common example is the water tank shown below. If, over time, threat of supply of
water to the tank differs from the rate at which it is demanded, a tank of water will be
needed if supply is to be maintained. When the rate of supply exceeds the rate of
demand, inventory increases; when the rate of demand exceeds the rate of supply,
inventory decreases. So, if an operation can match supply and demand rates, it will
also succeed in reducing its inventory levels.
Inventories provide many advantages for both operations and their customers. If a
customer has to go to a competitor because a part is out of stock or because they have
had to wait too long or because the company insists on collecting all their personal
details each time they call, the value of inventories seems undisputable. The task of
operations management is to allow inventory to accumulate only when its benefits
outweigh its disadvantages. The following are some of the benefits of inventory.

Buffer inventory (safety inventory) :

Inventory can act as a buffer against unexpected fluctuations in supply and demand.
For example, a retail operation can never forecast demand perfectly over the lead-
time. It will order goods from its suppliers such that there is always a minimum level
of inventory to cover against the possibility that demand will be greater than expected
during the time taken to deliver the goods. This is buffer, or safety, inventory.

Cycle Inventory:
Where a wide range of customer options is offered, unless the operation is perfectly
flexible, stock will be needed to ensure supply when it is engaged on other activities.
This is sometimes called cycle inventory. baker who makes three types of bread.
Because of the nature of the mixing and baking process, only one kind of bread can be
produced at any time. For example, the baker will have to produce each type of bread
in batches large enough to satisfy the demand for each kind of bread between the
times when each batch is ready for sale. So, even when demand is steady and
predictable, there will always be some inventory to compensate for the intermittent
supply of each type of bread. Physical inventory allows operations to take advantage
of short-term
Decoupling inventory:
To allow different stages to operate at different speeds and different schedule
In manufacturing concern, plant and machinery should always keep running.
• The reason for halt is not always the demand of the product. It may be because of the
availabilityof input.
• In a production line, one machine/process uses the output of other machines/process.
• The speed of different machines may not always integrate with each other.
• For that reason, the stock of input for all the machines should be enough to keep the
factory
running. Such WIP inventory is called decoupling inventory (Borad).

Anticipation Inventory:
Medium-term capacity management may use inventory to cope with demand. Rather
than trying to make a product (eg: chocolate) only when it is needed, it is produced
throughout the year ahead of demand and put into inventory until it is needed. This
type of inventory is called anticipation inventory and is most commonly used when
demand fluctuations are large but relatively predictable.

Pipeline Inventory: To Cope with Transportation Delays in Supply Network,

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. For example, a large European manufacturer of specialized steel regularly
moves cargoes of part
finished materials between its two mills in the UK and Scandinavia using a dedicated
vessel thatshuttles between the two countries every week. All the thousands of tons of
material in transit are pipeline inventory (Slack).
DISADVANTAGES
●Inventory governs the operation’s ability to supply its customers. The absence of
inventory means that customers are not satisfied with the possibility of reduced
revenue.

● Obsolete: Inventory may become obsolete as alternatives become available, or

could be damaged, deteriorate, or simply get lost. This increases costs (because
resources have been wasted) and reduces revenue (because the obsolete, damaged or
lost items cannot be sold).

● Valuable space: Inventory incurs storage costs (leasing space, maintaining

appropriate conditions, etc.). This could be high if items are hazardous to store (for
example, flammable solvents, explosives, chemicals) or difficult to store requiring
special facilities (for example, frozen food).

● Inventory involves administrative and 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 therefore
unavailable for other uses, such as reducing borrowings or making investment in
productive fixed assets (we shall expand on the idea of working capital later)’

● Inventory contracts with suppliers can dictate the timing of when suppliers need to
be paid. If they require paying before the operation receives payment from its
customers (as is normal), the difference between the amount the operation owes
suppliers and the amount suppliers owe the operation adds to working capital
requirements
Model Question:
Process type implies differences in the set of tasks performed by the process and the
way materials or information or customers flow through the process. Describe the main
process types to be found in manufacturing (50%) and service (50%) organizations.
Give examples of each process type.

Model Answer:
 Process types in manufacturing and service organizations are classified based
on variation in volume and variety. The flow of materials or information or
customers varies depending upon these classifications.
 The five generic process types in manufacturing are project, jobbing, batch,
mass (line) and continuous (10% marks for correctly naming all the process
types in manufacturing).
 A summary of the characteristics of each type should be given along with
specific examples (30% marks for explaining all process types with one
example each).
 The explanation added with a diagram representing different types based on
variation in volume and variety will be the good answer (10% marks for
providing diagram with proper labelling).

OPERATIONS PROCESSES HAVE DIFFERENT CHARACTERISTICS

Although all operations processes are similar in that they all transform inputs, they do
differ in a number of ways, four of which, known as the four Vs, are particularly
important:
1. The volume of their output;
2. The variety of their output;
3. The variation in the demand for their output;
4. The degree of visibility which customers have of the creation of their output.
1)The volume dimension
High-volume hamburger production is McDonald’s, which serves millions of burgers
around the world every day. Volume has important implications for the way
McDonald’s operations are organized. The first thing you notice is the repeatability of
the tasks people are doing and the systemization of the work where standard
procedures are set down specifying how each part of the job should be carried
out. Also, because tasks are systematized and repeated, it is worthwhile developing
specialized fryers and ovens. All this gives low unit costs
Now consider a small local cafeteria serving a few ‘short order’ dishes. The range of
items on the menu may be similar to the larger operation, but the volume will be far
lower, so the repetition will also be far lower and the number of staff will be lower
(possibly only one person) and therefore individual staff are likely to perform a wider
range of tasks. This may be more rewarding for the staff, but less open to
systemization. Also, it is less feasible to invest in no specialized equipment. So the
cost per burger served is likely to be higher (even if the price is comparable)

2)The variety dimension

Example: A taxi company offers a relatively high-variety service. It is prepared to
pick you up from almost anywhere and drop you off almost anywhere. To offer this
variety it must be relatively flexible. However, the cost per kilometre travelled will be
higher for a taxi than for a less customized form of transport such as a bus service.
Although both provide the same basic service (transportation), the taxi service has a
higher variety of routes and times to offer its customers, while the bus service has a
few well-defined routes, with a set schedule. If all goes to schedule, little, if any,
flexibility is required from the bus operation. All is standardized and regular which
results in relatively low costs compared with using a taxi for the same journey.

3)The variation dimension

It refers to how much level of demand changes over a time period due to external
factors. Example: Consider two home building contractors. One offers prefabricated
homes that you choose from a catalogue or online. It is transferred to site and erected
over the course of a few days. The second building company offers customised
homes they have display homes they have built that you can walk through. Each
aspect of the home from the façade to the number of bedrooms to the floor materials
to the type of heating can all be customised to the customer. The design and build
phase can take anywhere between 24 weeks to 52 weeks. Company two will have a
much higher level of cost and lower volume than company one who offers standard
pricing and can control costs much more easily.

4)The visibility dimension

 Visibility is a slightly more difficult dimension of operations to visualize. It
means the operation is exposed to its customers.
 Perceptions of customers will also be important, not objective criteria.
o If they perceive that a member of the operation’s staff is disrespectful to them,
they are likely to be dissatisfied (even if the staff member meant no disrespect),
so high-visibility operations require staff with good customer contact skills.
Customers asking for different shoe sizes at the store- high received variety.

o Conversely, a web-based retailer, while not a pure low-contact operation, has far
lower visibility. The time lag between the order being placed and the items ordered
by the customer being retrieved and dispatched does not have to be minutes as in
the shop, but can be hours or even days.

o This allows the tasks of finding, packaging and dispatching items to be

standardized by staff who need few skills in customer contacts. Also, there can
be relatively high staff utilization.
Implications of the 4vs
Profiles of two operations: hotel industry- Formule1 and Mwagusi Safari Lodge
Formule 1-
 uses technology when staff is not available- low visibility
  No restaurants in the hotel as they are located near restaurants outside- low
variety
 But have a continental breakfast and they are on self-service.
 The hotel is made from state-of-art volumetric prefabrications- high volume
Mwagusi Safari Lodge-
 Small exclusive tents as accomodation each furnished in style of the camp.-
low volume- only 10 tents available.
 Variation in demand- high because guests vary thoughout the year, ocupancy
low in rainy season and full in best game viewing period.
 Game viewing can be experienced
 Two staff for each customer, allowing each customer needs met quickly
 Walking safaris available customised for every visitors requirements and
abilities.
 Lunch provided
 Dinner also provided under stars- these all means- high variety service

The implications of high and low Volume in operations and processes

High volume, low variety, low variation and low customer contact all help to keep
processing costs down. Conversely, low volume, high variety, high variation and high
customer contact generally carry some kind of cost penalty for the operation. This is
why the volume dimension is drawn with its ‘low’ end at the left, unlike the other
dimensions, to keep all the ‘low cost’ implications on the right.
What are different process types found in a manufacturing and service operations?
Illustrate your answer with examples (80%) OR Process type implies differences in
the set of tasks performed by the process and the way materials or information, or
customers flow through the process. Describe the main process types to be found in
manufacturing (50%) and service (50%) organizations. Give examples of each
process type.
Process types in manufacturing and service organizations are classified based on
variation in volume and variety. The flow of materials or information or customers
varies depending upon these classifications.

Process types (slack et al.,2011, 2013)

 The position of a process on the volume–variety continuum shapes its overall

design and the general approach to managing its activities

 ‘general approaches’ to designing and managing processes are called process

types.

 Different terms are used to identify process types depending on whether they
are predominantly manufacturing or service processes, and there is some
variation in the terms used. For example, it is common to find the
‘manufacturing’ terms used in service industries.

Processes in Manufacturing

The five generic process types in manufacturing are project, jobbing, batch, mass
(line) and continuous.

 Project processes

Project processes deal with usually highly customized products often with a relatively
long timescale to complete each item , Project processes have low volume and high
variety. The activities involved in the process can be uncertain. Transforming
resources may have to be organized especially for each item (because each item is
different). Many different skills have to be coordinated. The process may be complex
because the activities in such processes often involve significant decisions to act
according to professional judgement. Examples of project processes include movie
production, most construction companies, like road and building construction.

 Jobbing processes

Jobbing processes also deal with high variety and low volumes. However, while in
project processes each item has resources devoted more or less exclusively to it, in
jobbing processes each product has to share the operation’s resources with many
others. Examples of jobbing processes many precision engineers such as specialist
toolmakers, furniture restorers, and the printer who produces tickets for the local
social event

 Batch processes: Batch processes may look like jobbing processes, but do not
have the same degree of variety. - Higher volumes and lower variety than for
jobbing. As the name implies, each time batch processes produce more than
one item at a time. So each part of the process has periods when it is repeating
itself, at least while the ‘batch’ is being processed. - Examples of batch
processes include machine tool manufacturing, the production of some special
gourmet frozen foods.

 Mass processes: Mass processes are those which produce items in high volume
and relatively narrow variety (narrow in terms of its fundamentals – an
automobile assembly process might produce thou-sands of variants, yet
essentially the variants do not affect the basic process of production). The
activities of mass processes are usually repetitive and largely predictable.-
Standard, repeat products (‘runners’). Examples of mass processes include
automatic packing lines, automobile plants, television factories, and DVD
production.
 Continuous processes : Continuous processes have even higher volume and
usually lower variety than mass processes. - Extremely high volumes and low
variety: often single product. They also usually operate for longer periods of
time. They often have relatively inflexible, capital-intensive technologies with
 highly predictable flow -Highly capital-intensive and automatedand, although
products may be stored during the process, their predominant characteristic is
of smooth flow from one part of the process to another.- Few changeovers
required, Difficult and expensive to start and stop the process. Examples of
continuous processes include water processing, steel making and some paper
making.

Processes in service industry

process types found in service organizations include: professional services, service

shops and mass services.
 Professional services

 • Professional services are high-contact processes in which customers spend a

significant amount of time in the service process.
 They can provide high levels of
customization (the process being highly
adaptable in order to meet individual
customer needs).

 Professional services tend to be people-

based rather than equipment-based,
focuses on how the service is delivered
to the customers (process focused
 Examples of Professional services include management Lawyers,
management consultants, architects, auditors, doctors’ surgeries.

 Service shops

 Service shops have levels of volume and variety (and customer contact,
customization and staff discretion)
 Customer contact

 Customisation

 Staff discretion
  Service shops examples

 Banks

 Most restaurants

 hotels

 Example explained- the health club has front-office staff who can give
advice on exercise programs and other treatments. To maintain a
dependable service the staff need to follow defined processes every day.

 Mass services

 Mass services have many customer transactions, High levels of volumes

of customers

 involving limited contact time- low degree of interaction , Low, or

mixed, levels of staff discretion

 little customization. - low/ mixed degree of customisation

 Staff are likely to have a relatively defined division of labour and have
to follow set procedures. - high labour intensive

 Examples of Mass services include supermarkets and library.

 Example explained- account management centre at a retail bank. It deals

with thousands of customers requests every day. Although each
customer request is different, they are all of the same type involving
customer accounts.