Irish Nicole Roura Assignment #1 BM602

1.) Give the definition of the word “inventory”.

Answer: Inventory is the full listing or term used to refer to the items or stock on hand, work in
progress, finished products that are available for sale, and the raw materials used to
manufacture goods that are available for sale.

2.) What are the reasons for obtaining and holding inventory?
Answer: Any company or business would like to obtain and hold an inventory at a particular
level in order to fulfill a smooth, uninterrupted production schedule or accommodate with
consumer demand and to protect the image from inaccuracies or fluctuating demand as the
case may be. Some of the more important reasons for obtaining and holding inventory are as
follows:
a) Predictability, to engage in capacity planning and production scheduling, the firm need to
control how much raw material and how many parts and subassemblies they process at a
given time.
b) Fluctuations in demand, a supply of inventory on hand is protection. The firm still need to
satisfy customer or production demand on time. If they can see how customers are acting in
the supply chain, surprises in fluctuations in demand are held to a minimum
c) Unreliability of supply, inventory protects the company from unreliable suppliers or when an
item is scarce, and a steady supply is difficult to ensure.
d) Price protection, buying quantities of inventory at appropriate times helps avoid the impact
of cost inflation.
e) Quantity discounts, many times, bulk discounts are available if the firm buy in large rather
than small quantities.
f) Lower ordering costs, if the company buy a larger quantity of an item less frequently, the
ordering costs are less than buying smaller quantities over and over again.

3.) Enumerate and discuss the different types of inventory or different types of stock.
a) Raw Materials –These are the materials or goods purchased by the manufacturer. They are
used to produce partial products or completed goods. In short, these materials are also
needed to turn the inventory into a finished product.
b) Work-In-Progress – Items are considered to be WIP during the time the raw material is being
converted into a partial product, subassemblies, and finished product. These are the partly
processed raw materials lying on the production floor. These are often called products that
are semi-finished and they may or may not be saleable. It is unavoidable inventory which
will be created in almost any manufacturing business. WIP occurs because of work delays,
long movement times between operations, and queuing bottlenecks.
c) Finished Goods - This is a product ready for current customer sales. It can also be used to
buffer manufacturing from predictable or unpredictable market demand. In other words,
 any product that is ready to be sold to the customers. These are the final products after
manufacturing process on raw materials and being sold in the market.

4.) What are functions of inventory?

Answer: The primary function of inventory is to provide a continuous supply of materials to
operations. To do this effectively, the firm should seek to find a sweet spot between too much
and too little, without ever running out of stock. This successful balance will keep improving
cash flow and profitability, and keep the firm running smoothly. Also, inventory carried by firms
have some purpose (or function), of which the following are some important ones:
a) Decoupling Inventory – This inventory's function is to help smoothen the workflow between
workstations and minimize the impact of fluctuations. Workstations have different
processing capacities, some may finish processing faster while others may take more time. A
workstation in the production line may also encounter a failure. If this happens, all upstream
workstations have to wait until the failed workstation is back up online. This inventory
detaches a manufacturing process from another.
b) Cycle (or Cyclical) Inventory – Firms prefer batch ordering because they derive the benefits
of economies of scale and this inventory is the result of ordering materials in batches. Cycle
stock also plays an integral part in the firm's operations. This stock converts into sales and
generates cash flows, which the company then uses to pay creditors. Furthermore, it is also
part of the firm's total assets on the balance sheet.
c) Pipeline Inventory – Inventory in transit (in trucks, ships, etc.) is referred to as pipeline
inventory. The function of this inventory is to account for uncertainties in supply lead time.
It should be noted that the units for demand and lead time must be the same. If demand is
expressed in units per day, the lead time must also be in days.
d) Buffer inventory – In other words, safety stock, it is maintained by firms to counter
uncertainty in demand. Buffer inventory reduces the probability of running out of stock. A
company may apply the concept of buffer inventory at all levels of the supply chain. The
main objective is to ensure that production or sales don't stop.

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