INVENTORY

MANAGEMENT

Naheed Ghaffar
MBA-M Phil SCM
Spring 2018
Indus University
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Chapter 2 Operational Environments

How Operational Situations Impact Inventory

Merchandising Environment : A Retail Store

(MTS) Make-to-Stock Environment : A Producer of Retail Items

(MTO) Make-to-Order Environment : A Specialty Steel Fabrication Shop

(ETO) Engineer-to-Order Environment: A Pre-engineered Firm Flow Process

Environment
Project Environment

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Inven Ch 2-Operational Environments

 How Operational Situations Impact Inventory

We now present a few operational environments that will show different inventory
situations. For each example we will derive a reasonable inventory management
approach.
We will see that because the market situation is different for each environment, the

proper inventory technique to be used will differ.

As the suitable operational environments to be adopted for different products are

dictated by demands of the marketplace,

the different operational environments are also called marketing strategies

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Inven

Chapter 2 Operational Environments

Different Operational Environments/Situations that Impact Inventory

Merchandising Environment : A Retail Store

(MTS) Make-to-Stock Environment : A Producer of Retail Items

(MTO) Make-to-Order Environment : A Specialty Steel Fabrication Shop

(ETO) Engineer-to-Order Environment: A Pre-engineered Firm Flow Process Environment

Project Environment

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 me n t
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Inven
Chapter 2 Operational Environments
 How Operational Situations Impact Inventory

Merchandising Environment : A Retail Store

This operational situation is characterized by a customer base that demands items

off the shelf.

That means that the store should be adept at guessing what the customers will want

and accordingly have those items in the right quantities on the shelf.
Consumer demand is composed of a multitude of factors that has to be interpreted in

the forecasting process.

If the store is unable to guess the demand of various items, it should at least have a

system for ordering and getting quick delivery.

This is the nature of off-the-shelf items that are demanded by the marketplace.

The store has to respond to that demand.

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(MTS) Make-to-Stock Environment: PUSH Processes of Operation Environment
A Producer of Retail Items :
the "Push type" can be considered as an escalator. Continuous supply even without demand.
There are market conditions that require producers to make products in advance and put them on the shelf

available for quick purchase.

An off-the-shelf item is produced by a firm on an MTS basis. That is, a company will produce large

quantities and keep the inventory on the shelf in anticipation of customer orders. The decision to produce
an item on an MTS basis is hugely dependent on the demands of the marketplace
 Products that are produced in advance of customer orders and placed on the shelf are called make-to-stock

(MTS) items.
There are many products that customers want to purchase outright without having to wait.

Examples of these items are bread, furniture, cars, ice cream, alarm clocks, etc.

The planning and procurement of inventory of raw materials needed for this situation is typically based on a

forecast of the future demand of the end product.

It is clear that to keep some quantity of the end product on the shelf, a company should first develop a

forecast.
Then, based on the forecast and other factors available on hand, such as financial constraints, etc., the

company should decide on how much to actually produce.

This decision then drives the amount of raw materials that needs to be purchased to implement the production

plan.
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(MTO) Make-to-Order Environment : PULL Processes of operation
A Specialty Steel Fabrication Shop)
 Inventory management in a specialty fabrication shop is governed by the capabilities of the equipment

that was originally decided by the owners to fill a certain segment of the market.
Production is typically performed on a make-to-order (MTO) basis if, indeed, that is dictated by the

marketplace. Planning and procuring inventory depend on what end items are actually ordered by
customers.
 There is some delay between the time a special order is received and the time the end product

is delivered to the customer. This delay is called the order lead time.
This lead time is unavoidable simply because it is not feasible to keep in stock all possible types of

special items that may be required for a customer special order.

 It is true, though, that the shop can keep some quantity on hand of the most commonly needed raw

materials.
 Customers of a specialty fabrication shop generally know if a certain type of product is available only

on an MTO basis and, therefore, would be willing to wait a reasonable time.

 If they cannot wait, they would probably be willing to purchase a general-purpose product that is

available off the shelf. An off-the-shelf item is produced by a firm on an MTS basis.

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(ETO) Engineer-to-Order Environment :

A Pre-engineered Firm
Another special situation is when an end product requires

extensive design and customization.

Inventory planning and procurement for this situation is

dependent on the engineering details that are designed into

the end product being produced.
Again, there is a delay from the time an order is placed until

the end product is completed.

In fact, there will be a lot of changes and revisions along the

way.
An example of this situation is the manufacture of an elevator

system, steel buildings, or space satellites.

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Flow Process Environment
There are many situations where the usage of inventory for company operations is

not exact and, hence, inventory planning has to be adjusted accordingly.

The process generally involves some physical or chemical conversion of material.

The resulting output is not always an exact quantity of input ingredients, nor are all

ingredients in continuous use.

Examples of this operational situation are a food processing plant, sawmill, dairy

processing, chemical plant, and a pharmaceutical facility.

The typical flow process environment has an end product that is produced via a

formula or recipe.
The equivalent for discrete production would be a bill of materials. The flow process

will have ingredients, and somewhere along the various stages, the production
process may be usually continuous but may be periodically stopped for changeover to
using a different set of ingredients.

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Project Environment :
A project is defined as a set of activities and tasks with a clearly
specified beginning and completion state. An example of a project is
constructing a building or producing a movie. Inventory planning and
procurement for projects are dictated by requirements specified in the
scope of work. Usually, the quantity and timing of delivery of inventory
becomes the critical factor in project inventory because there may be
limited space at the site or the inventory may have limited shelf life (for
example, cement)

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