Inventory Management: Types of Inventory Essay

Introduction Inventory is defined as a stock or store of goods .generally speaking, inventory can be divided by two types: independent demand and dependent demand, independent demand is kind of demand which is no need to rely others types of item they are ordered by the external customers or manufacturer for stock and sale. If one type of inventory depends upon another item, take the example of car. The car as finished goods is as independent demand item, while the raw materials and components used in the manufacture of the finished Goods.The number of goods depends on the types of the firm. If the firm is a manufacturer, it must maintain some inventory of raw materials and work-in-process in order to keep the factory operating. In addition, finishedgoods are another necessary inventory for the firm to meet the customers who need the goods suddenly. The firm which has enough inventories to satisfy customer is a goodevaluation for the firm’s standard and itsstability, italso is a good way to save the costs of production fee. There are 8 types of inventories: buffer inventory, de-coupling inventory anticipation inventory, pipeline inventory raw materials, partially completed goods and maintenance inventory and in-transmit goods inventory. I will use an example as a cart factory with four types of inventories and it will be raw materials, work-in-progress, finished goods and maintenance tools. Body Raw materials Raw materialsare one of the inventory items that are used in the manufacturer’s conversion process to produce the semi-completive goods and finished productsTypically, raw materials are the things such as ore, grain, minerals, petroleum, chemicals, paper, wood, paint, steel, and food items.cart is kind of old tools using for transfer goods, because it can saving the cost of the production, and the electric cart can be using as a vehicle, so what is the comments of the cart Consider an example of a rolling cart. This cart consists of a top that is pressed from a sheet of steel, a frame formed from four steel bars, and a leg assembly consisting of four legs, rolled from sheet steel, each with a caster attached, so even one component’sof cartcannot be made of without any types of materials. And if the firm buy large amount of quantity ,the factory which provide the raw materials for the firm may use â€Å"quantity discount model†, it will bring the benefit both factory and the firm Thefigure below showsus the cost that the firm charges for the customers from different period: From the figure that we can know: If the ordering quantity is less than or equal to Q1 then purchase price is Cp1. If the ordering quantity is more than Q1 and less than Q2 then purchase price is Cp2. If the ordering quantity is greater than or equal to Q2 then purchase price is Cp3. But this figurecannot show us a continuous total cost curve, because the annual purchase cost breaks at two places namely at Q1 and Q2.It means the more quantities customer order, the total cost is lower, this model achieve the economy of scale the benefit achieved through economy of scale that he wants to pass it onto customer. The how a firm saves the money and how much it can save, thecalculation below briefly shows the process: Thefirm decides to order the logs from the factory, and the ordering size is Lot-For-Lot.supposing they order annual demand is 1500units per year, holding cost is $30 per unit per year,ordering cost is $50 unit per year, and if order less than80 units the cost will be $55 per unit, however. If the firm orders more 70 or equal to 70 will be $52.5 per unit.According the EOQ calculation, firm’s order demand around 707 units.so the firm only need toordering10 more units will get $2.5 per unit. So the total holding ordering, and item costs for the year=ï ¼Ë†Q/2ï ¼â€°H+(D/Q)+DP, according this formula, if the firm buy 80 units, the total cost will be $83571.42,if the firm buy 80 units, the total cost will be $79968.75,it means the firm can save $3602.67.So it is the effect from the â€Å"quantity discount model† Work-in-process Work-in-process also can calledpartially completed goods, or subassemblies that are no longer part of the raw materials inventory and not yet part of thefinished products, it is hard to calculate amount of partially completed goods, so it is time wasted and some part of production cost is also put in the partially completed goods, however, it is also a process that almost all the firm use to decide the amount of the finished goods. Actually, when many type of accessories and clothing produce by the factory they always need many processes to do, so all the partially completed goods will appear in the process, the picture of shoes factory are operating their workobviously, this is a conveyorsystem which is use to producing the sole, and it is working automatically, it means this factory is using the batch process. This process can make Jobs set up so they can be run to completion without manual intervention, so all input data are preselected through scripts, command-line parameters, or job control language. Unlike interactive processing that prompts the human user for a command, batch processing stores up several tasks and executes them while the computer is idle. This frees up memory for more exhaustive programs and speeds up productivity. But how the system work is? One system need one set of data files as input data, and then it can produce one set of output data, and the input data are collected and are processed into the diagram. There is no doubt that using batch process can bring some benefits to the shoes factory, first of all, it can deduce the waste of time, †time waste† is a costly problem, however ,the factory still hard to avoid this problem,however† batch process† is a good way to maintain the time,and it also avoid the worker supervision minute-by-minute. Finished goods Finished goods are completely manufactured products and they are ready to sale and send to the market .For example, clothing, computer is kind of finished goods, however, like orange apple cannot count into finish food, although it can sale to the customers. In order to explain finished good more clearly, I will use an example with ABC classification. ABC classification is a ranking system to identifying how useful and importance of those inventories for achieving business goals. The picture above are showing the exactly figure that how many percentage they have on both stock items and total inventory value. A refers to a very important inventory; it means the products will be high value but little stock refers to moderately important inventory, so all percentage of items and the products of value are balance. C refers to least important inventory, it means the products may be just hold the low value but the firm holds so many stocks about it. Normally, ABC classification system is used by the firm to controlling their inventories, forexample, one firm they are selling electronic products, and they want to saving the space so that they have to set the number of different types of inventory they want to keep, in order to saving the holding cost. Television is a high value product, so maybe not all the customers will buy it, and it is not always need from the customers, so it can put in the A level of classification. And now still have so many customers enjoying to buy PSP and mp4 to reach their entertainment purpose ,this kind of product’s value is medium, however. The firm may consider put these more than the products like television and computers, because the price is cheaper, so it will have more customers buy it with less consideration. And the C classification can related to the products like the mouse and keyboard, because of the cheap price, so many people willing to buying it without consideration.so in order to prevent the â€Å"stock out conditions, the firms will holding a lot of the inventory, in other words, this firm have safety stock which is held in excess of expect demand due to variable rate and lead time. Although it will increase the holding cost, however, it will bring the benefit for the firm, once the firm purchase a lot from the suppliers, it will get the discounts, so it can save the cost of productionand this firm has enough inventories, it can satisfy the customers and meet their requirement levels. Maintenance inventory Maintenance inventory is a type of special inventory which is not for sale. Why the firms need to keep there kind of inventory? These kinds of inventories always refer to something like the machine which is using to produce the raw materials. Normally the firm can exchange their goods with the suppliers when shelf life of the item expired, however, from the research we knows that only 50% of the organizations polled in a survey allowed maintenance any controls over their inventory, so finally they have to maintain the spoil or expiry inventory by their internal politics. So theywill prepared some machines to incase the machines are spoil when they are doing their work. And how are the firms going to controlling their maintenance inventory? Historical model is a good choice, historical system is a method of distributed smart client software construction and it is based on a model of software behavior as a graph of partially ordered facts. From the graph we can knows that how the historical system work, first of all, the firm will put the previous conversation and message’s figure as input data, and the machine can record and do the same work at the next time, for example, the gift card system is become common and normal in our daily life, we only know that is anautomatic machine, however, how is that work? The first step is to identify changes. The second steps is to refine changes, it means normally all the customer will not all have a same action, so the people who set the gift card figure, they also need to think of all the impossible condition as input data and type them in. The third step is to query the model, ask questions till the gift card machine can reply it correctly, and the fourth step is to repeat step one, two, three. Compare with the traditional models, The advantages of historical system are history makes a number of operations easy that are difficult when dealing with state, the historical model can recognizing and resolving conflicts between two parties, caching and synchronizing changes, and durably transmitting messages all become simple operations. Conclusion Inventory is use to achieving satisfaction level of customer service and keeping the inventory costs within the reasonable level. A successful company will have their effective inventory management, first of all, the company should have a complete system to keep track of inventory and the firm will have a reliable forecast of demand and reasonable estimate of holding costs, ordering costs and shortage costs. And if the firm have the classification inventories, what kind of benefit will bring to then, smoothing production requirements and decouple operations, in order to saving the cost of the workers. Safety stock is a strategy that a firm will use it to protect against stock out conditions. All most all the firm will keep inventory, because it can not only save the costs, but also it is convenient way, the firm can take advantage of order cycles, they no need to order the stocks so frequently, and it also can help hedge against price increase, and the most easy way is to take advantage of quality discounts, it is mean that the firm buy a large amount of inventory, normallythe suppliers always can give discounts when the firm buy the large amount of raw materials, and sometimes it can have another kind of conditions, maybe when the firm store the inventory and after that the price will increase, and because the firm already have the enough stocks, so it is another way to saving the cost of the products. Anyway inventory management is an important lesson for the firm Reference * E notes: Inventory types, available at http://www.enotes.com/inventory-types-reference/inventory-types, view on 29/01/2013 * Inventory models, available at http://cde.annauniv.edu/CourseMat/mba/sem2/dba1651/im.html,view on 29/01/2013 * Types of inventories: independent and dependent demand, available at http://www.managementstudyguide.com/types-of-inventories.htm.view on 31/01/2013 * Accounting tools, available at http://www.accountingtools.com/dictionary-work-in-process-inv,view on 31/01/2013 * From Wikipedia, the free encyclopedia,02/02/2013 ,Batch process, Available at http://en.wikipedia.org/wiki/Batch_processing,view on 03/02/2013 * By terry wireman available at http://reliabilityweb.com/index.php/articles/maintenance_inventory_and_purchasing/,view on 03/02/2013 * Michael L Perry, 03/30/2009, what is historical modeling available at http://historicalmodeling.com/book/,view on 04/02/2013