MANAGEMENT OF INVENTORY SYSTEMS

Introduction to Inventory and Materials Management

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR

1
 Introduction to Inventory and
Materials Management
• Lecture-1: Importance of Inventory/Materials Management System,
Inventory and its Definitions, Types of Inventory
• Lecture-2: Why Inventory, Classification of Inventory Problems
• Lecture-3: Classes of Inventory Problems, Inventory Costs
• Lecture-4: Types of Inventory and Product Positioning Strategies,
Inventory Management and Financial Performance
• Lecture-5: Concept of Inventory Flow Cycle, Objectives and Decisions of
Inventory Control

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 2
Introduction to Inventory and Materials
Management
 Importance of Inventory/Materials Management System
 Inventory and its Definitions
 Types of Inventory

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 3
 Importance of Materials or Inventory
Management Systems

• Almost all organizations use, transform, distribute, or sell materials of one kind
or another.

• Inventory investment in any organization may be substantial.

• Inventory/Materials Management is one of the most important functions in

any organization.

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 4
 Importance of Materials or Inventory
Management Systems

• The performance (operational and financial) of an organization -

manufacturing or service, government or non-government - is significantly
dependent on effective management of materials or inventory - made available
in a number of forms as they are being processed in a manufacturing/service
stage.

• Materials management may influence tremendously the cost of production as

well as of product.
PROF PRADIP KUMAR RAY
DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 5
 Importance of Materials or Inventory
Management Systems
• A good and acceptable materials or inventory management system ensures a
smooth flow of materials within an organization or a plant. This flow should
connect the suppliers to the production systems and subsequently to the
customers/end users of the products through the distribution system with
generation of minimum or no wastes.

• For achieving the main objectives of materials management function as stated

above, a total and an integrated inventory management system needs to be
developed and used.

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 6
 Inventory and its Definition
• The core issue of materials management is maintenance and control of
inventory.
• This issue is common to all organizations in any sector of the national
economy.
• The term ‘inventory’ can be interpreted in a number of ways
 Stock on hand of materials at a given time.
 Tangible asset that can be seen, measured, and counted.
 List of items (physical assets).
 Quantity of items on hand.
 Value of stock of goods owned by an organization at a particular time.

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 7
 Inventory and its Definition
• In view of all these interpretations, ‘inventory’ is defined as ‘an idle resource
that has an economic value’.
• When a resource loses its economic value (after its use in one or multiple
cycles), it ceases to be an inventory.
• Sometimes, in certain situations, we may be careful in calling items with
certain characteristics/features as inventory,
e.g., is ‘hoarding’ an inventory, or is ‘waste’ an inventory?

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 8
 Types of Inventory
• The classification of inventory is based on two aspects:
i. State of inventory
ii. Utility of inventory
• Based on state of inventory, it is classified under four categories:
i. Supplies (in the form of maintenance, repair, and operating supplies
or MRO)
ii. Raw materials (R/M)
iii. Work-in-process (WIP)
iv. Finished goods (F/G)

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 9
 Types of Inventory
• MRO – not part of final product.
• R/M – inputs to production process, usually purchased from suppliers.
• WIP – partially completed products still in production process.
• F/G – final product, ready for storage, distribution, and sale.
• In a production system for a product, these categories of inventory need to be
explicitly defined.
• As the state of inventory changes, the function or the use of each category of
the inventory also changes. This concept is depicted in the figure below:

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 10
 Types of Inventory
State of inventory Subsequent Function

Sale

MRO
Idle Use

Transform

Incomplete

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 11
 Types of Inventory
• Based on utility of inventory, inventory is classified under six categories:
i. Working stock (cycle or lot size stock): amount of inventory as determined
by its lot size as required to meet its demand for a specific time period.
ii. Safety stock (buffer or fluctuation stock): amount of additional inventory
required exclusively as a protection against stock-out situation due to
fluctuations of demand during replenishment period.
iii. Anticipation stock (seasonal or stabilization stock): amount of inventory
built up to meet the higher or pick seasonal demand.

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 12
 Types of Inventory

iv. Pipeline stock (transit or work-in-process stock): amount of inventory being

processed or waiting to be processed, both internally and externally.
v. Decoupling stock: amount of inventory accumulated between dependent
processes or stages so that it can operate independently.
vi. Psychic stock: amount of inventory required to stimulate demand.

PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR 13
List of Reference Textbooks

• Starr, M K and Miller, D W, Inventory Control: Theory and Practice,

Prentice Hall.

• Tersine, R J, Principles of Inventory and Materials Management, PTR

Prentice Hall.

• Silver, E A, Pyke, D F and Peterson, R, Inventory Management and

Production Planning and Scheduling, John Wiley.

Prof Pradip Kumar Ray

Department of Industrial and Systems Engineering 14
Thank You!!

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