LESSON 2

INTRODUCTION TO INVENTORY MANAGEMENT AND

CONTROL

TOPICS: LEARNING OUTCOMES:

 Inventory Management vs. At the end of the lesson,
Inventory Control students must be able to:
 The Importance of Inventory 1. Explain and differentiate
 Functions of Inventory Inventory Management and
 Types of Inventory Inventory Control.
 Inventory Counting Systems 2. Identify personnel who handle
 Factors Affecting Inventory inventory and documents used
Management to record inventory.
3. Enumerate and expound the
elements that influence
Inventory Management.

Topic 1: Inventory Management vs. Inventory Control

Inventory control and inventory management are often used interchangeably.

Though they have similar scopes, there are some important distinctions to make.
Inventory control is a method of regulating the inventory that a business has on hand in
its warehouse. On the other hand, inventory management is the activity of forecasting
and replenishing inventory, focused on when to order stock, in what quantities and from
which supplier. Regardless of how they are defined, it is important to regard them as
two different concepts in order to make the appropriate strategic plans.

What is Inventory Management?

Inventory management involves forecasting and product replenishment. Inventory
management determines when to order products, in what quantities and from which
supplier. This ensures that your business will always have the right quantity of the right
item in the right location at the right time.
The scope of inventory management is arguably wider than inventory control. While
inventory control only requires understanding of your warehouse, inventory
management requires a business to understand the supply chain and maintain good
relationships with your suppliers.
In managing inventory, the aim is to get inventory at the right place at the right time.
This involves quickly reordering stock, having resources in the right place and having an
efficient process in place to receive and store inventory stock.

What is Inventory Control?

Inventory control regulates the inventory that is already in the warehouse. This
involves knowing what is in stock inside and out – how much is available, where is it
located in the warehouse and in what condition it’s in. It is also about ensuring that the
warehouse is set up in a way that allows warehouse staff to quickly pick and pack to
speed up customer order fulfilment.
In controlling the inventory that a business has on hand, the business must aim
to keep inventory costs down. This can involve identifying the least popular items and

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reducing the stock, accurately forecasting changes in demand to avoid overstocking. For
food and beverage manufacturers, this involves minimising waste by using inventory
before they expire.

Topic 2: The Importance of Inventory

Inventory is one of the most expensive assets of many companies, representing

as much as 50% of total invested capital. Operations managers around the globe have
long recognized that good inventory management is crucial. On the one hand, a firm can
reduce costs by reducing inventory. On the other hand, production may stop and
customers become dissatisfied when an item is out of stock. The objective of inventory
management is to strike a balance between inventory investment and customer
service. You can never achieve a low-cost strategy without good inventory
management.
All organizations have some type of inventory planning and control system. A
bank has methods to control its inventory of cash. A hospital has methods to control
blood supplies and pharmaceuticals. Government agencies, schools, and, of course,
virtually every manufacturing and production organization are concerned with inventory
planning and control.
In cases involving physical products, the organization must determine whether
to produce goods or to purchase them. Once this decision has been made, the next step
is to forecast demand, as discussed in Chapter 4 . Then operations managers determine
the inventory necessary to service that demand. In this chapter, we discuss the
functions, types, and management of inventory. We then address two basic inventory
issues: how much to order and when to order.

Topic 3: Functions of Inventory

Inventory can serve several functions that add flexibility to a firm’s operations.
The four functions of inventory are:
1. To provide a selection of goods for anticipated customer demand and to
separate the firm from fluctuations in that demand. Such inventories are typical
in retail establishments.
2. To decouple various parts of the production process. For example, if a firm’s
supplies fluctuate, extra inventory may be necessary to decouple the production
process from suppliers.
3. To take advantage of quantity discount, because purchases in larger quantities
may reduce the cost of goods or their delivery.
4. To hedge against inflation and upward price changes.

Topic 4: Types of Inventory

To accommodate the functions of inventory, firms maintain four types of

inventories: (1) raw material inventory, (2) work-in-process inventory, (3)
maintenance/repair/operating supply (MRO) inventory, and (4) finished-goods
inventory.
Raw material inventory has been purchased but not processed. This inventory
can be used to decouple (i.e., separate) suppliers from the production process.
However, the preferred approach is to eliminate supplier variability in quality, quantity,
or delivery time so that separation is not needed.
Work-in-process (WIP) inventory is components or raw materials that have
undergone some change but are not completed. WIP exists because of the time it takes

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for a product to be made (called cycle time). Reducing cycle time reduces inventory.
Often this task is not difficult: during most of the time a product is “being made,” it is in
fact sitting idle.
MROs are inventories devoted to maintenance/repair/operating supplies
necessary to keep machinery and processes productive. They exist because the need
and timing for maintenance and repair of some equipment are unknown. Although the
demand for MRO inventory is often a function of maintenance schedules, other
unscheduled MRO demands must be anticipated.
Finished-goods inventory is completed product awaiting shipment. Finished
goods may be inventoried because future customer demands are unknown.

Topic 5: Inventory Counting Systems

Inventory counting system can be periodic or perpetual. Under a periodic

system, a physical count of the items in inventory is made at periodic intervals (e.g.,
weekly, monthly) in order to decide how much to order of each item. On the other
hand, perpetual inventory system (also known as continual system) keeps track of
removals from inventory on a continuous basis, so the system can provide information
on the current level of inventory for each item.

Topic 6: Factors Affecting Inventory Management

When managing the inventory processes, there are a variety of factors which
should be considered. Both external and internal factors can affect inventory
management in different ways, and it is important to be aware of these variables. These
are the factors that affect the inventory processes (Chan, 2017).
 Financial Factors
Factors such as the cost of borrowing money to stock enough inventories
can greatly influence inventory management. In this case, the finances may
fluctuate according to the economy, and it is wise to keep an eye on changing
interest rates to help plan the organization’s spending.
The tax costs associated with stocking inventory is another factor that
can influence inventory management. This is especially salient when preparing
for the end of year tax returns.
Other financial factors include the expenses associated with warehouse
operations and transportation costs. Changes in these factors may require the
business to alter the inventory management processes accordingly. Fluctuations
in the cost of fuel, for example, require rethinking the transportation methods to
reduce costs. The business may choose to purchase its own trucks or use outside
contractors for transportation, which again will change the way how inventory is
managed.
 Suppliers
Suppliers can have a huge influence on inventory control. Successful
businesses require reliable suppliers in order to plan spending and arrange
production. An unreliable or unpredictable supplier can have huge knock-on
effects for inventory control. It can be a good idea to ensure that the business
has a reliable back up supplier to prevent product shortages or delays in the
manufacturing process.
 Lead Time
Lead time is the time it takes from the moment an item is ordered to the
moment it arrives. Lead time will vary widely depending on the product type and

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 the various manufacturing processes involved, and therefore changes in these
factors can require changes to inventory management.
Outsourcing manufacturing processes to other countries due to lower
production costs may result in longer waiting times. Producing the same goods
locally may cost more but take less time, and therefore the business may need to
adjust its stock levels accordingly.
 Product Type
Inventory management must take into consideration the different types
of products in stock. For example, some products may be perishable and
therefore have a shorter shelf life than others. In this case inventory must be
managed to ensure that these items are rotated in line with expiration dates.
 Management
Ultimately, responsibility for managing the business’ inventory sits with
its managers and any co-owners. Persons who will be handling the inventory of
the business must be equipped with the skills and competence to avoid
problems in inventory management.
 External Factors
There are multiple external factors that may affect inventory control. For
example, economic downturns may occur and this is something that the business
will generally have very little control over. Assessing the economy is a must in
order to guard against stock outs or a buildup of excess inventory.
Other factors may include the real estate markets or the extent of local
competition. These factors are also largely out of the business’ control, so it is a
good idea to assess the external climate regularly in order to stay prepared.

ACTIVITY/ TASK
Answers on the activity/task shall be written on a whole sheet/s of yellow
paper and must be submitted not later than the agreed deadline. Late submissions will
not be accepted and will result to a failing grade. Don’t forget to write your name,
section and date of submission.

Julius Tequila is a world famous distillery located in the state of Guanajuato,

Mexico. The distillery makes the Julius brand of premium tequila. The distillery procures
tons of full-grown agave pi~nas2 from the farms all over Mexico. An agave plant that
has grown for about 8 years to the size of a soccer ball is considered to be good for
producing tequila. The piñas are first cut into several uniform pieces and washed with
clean water. The cut pieces of piñas, the insides of which are white in color, are then fed
into an autoclave, a chamber that functions like a pressure cooker. The pieces of raw
piña are cooked for about 72 h in the autoclave. At the end of the cooking process, the
color of the piña turns golden brown.
The cooked golden brown piña pieces are then conveyed to a crusher where a
screw-crushing facility, consisting of several parallel rotating screw crushers, is
employed to continuously crush and extract the piña juice. The juice extracted from the
piña is separated from its fiber using a simple, sieve-based filtering process. The distilled
juice is then transferred to another chamber where it is mixed with yeast.
The mixture of juice and yeast is allowed to ferment and settle. This settling
down process takes a long time, and it does so in three layers. The top (the head) and
the bottom layers (the tail) of the settled partially fermented liquid is used in making
lower grades of tequila while the middle one is used in making the premium version.
The different versions of the partially fermented liquid are then transferred to
wooden barrels that are stored in dark, cool storage chambers for several hours
(minimum 20,000).

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 After more than 2 years of storage, the liquid is taken out of the barrels and
transferred into blue-hued bottles (capacity of 2 liters each). These bottles with tequila
are now ready for commercial sale. These bottles are ferried to distributor warehouses
around the world.
Mild, food-quality compliant detergents are used to clean the continuous
process machines before the next load of agave piñas are loaded into the system.

Case Study Questions

From the above case, classify the inventory in tequila production into:
1. Raw Materials Inventory
2. Work-In-Process Inventory
3. Finished Goods Inventory
RUBRICS FOR WRITTEN OUTPUT
This criterion shall include the reliability and
ingenuity of the output. Its reliability shall be
Content evaluated based on the truthfulness, while 50%
ingenuity indicates the originality and creativity
of the incorporated ideas and concepts.
This criterion encompasses the ways how the
Organization of ideas and concepts are presented. Coherence
30%
Ideas and structure of the content are the focus of the
criterion.
Grammar & This criterion shall include the grammatical
20%
Mechanics correctness, format and use of punctuations.
TOTAL 100%

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