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Part One - Basic Inventory Concepts The Context of Inventory Control The Importance of Inventory The design and operation of any logistics system or supply chain that deals with the manufacture and distribution of physical goods must address fundamental questions about how the inventory in the system will be managed and controlled. Over the past few decades,management attention has increasingly focused on the firm’s inventory as an area where improvements can be made so as to both reduce costs and improve the level of customer service that the enterprise delivers to its customer base. Reduction in the inventory level maintained in the enterprise, and hence in total assets and investment, is seen as an important tool to improve the firm’s rate of return onassets, return on investment, and ultimately, its shareholder value and stock price. Aggregate levels of inventory have come to be seen by some as a kind of global metric of the firm’s supply chain performance or efficiency. Corporations try to benchmark themselves against competitors and other firms, where low levels of inventory are seen as very desirable. While aggregate inventory is usually toosimple and crude a measure of true supply chain performance, it is a highly visible component of the firm’s asset structure, and because the level of inventory can be so easily manipulated (at least in theory), efforts to control and reduce inventory receive high-level attention. Over the past thirty years, scores of new inventory control procedures have been introduced across many differentindustries and lines of trade. The trade press and academic literature contains thousands of accounts of tools such as EOQ, MRP, DRP, JIT, VMI, and the list goes on, seemingly forever. Each new procedure was intended to address a significant weakness with the current state of practice, and in many cases firms reported great improvement in their inventory operations when the new procedure wasimplemented. In almost every case, the new approach was intended to reduce the amount of inventory in the system while providing a level of support as least as good as, if not in fact superior to, that provided by the prior practice. While firms have been striving for decades to reduce the level of inventory in their systems, empirical evidence (cites) has shown that the actual level of aggregate inventoryin the national economy , sector by sector, has remained stubbornly high. Inventory management, it seems, is not so simple after all. A decision maker will benefit from a comprehensive understanding of the issues and problems associated with inventory control in the supply chain, as well as from a fundamental understanding of the range of inventory control tools which are available, how



they work, and what problems they are designed to solve. The purpose of this section is to contribute to this understanding. The Purposes of Inventory Inventory defined. Inventory is material that the firm obtains in advance of need, holds until it is needed, and then uses, consumes, incorporates into a product, sells, or otherwise disposes of. A business inventory is by its naturetemporary; that is, the firm expects to hold an individual item as inventory for a relatively brief period of time. However, due to the ongoing nature of the firm's operation, aggregate or total inventory is continually being reordered and restocked. The net effect of these ongoing processes of usage and replenishment is that the firm retains a "permanent investment" in inventory. In other words,individual units come and go, but the firm generally maintains some amount or level of total or aggregate inventory. These inventory assets can be as important to the financial structure of the firm as is investment in, for example, plant and equipment. Inventory management and control consists of developing good answers to the following questions: A. Which items will the firm carry as inventory? B....
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