Business Management - Application of operations management systems:
inventory management
Inventory management
An effective operations management system will not only involve planning
the operations but also controlling the costs associated with these
operations. These costs may be classified as either direct or indirect
costs. Direct costs are those costs directly related to output and in
direct proportion to that output level e.g. supplies and employee costs.
Indirect costs are those costs that are incurred irrespective of output
levels e.g. rent and other related occupancy costs. Management of
organisations must pay particular attention to the costs associated with
the availability, purchase price and quality of its resources.
A large portion of the operations manager's job thus consists of inventory
[1] management. Inventory is defined as the goods that an organisation
keeps on hand for use in the production process - finished goods prior to
delivery, work in progress and raw materials. These forms of inventory may
be defined as follows:
* finished goods inventory [2] includes items that have passed through
the entire production process but have not yet been sold. This form of
inventory is expensive because the organisation has invested labour costs
and other related costs to make the finished product but as yet it has not
been sold.
* work-in-progress inventory includes the materials moving through the
stages of the production process that are not yet completed products.
* raw materials inventory [3] includes the basic inputs to the
organisation's production process. This form of inventory is the cheapest
because the organisation has not yet invested labour in its conversion or
transformation.
Inventory management is vitally important to organisations because
inventory sitting idly on the factory floor or in the warehouse is, in
fact, costing the organisation money in terms of insurance, deterioration,
space, stocktaking costs, handling costs and tied-up capital. Current
inventory management information systems allow for close inventory control
but with the capacity to meet customer needs on demand. No excess inventory
is needed by an organisation if an efficient control system is adopted.
