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The Purpose of Inventory in Operations Management

Managing your operations to balance inventory in an effort to satisfy customer demand — that is, actual demand in the market for products and services — without exposing the company to unnecessary cost and risk is crucial. But this aspect of operations can be one of the toughest.

There’s just no way around it for most businesses: If you’re going to sell products, you need to have stuff available for customers to purchase.

The goods that are available for immediate sale make up just one type of inventory; it’s known as finished goods inventory (FGI). The other two categories are raw material inventory (RMI), which are typically items purchased from a supplier and used to create the end product, and work in process inventory (WIP), or product that’s still going through the production process.

Here are some of the important functions of inventory in successful operations:

  • Meeting customer demand: Maintaining finished goods inventory allows a company to immediately fill customer demand for product. Failing to maintain an adequate supply of FGI can lead to disappointed potential customers and lost revenue.

  • Protecting against supply shortages and delivery delays: A supply chain is only as strong as its weakest link, and accessibility to raw materials is sometimes disrupted. That’s why some companies stockpile certain raw materials to protect themselves from disruptions in the supply chain and avoid idling their plants and other facilities.

  • Separating operations in a process: Inventory of subassemblies or partially processed raw material is often held in various stages throughout a process. Work in process inventory (or WIP) protects an organization when interruptions or breakdowns occur within the process. Maintaining WIP allows other operations to continue even when a failure exists in another part of the process.

  • Smoothing production requirements and reducing peak period capacity needs: Businesses that produce nonperishable products and experience seasonal customer demand often try to build up inventory during slow periods in anticipation of the high-demand period. This allows the company to maintain thruput levels during peak periods and still meet higher customer demand.

  • Taking advantage of quantity discounts: Many suppliers offer discounts based on certain quantity breaks because large orders tend to reduce total processing and shipping costs while also allowing suppliers to take advantage of economies of scale in their own production processes.

Inventory is necessary to your business. It supplies your operations processes and meets customer demand.

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