Inventory Management



Inventory Management Check List

Inventory are those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair and operating supplies), and meet customer service levels with finished goods and spare parts.

Inventory functions are anticipation, hedge, cycle (lot size), functions (safety stock, buffer, or reserve), transportation (pipeline) and service parts.

Types of Inventory

There are many ways to examine inventories.

Inventories include raw materials, purchased items or extracted materials that are converted via the manufacturing process into components and products.

Work-in-process: a product or products in various stages of completion throughout the plant.

Subassemblies: An assembly that is used at a higher level to build another assembly

Finished goods: Items ready for sale to a customer

MRO: maintenance, repair and operation supplies.

Reasons for holding inventory

  • variations in supplier lead time
  • quantity discounts
  • price changes
  • scarcities of materials
  • to cover period between production runs
  • allow flexibility in production scheduling
  • variations in product demand (safety stock)
  • economies of scale

Inventory Costs

Cost of inventory production and holding:

  • purchase order/setup costs
  • cost of replenishing inventory through changes in the production run for a different item includes labour and other associated costs
  • cost of capital
  • insurance costs
  • costs of space, staff
  • inventory handling
  • deterioration
  • damage
  • obsolescence
  • insurance
  • restriction of other investments that could have been made with the same money in other parts of your business
  • lost sales; and
  • halted production

ABC Classification

(where items are not of equal importance)

A-items: few items (ex. 20 %) which have a high rate of usage and/or high unit cost and account for 80 % of total value of usage in the inventory

B-items: number of items (ex. 30 %) which in total account for 15 % of total value of usage

C-items: great many items (ex. 50 %) with low individual usage and/or low unit value which in total account for only 5 % of total value of usage

ABC and inventory control efforts:

  • A-items: very careful management and careful estimates of future usage
  • B-items: routine management and routine effort in forecasting demand
  • C-items: little effort in forecasting demand, however be careful of strategic items.


  • Find out why you have inventories
  • Analyse the present situation
  • Do an ABC-analysis
  • Define inventory levels
  • Define inventory system
  • Define key performance indicators
  • Introduce key performance follow-up reports
  • Report on slow and non-moving inventories

Do you have the right inventory?

Do you have opportunities to reduce capital invested and improve service levels?

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