IGNOU MCA: What is inventory? What are the reasons for holding inventory? Explain the traditional techniques of
inventory control.

IGNOU MCA: What is Inventory?

Inventory refers to the stock of goods, materials, or products that a business holds for the purpose of resale, production, or future use. It is a critical component of supply chain management and can include raw materials, work-in-progress (WIP), and finished goods.

IGNOU MCA What are the reasons for holding inventory?

Businesses hold inventory for several reasons, including:

Meeting Customer Demand:

Ensures products are available when customers need them, preventing stockouts and lost sales.

Buffer Against Uncertainty:

Acts as a safety net against unpredictable demand, supply chain disruptions, or delays in production.

Economies of Scale:

Bulk purchasing or production reduces per-unit costs, making inventory holding cost-effective.

Seasonal Demand:

Businesses stock up in anticipation of seasonal peaks (e.g., holiday sales, festivals).

Production Smoothing:

Maintains a steady flow of materials for production processes, avoiding downtime.

Lead Time Reduction:

Reduces the time between order placement and delivery, improving customer satisfaction.

Price Fluctuations:

Businesses may stock up when prices of raw materials are low to avoid future price increases.

Traditional Techniques of Inventory Control

Inventory control involves managing and optimizing inventory levels to balance costs and service levels. Traditional techniques include:
1. ABC Analysis

Concept: Classifies inventory into three categories based on their value and importance:

• A Items: High-value items with low sales frequency (tight control).
• B Items: Moderate-value items with moderate sales frequency.
• C Items: Low-value items with high sales frequency (minimal control).
• Purpose: Focuses resources on managing high-value items more effectively.

2. Economic Order Quantity (EOQ)

Concept: Determines the optimal order quantity that minimizes total inventory costs (ordering and holding costs).

Formula:
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Purpose: Balances ordering and holding costs to reduce overall expenses.

3. Reorder Point (ROP)

Concept: The inventory level at which a new order should be placed to replenish stock before it runs out.

Formula:
ROP=Lead Time Demand+Safety Stock

Purpose: Ensures timely replenishment to avoid stockouts.

4. Safety Stock

Concept: Extra inventory held to protect against uncertainties in demand or supply.

Purpose: Reduces the risk of stockouts due to unexpected demand spikes or delays.

5. First-In, First-Out (FIFO)

Concept: Assumes that the oldest inventory (first in) is sold or used first (first out).

Purpose: Prevents obsolescence and ensures inventory freshness, especially for perishable goods.

6. Just-In-Time (JIT)

Concept: Inventory is ordered and received only when needed, minimizing holding costs.

Purpose: Reduces waste and improves efficiency, though it requires reliable suppliers.

7. Periodic Review System

Concept: Inventory levels are reviewed at fixed intervals, and orders are placed to bring stock up to a target level.

Purpose: Simplifies inventory management for businesses with predictable demand.

8. Perpetual Inventory System

Concept: Inventory levels are continuously tracked in real-time using technology (e.g., barcode scanners, RFID).

Purpose: Provides accurate, up-to-date inventory data for better decision-making.

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