2. Basic Concepts in Inventory Management

In this chapter, the concept of inventory is discussed which is central to materials management function. The definition of inventory and various types of inventories – raw materials, finished goods, in-process inventory, MRO inventory, etc. – are outlined. The need to keep inventory and the functions of inventory as a decoupling agent to enable various subsystems in a supply chain to be decoupled are described. The inventory-related cost parameters are listed along with methods of estimating these. Other situational parameters like demand and lead times also need to be estimated. Before an inventory model is employed for optimal operation of the inventory system, an appropriate inventory policy has to be selected. Three types of inventory policies are described, and their relative strengths and weaknesses are discussed. A taxonomy of inventory models is presented to give an overview of a plethora of inventory models available in inventory management literature. However, the right choice of the inventory model is crucial for the success of inventory management.