INTRODUCTION:

For any manufacturing entity, inventory management plays a crucial role in ensuring that the production process runs efficiently and smoothly. The primary goal of inventory management is to have the right amount of inventory at the right time to meet production demands and customer needs, knowing when to sell and at what price while also minimizing costs for the manufacturing entity. This paper delves into various strategies and models used by manufacturers to balance and manage their inventory.

MODELS AND STRATEGIES FOR INVENTORY MANAGEMENT:

1. Just-in-Time (JIT) Model
   

   This model focuses on keeping as little inventory on hand as possible with the aim of reducing inventory levels and preventing overproduction by receiving inputs or raw materials only as they are needed in the production process. The JIT model originated in the 1960s and 1970s in Japan. Toyota Motor made the greatest contribution in the development of this model. This method allows companies to save significant amounts of money and reduce waste by keeping only the inventory they need to produce and sell products.
   This approach reduces holding and insurance costs, as well as the cost associated with liquidating or discarding excess inventory. Despite several advantages of JIT inventory management method, it can still prove to be risky. If demand increases unexpectedly, the manufacturer might struggle to acquire the necessary inventory to meet this demand, potentially harming its reputation with customers and pushing business towards competitors. Even minor delays can be problematic if a crucial input fails to arrive “just in time.” Thus, a reliable supply chain and precise coordination with the suppliers is a necessity to practice the JIT method.

2. Economic Order Quantity (EOQ) Model
   

   The EOQ model is used for inventory control and management in manufacturing companies. It is a mathematical approach that calculates the optimal order quantity for each batch which balances the holding and ordering costs and thus helps in minimizing the total costs. The optimal order quantity is calculated using three components: holding costs, ordering costs and demand rate.
   The EOQ model seeks to ensure that the right amount of inventory is ordered per batch, so a company does not have to make orders too frequently and there is not an excess of inventory sitting on hand, thereby avoiding overproduction and underproduction.
   Despite the advantages of the EOQ model of striking a balance between holding costs and ordering costs which helps to prevent poor inventory levels, it has a few disadvantages as well. This model is based on certain assumptions such as constant demand, fixed ordering costs, and constant holding costs, which might not always remain constant in a dynamic environment.
   Additionally, this model is suited for businesses with simpler inventory systems and might not work where inventory systems involve multiple products and varying demand patterns. Even after these disadvantages, the EOQ model remains significant as one of the inventory management systems.

3. Material Requirement Planning (MRP) Model
   

   MRP is a software used by manufacturers and producers to control and manage inventory levels and the overall supply chain. It helps to determine the right quantity and timing of raw materials, components, and subassemblies required to meet the production schedules. MRP is useful in forecasting the future demand for a manufacturer’s product, thereby making it easier for the manufacturer to produce the optimal quantity of products and preventing both overproduction and underproduction.
   MRP also considers the lead time required to receive materials or inputs from suppliers and the time to manufacture the products from these inputs. Based on this information, MRP generates a production schedule and ensures that there are enough materials to meet these schedules. It also helps in reducing the lead time by identifying the most efficient production schedule. Using MRP software, manufacturing entities can achieve accuracy and eliminate errors which might occur while entering the data manually.
   MRP Model also has certain shortcomings, one major disadvantage of it being a complex model to implement as it is resource-intensive and requires significant investment in technology and training since it is a software-based approach. Another disadvantage is that it relies heavily on accurate data, including demand forecasts, inventory records, and lead times. Inaccurate data can lead to incorrect planning and scheduling.

4. ABC Analysis Model
   

   ABC Analysis is a technique used by manufacturers for inventory management and control. It divides inventory items based on their importance and value to the business into 3 categories: A, B and C. Category A represents inventory having the highest value, Category B is of moderate value and Category C has the lowest value.
   ABC Analysis is based on the Pareto Principle, also known as the 80/20 rule. This principle states that 80% of sales is generated with the top 20% of goods. ABC Analysis thus helps to identify those 20% of the goods that help in the generation of the 80% of sales volume.

   Category A represents ‘High Value and Low Quantity’ which means the items in this category represent a small percentage of the total inventory items but a large portion of the total inventory value. These make up about 70-80% of the company’s annual consumption value with only about 10-20% of the total inventory.
   Category B represents ‘Moderate Value, Moderate Quantity’ which means items in this category represent a moderate percentage of the total inventory items and a moderate portion of the total inventory value. These account for about 15-20% of the company’s annual consumption value with about 30% of the total inventory.
   Category C represents ‘Low Value, High Quantity’ which means items in this category represent a large percentage of the total inventory items but a small portion of the total inventory value. These represent less than 5% of the company’s annual consumption value with about 50% of the total inventory.

   ABC Analysis provides a framework for decision-making to manufacturers as it efficiently allocates resources by prioritizing high-value items for closer monitoring and control. Additionally, it helps in cost reduction by optimizing inventory levels and reducing excess stock of low importance to the business, through which manufacturers can lower holding costs and minimize waste. ABC Analysis also has limitations since it focuses primarily on the value of inventory and ignores other factors such as lead time, demand variability and consumer preferences. To enhance this model, it is important to regularly update the classification based on changing conditions and incorporate additional factors to create a more comprehensive classification system.