Production side of inventory management

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THE PRODUCTION SIDE

The first step in inventory planning deals with the manufacturing mix of inventory items and end products. Every product is made up of a specified list of components. The analyst must recognize the different mix of components in each finished product. Each item maintained in inventory will have a cost. This cost may vary based on volume purchases, lead time for an order, historical agreements, or other factors. For the purpose of preparing a budget, each item must be assigned a unit cost.
Once the mix of components is known and each component has been assigned a value, the analyst can calculate the materials cost for each product, which is the weighted average of the components, and the individual products.

The figure below ties each subsystem together and shows the three items of information needed for the decision to order additional inventory.

The three subsystems are tied together in a single inventory-management system. The inventory management system can also be illustrated in terms of the three subsystems that comprise it. The figure below ties each subsystem together and shows the three items of information needed for the decision to order additional inventory.

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