1) Why is inventory management important? 2. Describe the four types of inventory. 3. Identify and explain the types of costs that are involved in an inventory system.

1) Inventory management is important for the following reasons:

• It ensures increased customer satisfaction since products are always available when the customer needs them.
• It enhances cost management. For instance, warehousing costs can be effectively managed through inventory management.
• Inventory management enhances production planning. By having an effective inventory management system, businesses know what items are in stock and the quantities that need to be produced.
• Inventory management enhances efficiency by avoiding underproduction and minimizes the risk of overproduction.
• It enhances order fulfillment as warehouses are better organized in inventory management.

2) The four types of inventory are:

a) Raw materials inventory. These are the materials that are used to make the finished products.

b) Work-in-progress inventory. This inventory consists goods that are partially completed. The goods include those in the initial fabrication stages and those that await further processing.

c) Finished goods inventory. This inventory consists of the goods whose production has been completed and are ready for sale to consumers.

d) Maintenance, repair and operating supplies (MRO) inventory. This inventory consists of the items that are used in the production of the goods but do not form part of the goods. For instance protective clothing falls under this inventory.

3) The costs involved in inventory management include:

• Ordering costs. These are the costs that are incurred when replenishing an inventory such as clerical costs, communication, invoicing costs and inbound logistics costs such as transportation, inspecting and unloading costs.
• Carrying costs. These are the costs that are incurred for storing the inventory that is not sold. These costs include depreciation of products, opportunity costs and warehousing costs.
• Stock-out costs. These costs include lost income due to a shortage of the inventory. They also include the costs that are associated with the shortage of the inventory. These costs include costs for emergency shipments, change in suppliers and loss of customer loyalty among others.