Quality and inventory management
Quality keeps customers loyal and reduces costs. Inventory management balances having enough stock against the cost of holding it.
What quality means
Quality means meeting or exceeding customer expectations consistently: reliability, durability, performance, features, and service. Poor quality causes returns, warranty costs, lost customers, and reputational damage. Prevention is usually cheaper than fixing defects after the fact.
Quality control and assurance
Quality control inspects products to find and remove defects, often at the end of production. Quality assurance builds quality into every stage, preventing defects through standards, training, and process design. Statistical process control uses sampling and control charts to detect when a process drifts out of its normal range.
Total quality management
Total quality management (TQM) makes quality everyone's responsibility, focusing on customer satisfaction, continuous improvement, and employee involvement. W. Edwards Deming, who helped Japanese manufacturers improve quality after World War II, emphasised reducing variation and fixing systems rather than blaming workers.
Six Sigma and ISO 9001
Six Sigma, developed at Motorola in the 1980s, uses data to reduce defects to no more than 3.4 per million opportunities, following the DMAIC cycle: define, measure, analyse, improve, control. ISO 9001 is an international standard for quality management systems; certification signals that a firm follows documented quality processes.
Why hold inventory
Inventory includes raw materials, work in progress, and finished goods. Businesses hold it to meet demand, protect against supply delays, and benefit from bulk buying. But holding inventory costs money: storage, insurance, spoilage, obsolescence, and the opportunity cost of cash tied up.
Inventory methods
Just-in-time (JIT) inventory receives materials only as needed, minimising holding costs but requiring reliable suppliers. Buffer stock (safety stock) protects against unexpected demand or delays. The economic order quantity model balances ordering costs against holding costs. ABC analysis focuses attention on the few high-value items that matter most.
Lessons from disruption
During the COVID-19 pandemic and the 2021 semiconductor shortage, many businesses relying on lean, just-in-time supply found themselves unable to get parts. Car makers halted production lines. Many firms responded by holding more safety stock of critical components and diversifying suppliers, balancing efficiency with resilience.
Worked example
A shop sells 20 units a day of a product, and its supplier takes 5 days to deliver. It keeps a safety stock of 40 units. The reorder point is 20 x 5 + 40 = 140 units: when stock falls to 140, it places a new order so that, even with a short delay, it will not run out before the delivery arrives.
Key takeaways
Quality means consistently meeting expectations; prevention is cheaper than correction. Quality control inspects; quality assurance prevents; statistical process control monitors variation. TQM and Deming emphasise continuous improvement and systems. Six Sigma targets 3.4 defects per million; ISO 9001 certifies quality systems. Inventory meets demand but costs money. JIT minimises stock; safety stock protects against shocks. Recent disruptions pushed firms to balance efficiency with resilience.
Flashcard
Consistently meeting customer expectations
Check your understanding
A store sells 30 units a day, delivery takes 4 days, and it keeps 50 units of safety stock. What is its reorder point?