Unit 2: Development strategies and inventory
Operations Strategy notes · PTU syllabus (MBA 951-18)
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Unit summary
New products and the right inventory policies shape cost and responsiveness. This unit covers product and service development strategy, inventory concepts, reasons for holding inventory, types of inventory, inventory reduction tactics, inventory turnover, and ABC, VED and FSN selective inventory management.
After this unit you can
- Explain product and service development strategy
- Explain inventory concepts, reasons and types
- Apply inventory reduction tactics and inventory turnover
- Apply ABC, VED and FSN analysis
PTU syllabus topics
- Product and service development strategy
- inventory concepts
- reasons for holding inventory
- types of inventory
- inventory reduction tactics
- inventory turnover
- ABC/VED/FSN selective inventory management
ABC
Annual consumption value
Tight control of A items
VED
Criticality: vital, essential, desirable
Never run out of vital items
FSN
Movement: fast, slow, non-moving
Clear non-moving stock
Topic 1
Product and service development strategy
- 1
Idea generation
- 2
Screening
- 3
Concept development and testing
- 4
Business analysis
- 5
Product and process design
- 6
Testing and validation
- 7
Launch
- Strategies: first-mover vs fast-follower; platform and modular design; mass customisation; concurrent engineering with cross-functional teams; design for manufacture and assembly; quality function deployment (house of quality) to translate customer needs into specifications.
- Service development: service blueprinting, customer participation, front-office and back-office design, pilot testing.
Example
Maruti Suzuki builds several models on common platforms, sharing components to cut cost and development time while offering variety.
Topic 2
Inventory concepts and reasons for holding inventory
- Inventory: stock of items held for future use or sale — an asset that ties up capital.
Cycle stock
Ordering in lots for economies
Safety (buffer) stock
Protect against demand and lead-time uncertainty
Anticipation stock
Seasonal demand, promotions, price rises
Pipeline (in-transit) stock
Goods moving through the supply chain
Decoupling stock
Separate stages so each works independently
Hedge stock
Protect against price or supply shocks
Topic 3
Types of inventory
- Raw materials, work in progress, finished goods, MRO (maintenance, repair and operating supplies), spares, goods in transit.
Topic 4
Inventory reduction tactics
Cycle stock
Large lot sizes
Reduce set-up and ordering costs (SMED), smaller lots
Safety stock
Uncertainty
Better forecasting, shorter and reliable lead times, supplier collaboration
Anticipation stock
Seasonal peaks
Level demand through pricing; flexible capacity
Pipeline stock
Long lead times
Faster transport, nearer suppliers, fewer stages
- Other approaches: JIT and Kanban, vendor-managed inventory, consignment stock, postponement (delay final customisation), standardising components, eliminating obsolete stock.
Topic 5
Inventory turnover
Inventory turnover
Cost of goods sold ÷ average inventory (at cost)
Days of inventory
365 ÷ inventory turnover
Weeks of supply
Average inventory ÷ weekly cost of goods sold
Example
Cost of goods sold ₹120 crore, average inventory ₹15 crore → turnover 8 times; days of inventory = 365 ÷ 8 ≈ 46 days.
- Higher turnover means less capital tied up, but too little stock risks stock-outs.
Topic 6
EOQ and ABC analysis
Economic Order Quantity
EOQ = √(2DS / H)
D annual demand, S ordering cost per order, H holding cost per unit per year
Reorder level
Lead time demand + safety stock
Number of orders
D / EOQ
Example
D = 10,000 units, S = ₹50, H = ₹4. EOQ = √(2 × 10,000 × 50 / 4) = √2,50,000 = 500 units, so 20 orders a year.
A items
About 10%
About 70% — tight control
B items
About 20%
About 20% — moderate control
C items
About 70%
About 10% — simple control
Topic 7
VED and FSN analysis
- VED analysis classifies items (especially spares) by criticality: vital (production stops without them — keep ample stock), essential (stoppage cost high but tolerable for a short time), desirable (little effect).
- FSN analysis classifies by movement: fast-moving, slow-moving and non-moving — identifies obsolete stock for disposal.
- Combined matrices: ABC–VED matrix — e.g., a C-class vital spare is still stocked generously, while an A-class desirable item is bought only when needed.
Key terms
- Stage-gate process
- Product development with go/kill decisions at each gate
- Safety stock
- Extra stock against uncertainty
- Postponement
- Delaying final product customisation
- Inventory turnover
- Cost of goods sold divided by average inventory
- VED analysis
- Classification by criticality
Quick revision
- Development: stage-gate, platforms, concurrent engineering, QFD; service design.
- Functions of inventory: cycle, safety, anticipation, pipeline, decoupling, hedge.
- Types: raw materials, WIP, finished goods, MRO.
- Reduction tactics by type; JIT, VMI, postponement; turnover and days of supply.
- ABC (value), VED (criticality), FSN (movement); combined matrices.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is quality function deployment?
- Q2.Name four reasons for holding inventory.
- Q3.What is decoupling stock?
- Q4.State two tactics to reduce cycle stock.
- Q5.Calculate inventory turnover if COGS is ₹60 lakh and average inventory ₹10 lakh.
- Q6.Distinguish VED and FSN analysis.
Long-answer questions
- Q1.Explain product and service development strategies.
- Q2.Explain the reasons for holding inventory and the types of inventory.
- Q3.Discuss inventory reduction tactics and the measurement of inventory turnover.
- Q4.Explain ABC, VED and FSN selective inventory control.
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