Inventory Management

An inventory management system (or inventory

system) is the process by which you track your goods
throughout your entire supply chain, from purchasing
to production to end sales. It governs how you
approach inventory management for your business.
• Inventory management refers to the process
of ordering, storing and using a company's
inventory. This includes the management of
raw materials, components and finished
products, as well as warehousing and
processing such items.
• For companies with complex supply chains
and manufacturing processes, balancing the
risks of inventory gluts and shortages is
especially difficult. To achieve these balances,
firms have developed two major methods for
inventory management: just-in-time
(JIT) and materials requirement planning
(MRP).
• KEY TAKEAWAYS
– Inventory management refers to the process of ordering,
storing and using a company's inventory. This includes the
management of raw materials, components and finished
products, as well as warehousing and processing such items.
– For companies with complex supply chains and
manufacturing processes, balancing the risks of inventory
gluts and shortages is especially difficult.
– To achieve these balances, firms have developed two major
methods for inventory management: just-in-time (JIT) and
materials requirement planning (MRP).
 Objectives of Inventory Management
• Maintaining uninterrupted flow of raw materials and finished goods.
This is to ensure continuous production process and timely
fulfillment of demand for goods by customers.
• Getting rid of excessive or inadequate inventory.
• Keeping a check on raw material cost thereby reducing the cost of
production and the overall cost of running the business.
• Reducing losses on account of wastage, damage or spoilage of raw
material inventory.
• Ensuring continuous inventory control. This is done so that inventory
reflecting in the financial statements should always match with the
physical inventory in warehouses.
• Holding optimum inventory as needed by production and sales
process.
• Ensuring that goods are of high quality and are offered at
favorable prices.
• Maintaining optimum level of inventory. This is to ensure
that all the activities including production and operations
are carried out seamlessly.
• Avoiding double ordering of the same raw material stock.
• Providing necessary statistics for future inventory control
and planning.
• Holding various management levels accountable by
laying out clear cut inventory management policy.
 Concept of Inventory:
• What is inventory? Inventory refers to those
goods which are held for eventual sale by the
business enterprise. In other words,
inventories are stocks of the product a firm is
manufacturing for sale and components that
make up the product. Thus, inventories form a
link between the production and sale of the
product.
• (i) Raw Materials:
– These are those goods which have been purchased and stored for future productions.
These are the goods which have not yet been committed to production at all.
• (ii) Work-in-Progress:
– These are the goods which have been committed to production but the finished
goods have not yet been produced. In other words, work-in-progress inventories
refer to ‘semi-manufactured products.’
• (iii) Finished Goods:
– These are the goods after production process is complete. Say, these are final
products of the production process ready for sale. In case of a wholesaler or retailer,
inventories are generally referred to as ‘merchandise inventory’.
– Some firms also maintain a fourth kind of inventory, namely, supplies. Examples of
supplies are office and plant cleaning materials, oil, fuel, light bulbs and the like.
These items are necessary for production process. In practice, these supplies form a
small part of total inventory involving small investment. Therefore, a highly
sophisticated technique of inventory management is not needed for these.
 Benefits of Inventory
Management
The two main benefits of inventory management are that it ensures
you’re able to fulfill incoming or open orders and raises profits.
Inventory management also:
• Saves Money:
Understanding stock trends means you see how much of and where
you have something in stock so you’re better able to use the stock
you have. This also allows you to keep less stock at each location
(store, warehouse), as you’re able to pull from anywhere to fulfill
orders — all of this decreases costs tied up in inventory and
decreases the amount of stock that goes unsold before it’s obsolete.
• Improves Cash Flow:
With proper inventory management, you spend money on inventory
that sells, so cash is always moving through the business.
• Satisfies Customers:
One element of developing loyal customers is ensuring they receive
the items they want without waiting.
 Inventory Management
Techniques and Terms
• ABC Analysis:
This method works by identifying the most and least popular types of
stock.
• Batch Tracking:
This method groups similar items to track expiration dates and trace
defective items.
• Bulk Shipments:
This method considers unpacked materials that suppliers load directly into
ships or trucks. It involves buying, storing and shipping inventory in bulk.
• Consignment:
When practicing consignment inventory management, your business won’t
pay its supplier until a given product is sold. That supplier also retains
ownership of the inventory until your company sells it.
• Cross-Docking:
Using this method, you’ll unload items directly from a supplier truck to the
delivery truck. Warehousing is essentially eliminated.
• Demand Forecasting:
This form of predictive analytics helps predict customer demand.
• Drop shipping:
In the practice of drop shipping, the supplier ships items directly from its
warehouse to the customer.
• Economic Order Quantity (EOQ):
This formula shows exactly how much inventory a company should order to
reduce holding and other costs.
• FIFO and LIFO:
First in, first out (FIFO) means you move the oldest stock first. Last in, first out
(LIFO) considers that prices always rise, so the most recently-purchased
inventory is the most expensive and thus sold first.
• Just-In-Time Inventory (JIT):
Companies use this method in an effort to maintain the lowest stock levels
possible before a refill.
• Lean Manufacturing:
This methodology focuses on removing waste or any item that does not
provide value to the customer from the manufacturing system.
• Materials Requirements Planning (MRP):
This system handles planning, scheduling and inventory control for
manufacturing.
• Minimum Order Quantity:
A company that relies on minimum order quantity will order
minimum amounts of inventory from wholesalers in each order to
keep costs low.
• Reorder Point Formula:
Businesses use this formula to find the minimum amount of stock
they should have before reordering, then manage their inventory
accordingly.
• Perpetual Inventory Management:
This technique entails recording stock sales and usage in real-
time. Read “The Definitive Guide to Perpetual Inventory” to learn
more about this practice.
• Safety Stock:
An inventory management ethos that prioritizes safety stock will
ensure there’s always extra stock set aside in case the company
can’t replenish those items.
 Types of Inventory Model
• Fluctuation inventory
• Anticipation inventory
• Lot size inventory
• Transportation inventory
• Decoupling inventory
Types of Inventory Management
• Bar-code Inventory Management
– The barcode system is its automated and simplified version. The management
can find out the stock remaining with just one click on a computer device. The
scanned barcodes enable the software to maintain a track of all the purchases
and the flow of inventory.
• Continuous Inventory Management
– It links the barcode and radio frequency identification with the accounting
inventory system, inventory received, and point of sales systems along with the
production system, to trace the path of inventory movement. It is mostly
beneficial for accounting purpose. This is also termed as perpetual inventory
management.
• Periodic Inventory Management
– It is a manual process, which is used for determining the closing inventory value,
for putting it up in the ledger at the end of a financial year. Depending on the
organizational need, it can also be analyzed quarterly. However, it is a time-
consuming way, since the inventory has to be physically counted.
Inventory Management Process
• Step 1: Determining the Loopholes
• The foremost step is to evaluate the inventory requirement and the
actual stock of the goods. Also, the reasons for this gap between
the demand and inventory should be ascertained.
• Step 2: Analyzing Consumer Demand and Spending Patterns
• The market demand forecasting holds equal importance. This is
because it helps the organization to estimate the production
quantity, which ultimately leads to the maintenance of adequate
inventory.
• Step 3: Evaluating the Cost Involved
• Its implementation involves different types of expenses such as
warehousing, maintenance, transport, bulk discounts and supply
chain costs. Each of these should be well analyzed.
• Step 4: Identifying the Extent of Process Automation
• It is not possible for every organization to completely automate the
inventory management process. However, the management can recognize
those particular areas where there are possibilities of automation.
• Step 5: Inspecting Supplier’s Practices and Performance
• The next step is to find out the suppliers’ inventory management practices
since this strategy cannot be implemented solely. If the supplier is resistant
to change and tends to proceed with the traditional means, the
organization needs to look for alternative vendors.
• Step 6: Classifying Inventories into Different Categories
• The goods have to be segregated into various categories depending upon
the product type, customer class, maintenance cost or profit margin.
• Step 7: Setting Objectives for Each Inventory Category
• To efficiently manage and track the performance of the
applied technique for each category, it is essential to set
individual goals. It not only provides a base
for benchmarking but also identifies the problems and issues
faced in each of these categories.
• Step 8: Prioritizing the Areas of Improvement
• Now, that we are aware of the problems, the next step is
about finding out the density of each issue and its impact. The
concerns which can be resolved immediately needs to be
addressed first. And then, the ones which are complex and
requires restoration should be considered.
• Step 9: Taking Advice or Opinion from Experts
• Designing an appropriate inventory management system is the
task of the personnel who specialize in the field. Thus, at this
stage, the organization needs to hire consultants or experts for
advice and opinion on current technology and problem fixation
within the desired budget.
• Step 10: Framing Suitable Inventory Management Policy
• The last step is to implement a satisfactory inventory
management strategy for the desired change. This improvement
should be incorporated as an inventory management policy to
deal with the changes in demand and add value to customer
experience.
Importance of Inventory Management
• Enables Enterprise Resource Planning (ERP)
• The ERP software accommodates and links the different business
operations. These are inventory procurement, warehousing, production,
human resource, finance, marketing and sales to one another. In this
process, inventory management contributes its part of providing the
necessary data.
• Proper Warehouse Management
• The barcode system, LIFO and FIFO techniques provide a clear picture of
the past and present inventory available with the company to optimize
the warehousing functions.
• Efficient Inventory Valuation
• It provides for proper evaluation of the different types of inventory, i.e.,
stock in hand, opening and closing stocks, raw material, finished goods,
etc. This data is also used to prepare the cost sheet.
• Supports Supply Chain Management
• Being a segment of supply chain management, it is
responsible for streamlining all the warehousing
operations and flow of raw material or stock.
• Manages Sales Operations
• Sales, as we know, is a continuous process which
depends upon the production of goods or services. If
there is inefficient inventory management in the
organization, the chances of unavailability of raw
material for manufacturing may arise.
Challenges Faced in Inventory Management
• Lack of Knowledge: The personnel at the receiving and
warehousing departments may lack the required expertise
and adequate knowledge of segregating the regular and
seasonal goods out of the whole stock.
• Expanding Product Portfolios: The customers’ demand and
requirements for a wide range of products have tremendously
increased the inventory size, making it difficult to manage,
manually.
• Supply Chain Complexity: The organization, at times, fail to
track the stock or goods during the supply chain process.
Moreover, it is not necessary that the business partners also
maintain an inventory management system, creating hurdles.
• Getting Accurate Stock Details:
If you don’t have accurate stock details,there’s no way to
know when to refill stock or which stock moves well.
• Poor Processes:
Outdated or manual processes can make work error-prone
and slow down operations.
• Changing Customer Demand:
Customer tastes and needs change constantly. If your
system can’t track trends, how will you know when their
preferences change and why?
• Using Warehouse Space Well:
Staff wastes time if like products are hard to locate.
Mastering inventory management can help eliminate this
challenge.