Unit – 2
Inventory Management
Inventory management is the practice overseeing and controlling of the ordering, storage and use of components that a company uses in the production of the items it sells. A component of supply chain management, inventory management supervises the flow of goods from manufacturers to warehouses and from these facilities to point of sale. Inventory control means efficient management of capital invested in raw materials and supplies, work- in – progress and finished goods.
Inventory management is the supervision of noncapitalized assets -- or inventory -- and stock items. As a component of supply chain management, inventory management supervises the flow of goods from manufacturers to warehouses and from these facilities to point of sale. A key function of inventory management is to keep a detailed record of each new or returned product as it enters or leaves a warehouse or point of sale.
Organizations from small to large businesses can make use of inventory management to track their flow of goods. There are numerous inventory management techniques, and using the right one can lead to providing the correct goods at the correct amount, place and time.
Inventory control is a separate area of inventory management that is concerned with minimizing the total cost of inventory, while maximizing the ability to provide customers with products in a timely manner. In some countries, the two terms are used synonymously.
Definition
Inventory management refers to the process of ordering, storing, using, and selling a company's inventory. This includes the management of raw materials, components, and finished products, as well as warehousing and processing of such items.
Why is inventory management important?
Effective inventory management enables businesses to balance the amount of inventory they have coming in and going out. The better a business controls its inventory, the more money it can save in business operations.
A business that has too much stock has overstock. Overstocked businesses have money tied up in inventory, limiting cash flow and potentially creating a budget deficit. This overstocked inventory, which is also called dead stock, will often sit in storage, unable to be sold, and eat into a business's profit margin.
But if a business doesn't have enough inventory, it can negatively affect customer service. Lack of inventory means that a business may lose sales. Telling customers they don't have something, and continually backordering items, can cause customers to take their business elsewhere.
An inventory management system can help businesses strike the balance between being under- and overstocked for optimal efficiency and profitability.
The inventory management process:
Inventory management is a complex process, particularly for larger organizations, but the basics are essentially the same, regardless of the organization's size or type. In inventory management, goods are delivered in the receiving area of a warehouse -- typically, in the form of raw materials or components -- and are put into stock areas or onto shelves.
Compared to larger organizations with more physical space, in smaller companies, the goods may go directly to the stock area instead of a receiving location. If the business is a wholesale distributor, the goods may be finished products, rather than raw materials or components. Unfinished goods are then pulled from the stock areas and moved to production facilities where they are made into finished goods. The finished goods may be returned to stock areas where they are held prior to shipment, or they may be shipped directly to customers.
Inventory management uses a variety of data to keep track of the goods as they move through the process, including lot numbers, serial numbers, cost of goods, quantity of goods and the dates when they move through the process.
Key takeaways - Inventory management is the entire process of managing inventories from raw materials to finished products.
Inventory management tries to efficiently streamline inventories to avoid both gluts and shortages.
The objective of inventory management is to maintain inventory at an appropriate level to avoid excess or shortage of inventory. Inventory management systems reduce the cost of carrying inventory and ensure that the supply of raw material and finished goods remains continuous throughout the business operations. The objectives specifically may be divided into two categories mentioned below:
A. Operating objectives: They are related to the operating activities of the business-like purchase, production, sales etc.
- To ensure continuous supply of materials.
- To ensure uninterrupted production process.
- To minimize the risks and losses incurred due to shortage of inventory.
- To ensure better customer services.
- Avoiding of stock out danger
B. Financial Objectives:
- To minimize the capital investment in the inventory.
- To minimize inventory costs.
- Economy in purchase.
Apart from the above objectives, inventory management also emphasize to bring down the adverse impacts of holding excess inventory. Holding excess inventory lead to the following consequences:
- Unnecessary investment of funds and reduction in profit.
- Increase in holding costs.
- Loss of liquidity.
- Deterioration in inventory.
Key takeaways - The objective of inventory management is to maintain inventory at an appropriate level to avoid excess or shortage of inventory
Advantages of inventory management
Accurate inventory management is key to running a successful product business. Tracking stock regularly can help avoid stock errors and other problems. The following are the benefits of strong inventory management:
- It helps to maintain the right amount of stocks: contrary to the belief that is held by some people, inventory management does not seek to reduce the amount of inventory that you have in stock, however, it seeks to maintain an equilibrium point where your inventory is working at a maximum efficiency and you do not have to have many stocks or too few stocks at hand at any particular point in time. The goal is to find that zone where you are never losing money in your inventory in either direction. With the aid of an efficient inventory management strategy, it is easy to improve the accuracy of inventory order.
2. It leads to a more organized warehouse: with the aid of a good inventory management system, you can easily organize your warehouse. If your warehouse is not organized, you will find it very difficult to manage your inventory. A lot of businesses choose to optimize their warehouse by putting the items that have the highest sales together in a place that is easy to access in the warehouse. This ultimately helps to speed up order fulfilment and keeps clients happy.
3. It saves time and money: an effective inventory management system can translate to time and money saved on the part of the business. By keeping track of the product that you already have at hand, you can save yourself the hassles of having to do an inventory recount in order to ensure your records are accurate. It also allows you to save cash that would have otherwise been spent on slow moving products.
4. Improves efficiency and productivity: inventory management devices like bar code scanners and inventory management software can help to greatly increase the efficiency and productivity of a business. They do this by eliminating the manual way of doing things thus allowing employees to do other more important things for the business.
5. A well-structured inventory management system leads to improved customer retention: for customers to keep patronizing you, you will need to always have the goods they want, at the amount they want, and at the time they want it. Inventory management helps you to meet up this demand by allowing you to have the right products all the times so that you and your customers are never stranded.
6. Avoid lawsuits and regulatory fines: like mentioned previously, inventory management allows you to keep your warehouse or facility in order. If it is not kept in order, it can result in lawsuits, injury and fines associated with not following regulatory guidelines and rules. In addition, proper inventory management (including keeping records of your staff activities) helps document your actions in the event of an undesirable situation.
7. Schedule maintenance: once you get hold of a new appliance, you can begin to schedule routine and preventative maintenance, issue work order to your staff and track that the maintenance was actually carried out. This will help to elongate the life span of that particular asset.
8. Reduction in holding costs: yet another benefit of an efficient management system is that it helps to save on inventory cost. These types of cost can be large and can be detrimental to a healthy profit margin. These types of costs are financing costs, warehouse rent, warehouse staff salaries, electricity bills, security et al. The key to keeping these costs in check is to have only the amount of inventory that you need at a particular time. With an inventory management program that assists you to make good forecasts, you can avoid over stocking and thus over pay on holding costs. Furthermore, having confidence in your forecast will mean that you will not have to hold a lot of “safety stock”.
9. Flexibility: a good inventory management strategy will allow the manager to be flexible and adapt to situations as they arise. The business world is dynamic and often unpredictable, and the same can also be said for inventory management.
10. Increased information transparency: a good inventory management helps to keep the flow of information transparent. This information includes when items were received, picked, packed, shipped, manufactured et al. You also get to know when you need to order more of any good, when you have too much stock or too little stock.
Disadvantages of inventory management
- Bureaucracy: even though inventory management allows employees at every level of the company to read and manipulate company stock and product inventory, the infrastructure required to build such a system adds a layer of bureaucracy to the whole process and the business in general. In instances where inventory control is in-house, this includes the number of new hires that are not present to regulate the warehouse and facilitate transactions. In instances where the inventory management is in the hands of a third party, the cost is a subscription price and a dependence on another separate company to manage its infrastructure. No matter the choice you go for, it translates to a higher overhead cost and more layers of management between the owner and the customer. From the view point of the customer, a problem that requires senior management to handle will take a longer period of time before it will be trashed out.
2. Impersonal touch: another disadvantage of inventory management is a lack of personal touch. Large supply chain management systems make products more accessible across the globe and most provide customer service support in case of difficulty, but the increase in infrastructure can often mean a decrease in the personal touch that helps a company to stand out above the rest. For instance, the sales manager of a small manufacturing company that sells plumbing supplies to local plumbers can throw in an extra box of washers or elbows at no charge to the customer without raising any alarms. This is done for the sake of customer relations and often makes the customer feel like he is special. While free materials can also be provided under inventory management, processing time and paper work make obtaining the material feel more like a chore for the customer or even an entitlement.
3. Production problem: even though inventory management can reveal to you the amount of stock you have at hand and the amount that you have sold off, it can also hide production problems that could lead to customer service disasters. Since the management places almost all of its focus on inventory management to the detriment of quality control, broken or incorrect items that would normally be discarded are shipped along with wholesome items.
4. Increased space is need to hold the inventory: in order to hold inventory, you will need to have space so unless the goods you deal in are really small in size, then you will need a warehouse to store it. In addition, you will also need to buy shelves and racks to store your goods, forklifts to move around the stock and of course staff. The optimum level of inventory for a business could still be a lot of goods and they will need space to be stored in and in some cases additional operational costs to manage the inventory. This will in turn increase cost and impact negatively on the amount of profit the business makes.
5. Complexity: some methods and strategies of inventory management can be relatively complex and difficult to understand on the part of the staff. This may result in the need for employees to undergo training in order to grasp how the system works.
6. Some inventory management systems such as the fixed order period system compels a periodic review of all items. This itself makes the system a bit inefficient.
7. High implementation costs: some inventory management systems can come at a high price because the business needs to install specialized systems and software in order to use them. This can be problematic for large businesses which operate in difficult locations. Even after installing the costly system, it still needs to be maintained and upgraded on a regular basis, thus incurring more costs.
8. Even with an efficient inventory management method, you can control but not eliminate business risk.
9. The control of inventory is complex because of the many functions it performs. It should thus be viewed as a shared responsibility.
10. Holding inventory can result to a greater risk of loss to devaluation (changes in price).
Key takeaways - Inventory management involves the supervision of non-capitalized assets and stock items. It sees to the flow of goods from manufacturers to the warehouse and from these facilities to the point of sale.
Sources
- Pandey, I M, Financial Management. Vikas Publications.
- Chandra, P Financial Management-Theory and Practice (Tata Mc Graw Hill).
- Rustagi, R.P. Fundamentals of Financial Management.Taxmann Publication Pvt.Ltd.
- 5.Singh J.K, Financial Management-Text And Problems.2nd Edition Dhanpat Rai And Company,Dellhi.
