Inventory is the idle stock of products that holds a significant economic value. It is held by the business to meet the future requirements of the market. The goods held in the companyâ€™s custody are lined up for packaging, processing, and transportation to meet the sudden requirements.
Inventory management is a dynamic process that requires constant observation of internal and external factors influencing the supply chain. In general, companies have a separate department that plans and reviews all inventory-related operations. The inventory department monitors the entire process and maintains an interface with the companyâ€™s production, procurement, and finance divisions.
Inventory management helps businesses to keep track of the stock. An organized system can save the cost of managing excessive stock and support the businesses in managing the supply chain in situations of urgent demand. Technology-enabled analytics can help in evaluating order frequency and customer behavior. Predictive analytics can help in identifying market trends and demand patterns based on the fluctuations in inventory levels.
The Stages of Inventory Management
Inventory management begins from the production of raw material and continues till the final point of sale. It is an ever-going process that requires keen attention to be paid. Manufacturers, transporters, and retailers need to analyze the demand and supply chain to decipher when to order and how much to order. Safe storage is a very important phase of inventory management, especially for goods that have a short shelf-life. Therefore, every stage of inventory management has limitations of time, space, and resources. Following are the basic steps involved in inventory management:
Purchase of inventory: Readymade goods are procured and delivered to the storage point or point of sale.
Inventory storage: Inventory is kept idle till the time the market raises its demand. Finished goods or raw materials are kept ready to be delivered across the desired supply chain network.
Profit generation: The demand-supply chain influences the inventory to be kept idle. More inventories are required to meet the high market demand and vice-versa. One can control the quantity to be supplied via an efficient supply chain to deliver products to customers and reap profits.
Inventory management is the optimization of the overall supply chain process to meet the market demand. The market demand could be categorized as independent or dependent demand. The independent demand of a product does not depend on another item, and can analyze it based on the previously confirmed orders or past consumer data. While dependent demand of a product signifies the dependency of one good over another, such as raw material demand depends on the demand of finished goods in the market.
The independent demand is managed by sales forecast (sales order process), while the dependent demand is managed by Enterprise Resource Planning or Material Resource Planning. The management of raw materials inventory is more complex than managing finished goods inventory. The inventory management process includes analysis of delivery capacity, lead times, delivery schedule, logistics, and transit timelines. A holistic inventory management process must include regular tabulation and audits followed by report generation to assist in financial and management decisions.
Inventory is the asset for a business that holds a significant value. Its management or accounting can be done by three methods of (FIFO) First-in-First Out, (LIFO) Last-in-First Out, and weighted average costing. The four categories of inventory accounting are: Raw materials, Work in process, Finished goods, and Merchandise.
Raw materials are the resources used to produce finished goods. Work-in-process signifies the transformation of raw materials into finished goods. Finished goods are final products available for sale to customers. Merchandise is the finished goods procured by a company from a supplier for resale. The methods used by businesses for the overall analysis of the stock holdings are referred to as inventory management methods. It includes just-in-time (JIT) management, Material Requirement Planning (MRP), and Economic Order Quantity.
Just-in-time management â€“ It is commonly referred to as JIT. It allows companies to save costs by reducing insurance costs and wastage. Only the inventory that is needed to produce and sell products is kept in stock. This method bears the risk in case of unexpected spikes in market demand.
Materials Requirement Planning â€“ It is dependent on the sales forecast. The manufacturers must maintain accurate sales records to plan the inventory needs. The records and needed inventory are then communicated to materials suppliers. However, this method is at risk; if a manufacturer cannot do a specific sales forecast and plan inventory acquisition.
Economic Order Quantity â€“ It is used to calculate the number of units that should add to inventory to reduce the total costs. An assumption of constant consumer demand is made in this method. It includes both the holding and setup costs and attempts to ensure that the right quantity is ordered per batch to avoid recurring orders.
Besides these methods, ABC analysis, drop shipping, and qualitative analysis of inventory analyze the market trend. The inventory accounting methods help the businesses to meet the demand variations, cater to cyclical and seasonal fluctuations, maintain economies of scale, and reduce the overall cost and transit times.
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