Inventory or stock is the goods and materials that a business holds for the ultimate goal of resale. It is to do with keeping accurate records of goods that are ready for shipment and maintaining enough stock of goods.
Inventory management primarily specifies the shape and placement of stocked goods.
As a component of supply chain management, inventory management supervises non-capitalized assets, the flow of goods from manufacturers to warehouses and from these facilities to point of sale.
Inventories can further be classified under the following
1. Indirect Inventory
2. In-process Inventory
3. Raw material Inventory
Objectives of inventory control
1. Avoid over/under investment in inventories.
2. Maintain good product quality at an optimised cost
3. Provide adequate level of customer service
4. Maximize the level of customer service by avoiding understocking.
Major benefits of a good inventory management strategy
Greater Accuracy of Inventory Orders
Proper inventory management helps gauge the exact inventory you need to stock. This ensures there is no shortage of products and will also avoid overstocking in the warehouse.
Better Utilisation of the Warehouse Space
A good inventory management strategy supports an organized warehouse which in turn helps in optimising the products it stores. The products could be categorized as per their demand value and will in turn speed up the order fulfilment process.
It Helps Save Time
If the records of the stored products and the inbound products are in place, a reasonable amount of effort can be saved in recounting the stocks once they have arrived or are due for delivery.
It Increases Efficiency and Productivity
Inventory management devices, such as barcode scanners and inventory management software, can help drastically improve your efficiency and productivity. These devices will help eliminate manual processes so your employees can focus on other – more important – areas of the business.
A good inventory management strategy keeps your customers coming back for more
If you want your hard-earned customers to come back for your products and services, you need to be able to meet customer demand quickly. Inventory management makes this possible by allowing you to have the right products as soon as your customers need them thus leading to repeat customers.
Account for returned goods
When the company has a return policy in place, there is usually a sub-category contained in the finished goods inventory to account for any returned goods that are reclassified or second grade quality. Accurately maintaining figures on the finished goods inventory makes it possible to quickly convey information to sales personnel as to what is available and ready for shipment at any given time by the buyer.
Other benefits of inventory management
- Aids better service level
- Eliminates unnecessary storage cost
- High inventory turnover brings revenues
- Regular supply at optimised cost warrants customer satisfaction
- Effective inventory control enhances market share
- Inventory control improves product quality
- Effective inventory control brings the potential saving
- It avoids cost overheads in operation
- Inventory control strategy facilitates purchase economies
Some Important Terms in Inventory Management
Economic Order Quantity (EOQ) :
The optimal order quantity that will minimize total inventory costs .The carrying cost per unit per year is determined through the annual requirement to the total EOQ
Reorder Point :
Inventory point at which a new order is placed. R = dL where d = demand rate per period, L = lead time
Fixing Stock Levels :
A standard that does not permit to exceed the limits.
Reorder Level :
The level where the stock level reaches a stage indicating the replenishment of the stock as there is always a gap between placing an order and actually getting the stock . Re- order level= maximum usage rate * maximum reorder period .
Maximum Level :
Indicates the maximum quantity of an item of inventory which can be held in store at any time. Maximum level= (Reorder level + Reorder quantity) – minimum consumption rate * minimum Re-order period)
Minimum Level :
Indicates the quantitative balance of an item of inventory which must be maintained at all times. Minimum level= Reorder level – (normal usage rate * normal Re-order Period)
Average stock level :
Average stock level= maximum level + minimum level
VED Analysis :
According to this analysis, the utility of items depends on their value. The inventory items are grouped into vital, essential, and desirable.
Vital items: Inadequate inventory of these may significantly disrupt the product activities.
Essential items: Their unavailability even for a few hours shoots the cost of product lost.
Desirable items: Need to maintain these in inventory on a regular basis as they do not have any immediate impact on production.
SDE Analysis :
The inventory is categorized into:
Scarce items: High on demand but usually in short supply.
Difficult items: Generally cannot be procured easily
Easy items: Their supply flow is regular and can be procured easily.
FSN Analysis :
Items here are grouped as:
Fast moving items are stored in large quantities and a close
Slow moving items are not frequently required
Non moving items are rarely required by the production department .
Just In Time (JIT) Inventory System :
It aims at reducing the inventory carrying costs thereby improving the ROI. It also helps in establishing a greater efficiency and quality through a point to point communication between the processes.
Two Bin System :
The inventory items are stored in two separate bins. The first bin holds a sufficient supply for a designated period of time. The second bin maintains stock using lead time. When the stock of the first bin is about to exhaust, a new order is immediately placed. In the meanwhile, the stock from the second bin is used. On receipt of a new order, the second bin is restored and the balance is put in the first bin.
Inventory management is important for keeping costs down, while meeting regulation. Supply and demand is a delicate balance, and inventory management hopes to ensure that the balance is undisturbed. The ROI of Inventory management is reflected in increased revenue and profits, optimal employee atmosphere, and an increased customer satisfaction rate.
The above blog has been collaborated on by Desmond Christopher, our Logistics Team member. For more such articles, stay tuned to Square Off’s Blog space.
Check out the world’s smartest AI board, that makes its own moves!