EXPLANATION ON INVENTORY MANAGEMENT

Brief Explaining about Inventory Management of the Benefits, Types of Inventory, Objectives, Techniques, Challenges and Process Involved in Inventory Management 

Definition -

The term inventory includes raw material, work-in-process, finished goods and stores and spares.

MRO inventories required for maintenance, repair and operating machinery.

Objectives of Inventories:

The primary objective of inventory management is to ensure continuous supply of raw materials and facilitate uninterrupted production.

Obtaining a reasonable utilization of people and equipment is one of the reasons for holding inventories.

Why Is Inventory Management Important?

Inventory management is vital to a company’s health because it helps make sure there is rarely too much or too little stock on hand, limiting the risk of stockouts and inaccurate records.

Public companies must track inventory as a requirement for compliance with Securities and Exchange Commission (SEC) rules and the Sarbanes-Oxley (SOX) Act. Companies must document their management processes to prove compliance.

Benefits of Inventory Management

                        The main benefits of inventory management are that it ensures you’re able to full fill 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 ful fill 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.

How Inventory Management Works:

                         The Goal of inventory management is to understand stock levels and stock’s location in warehouses. Inventory management software tracks the flow of products from supplier through the production process to the customer. In the warehouse, inventory management tracks stock receipt, picking, packing and shipping.

Inventory Management Challenges

The primary challenges of inventory management are having too much inventory and not being able to sell it, not having enough inventory to fulfill orders, and not understanding what items you have in inventory and where they’re located. Other obstacles include:

1. 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.

2.Poor Processes:
Outdated or manual processes can make work error-prone and slow down operations.

3.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?

4.Using Warehouse Space Well:
Staff wastes time if like products are hard to locate. Mastering inventory management can help eliminate this challenge.

What Are the Different Types of Inventory?

There are 13 different types of inventory:

1. Raw Materials: Raw materials are the materials a company uses to create and finish products. When the product is completed, the raw materials are typically unrecognizable from their original form, such as oil used to create shampoo.

2.  Components: Components are like raw materials in that they are the materials a company uses to create and finish products, except that they remain recognizable when the product is completed, such as a screw.

3. Work In Progress (WIP): WIP inventory refers to items in production and includes raw materials or components, labor, overhead and even packing materials.

4.     Finished Goods: Finished goods are items that are ready to sell.

5. Maintenance, Repair and Operations (MRO) Goods: MRO is inventory — often in the form of supplies — that supports making a product or the maintenance of a business.

6.  Packing and Packaging Materials: There are three types of packing materials. Primary packing protects the product and makes it usable. Secondary packing is the packaging of the finished good and can include labels or SKU information. Tertiary packing is bulk packaging for transport.

7. Safety Stock and Anticipation Stock: Safety stock is the extra inventory a company buys and stores to cover unexpected events. Safety stock has carrying costs, but it supports customer satisfaction. Similarly, anticipation stock comprises of raw materials or finished items that a business purchases based on sales and production trends. If a raw material’s price is rising or peak sales time is approaching, a business may purchase safety stock.

8.     Decoupling Inventory: Decoupling inventory is the term used for extra items or WIP kept at each production line station to prevent work stoppages. Whereas all companies may have safety stock, decoupling inventory is useful if parts of the line work at different speeds and only applies to companies that manufacture goods.

9.     Cycle Inventory: Companies order cycle inventory in lots to get the right amount of stock for the lowest storage cost. Learn more about cycle inventory formulas in the “Essential Guide to Inventory Planning.”

10. Service Inventory: Service inventory is a management accounting concept that refers to how much service a business can provide in a given period. A hotel with 10 rooms, for example, has a service inventory of 70 one-night stays in each week.

11. Transit Inventory: Also known as pipeline inventory, transit inventory is stock that’s moving between the manufacturer, warehouses and distribution centers. Transit inventory may take weeks to move between facilities.

12. Theoretical Inventory: Also called book inventory, theoretical inventory is the least amount of stock a company needs to complete a process without waiting. Theoretical inventory is used mostly in production and the food industry. It’s measured using the actual versus theoretical formula.

13. Excess Inventory: Also known as obsolete inventory, excess inventory is unsold or unused goods or raw materials that a company doesn’t expect to use or sell but must still pay to store.

Inventory Costs

Inventory costs includes ordering cost plus carrying costs.

 1.Ordering Costs

 2.Carrying Costs

·        Capital Costs

          Capital cost is the loss of interest on money invested in inventory building and inventory control equipment.

·        Storage Space Costs

·        Inventory Service Costs

·        Handling-equipment Costs

·        Inventory Risk Costs

3.Out-of-stock Costs

4.Capacity Costs

Inventory Management and Control

  Inventory management involves administration, policies and procedures to reduce in inventory cost.

Factors Influencing Inventory Management and Control

·        Type of Product

·        Type of Manufacture

·        Volume of Production

Process of Inventory Management and Control:

Step 1: - Determination of optimum inventory levels and procedures of their review and                 adjustment.

Step 2: -Determination of the degree of control that is required for the best results.

Step 3: - Planning and design of the inventory control system.

Step 4: - Planning of the inventory control organization.

Inventory Management Techniques:

1.     Always better control (ABC) classification.

2.     High, medium and low (HML) classification.

3.     Vital, essential and desirable (VED) classification.

4.     Scarce, difficult and easy to obtain (SDE).

5.     Fast moving, slow moving and non-moving (FSN).

6.     Economic order quantity (EOQ).

7.     Max-Minimum system.

8.     Two bin system.

Some inventory management techniques use formulas and analysis to plan stock. Others rely on procedures. All methods aim to improve accuracy. The techniques a company uses depend on its needs and stock.

 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

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.

Six Sigma:
This is a data-based method for removing waste from businesses as it relates to inventory.

Lean Six Sigma:
This method combines lean management and Six Sigma practices to remove waste and raise efficiency.

Demand Planning and Inventory Management:                                  

      Demand planning is an important part of successful inventory management. It is the process of determining how much of each item you anticipate selling, and when. Once demand is determined, inventory management follows the flow of goods from the supplier through production and ultimately fulfilling customer orders.

Inventory Management Formulas:                                                  

                                               Understanding inventory management formulas is crucial to optimizing stock levels. Multiple inventory and accounting professionals have vetted formulas to make inventory calculations easier.

Inventory Management KPIs :                                                                       

                                  Effective inventory management plays an important role throughout the supply chain. There are many key performance indicators for measuring inventory management success throughout the different organizations in the business. Understand which calculations return the most insight into your business processes is important.

How is Inventory Management different from other Process?

Inventory management controls all stock within a company. Supply chain management manages the process from supplier to delivering the product to the customer. Warehouse management is a part of inventory control and focuses on stock in a specific location.

Inventory Management vs. Inventory Control

inventory control is a part of the overall inventory management process. Inventory control manages the movement of items within the warehouse.

Inventory Management vs. Inventory Optimization

Inventory optimization is the process of using inventory in the most efficient way, and as a result minimizing the dollars spent on stock and storing those items.

You can also think about inventory optimization as seeing inventory across all locations and selling channels, being able to use any of it to fulfill customer orders—in doing so, you can hold less stock overall.

Inventory Management vs. Order Management

Inventory management is responsible for ordering and tracking stock as it arrives at the warehouse. Order management is the process of receiving and tracking customer orders. Software often combines both tasks.

Inventory Management plays an important role in order management. As orders are received, inventory can be allocated to specific orders, and then the status can be changed in the inventory record to essentially put it “on hold” for that order. Furthermore, when the order management system and inventory system are integrated, the inventory system can recommend which location should fulfill the order, based on where all the items in the order are available—this eliminates multiple shipments for a single order.

Inventory Management vs. Supply Chain Management

Supply chain management is a process of managing supply relationships outside a company and the flow of stock into and through a company. Inventory management may focus on trends and orders for the company or a part of the company.

Inventory management is essential for a properly running supply chain. Inventory management follows the flow of goods to, through and out of the warehouse. The supply chain includes demand planning, procurement, production, quality, fulfilment, warehousing and customer service—all of which require inventory visibility.

Inventory Management vs. Warehouse Management

Warehouse management complements inventory management. Warehouse management organizes stock in a warehouse. Inventory management manages stock and trends for many warehouses or an entire company.

The key to streamlining your warehouse operations is a thoughtfully laid out and meticulously organized facility. When each product has a specific place in the warehouse, it prevents staff from moving about inefficiently and maximizes labour efficiency. But these processes are only as good as the inventory records that drive them.

Inventory Management vs Logistics

Logistics is the practice of controlling processes in a warehouse and in the replenishment and delivery systems. Inventory management maintains stock levels and manages stock location.

Inventory management is a crucial part of how companies manipulate their logistics. The relationship between inventory management and logistics is interdependent. Logistics need inventory management to perform their activities. Good logistics systems improve warehouse and operational activities.

INVENTORY BEST PRACTICES

The business saying if you can’t measure it, you can’t manage it” applies to inventory management and best practices. While the first best practice is keeping track of your inventory, others include:

Carry Safety Stock:

Also known as buffer stock, these products help keep companies from running out of materials or high-demand items. Once companies deplete their calculated supply, safety stock serves as a backup should the level of demand increase unexpectedly.

Invest in a Cloud-based Inventory Management Program:

Cloud-based inventory management systems let companies know in real-time where every product and SKU are located globally. This data helps an organization be more responsive, up-to-date, and flexible.

Start a Cycle Count Program:

Cycle counting benefits extend well past the warehouse by keeping stock reconciled and customers happy while also saving businesses time and money.

Use Batch/Lot Tracking:

Record information associated with each batch or lot of a product. While some businesses log precise details, such as expiration dates that provide information about their products’ sellable dates, companies that do not have perishable goods use batch/lot tracking to understand their products’ landing costs or shelf lives.

What is Multi-location inventory management?

Multi-location inventory management is the process of managing stock across multiple locations, warehouses, and retail stores or across multiple selling channels. With multi-location management, you can watch stock levels in all locations and optimize your inventory to fulfill orders.