.
What is Inventory Management? – Inventory management is one of the most important logistical tasks. It is a set of techniques used to balance the level of inventories within different companies. The aim is to reduce the cost of supplies as much as possible while maintaining the level of service demanded by customers.
Many economic operators face problems that make it difficult to find the optimal inventory management policy – the inability to predict demand, the precarious supply process, long delivery times, the short demand time for certain (especially seasonal) products. Inventory management inputs come from demand forecasts and product prices. Inventory management is a continuous process that balances between requests to meet demand and to keep costs at a low level.
.
To understand better let us clarify what a stock is and why a stock is needed. Stock is the collection of goods that one keeps available to sell or produce. In most cases, it is an investment with the aim of a better or faster service to the customer. Stock can consist of raw materials, parts, semi-finished products and finished products.
.
One of the main reasons for keeping stock is that the “inflow” and “outflow” of goods are out of sync. This can take on several facets: packaging, timing and the like. Another main reason for keeping stock is the waiting times, a buyer wishes his product (e.g. a garment) at very short notice or even immediately, but the production time and transport time takes several weeks.
.
Types of stock
.
There was a time when warehouses were used to store goods that had stood there for quite a long time. Nowadays the warehouse serves to bridge the demand and in this sense, we can actually talk about three types of stock:
.
Cyclic stock – stocks to bridge the period between two orders. The sheer quantity of the order is determined by the cost of that order and the cost of keeping the stock of that product.
Seasonal stock – inventories produced and collected in one period to be delivered in the future for future demand. Seasonal inventories are to take advantage of economies of scale or volume, but stacking these stocks requires us to be accurate in predicting demand.
Safety stock – inventories that are necessary to cover the uncertainty factor in the supply chain such as demand uncertainty and cycles from order to delivery. Distributors and retailers (retail sector) do not like to run out of goods as this directly reflects the security inventory revenues we can define as the quantity of stock of an item at hand (in stock) at the time of arrival of the new delivery. This means that this stock does not reverse (the coefficient of the stock is zero). And as we mentioned earlier, this stock is converted into a thing of your fixed (basic) assets and is the bearer of the cost of holding stock.
.
.
Coming back to the question what is Inventory management? It is the daily follow-up of inventory levels, both in the short and medium-term. The current inventory plus the expected incoming goods minus the scheduled shipments determine the scheduled inventory over a certain period of time. On the basis of this planned stock, depending on the parameters of inventory management, any actions such as purchases or production of goods will follow. This is a very dynamic fact.
Since investments by companies in stocks typically account for 30-50% of their total assets, inventory decisions have a significant impact on other costs.
If too less products are kept in stock, there is a shortage of products in stock, causing the company’s reputation to be lost, sales falling and consumers losing. On the other hand, keeping too many products or many poorly sold products increases storage costs, risk of obsoletion, possibility of theft and damage to products.
Therefore, the aim of managing inventories is to minimise the cost of inventories while maintaining an appropriate supply of goods. The optimal level of inventory represents at the same time the optimal operating costs as a whole.
.
What is good inventory management like?
.
Inventory is a very important proposition in logistics and supply chain management, involving the success or failure of the entire company’s operating system. Excellent inventory management reduces costs, optimizes productivity, generates more revenue, and achieves customer satisfaction and recognition. However, as part of corporate capital investment, it is also a double-edged sword.
.
Types of Inventory
.
There are a total of three categories, raw material inventory, semi-finished goods inventory and finished goods inventory. Raw material inventory is the simplest to understand, referring to those components bought to use for production activities, but has not yet been converted into semi-finished parts materials. Semi-finished goods inventory is the raw material that is given more value in the production and processing and changes the original form structure. This type of inventory is applicable to the in-plant logistics management of manufacturing enterprises, but at this stage, as it is not a manufactured product, has not yet been able to enter the factory into the sales process. Finished good is the final product ready to leave the factory for sale in the market.
.
In the enterprise production operation, it is necessary to accumulate a certain amount of inventory to manage and control its supply chain. The basic function of inventory is timely production and effective response to meet their own, customers, supply chain partners different needs. To meet these demands, enterprise needs forecast inventory, safety inventory and safe-haven inventory.
.
Forecast inventory, as the name implies, has been forecasted and prepared before it is really needed, ready to complete production and sales. In the fast-moving industry, that is, according to seasonal fluctuations, planned promotions, historical sales records, etc. are used to predict future inventory requirements. However, forecasts are often not accurate, and a certain amount of safety inventory is needed to ensure that they can respond to and complete production and meet downstream customer needs even when they are far from the actual. The last safe-haven inventory is used to achieve cost control, and given that inventory is an investment, price volatility indirectly leads to lower returns and increased liabilities. So risk aversion requires buying inventory at a fixed price to minimize risk.
.
Inventory Management methods
.
The core of inventory management is to shorten turnaround time, let products and services go to the market and customers, bring abundant cash flow for the enterprise, and effectively allocate assets to create revenue. Among them, ABC classification is the most classic total inventory management method.
.
ABC analysis
.
In this classification, inventory is divided into three categories, Category A, Category B and Category C. Category A represent those that, although only 10%-20% of inventory, occupy 50%-70% of the capital of the enterprise. Category B, for which 20% of the company’s inventory and capital is accounted for. The last category of C, despite its large volume, is 60-70 per cent, and accounts for only 10 per cent of corporate capital.
.
Based on ABC inventory classification, Pareto analysis is widely used in inventory management. In layman’s terms, the 80/20 principle, 20% of the inventory/cause/population brings 80% profit/result/problem. Through Pareto’s analysis, the company spends more time, energy, capital in the establishment, development, and maintenance of supplier relationships with inventory A. At the same time, inventory A needs to provide a better, safer storage environment, to maintain the quality of logistics and transportation, rapid response to the needs of customers and downstream suppliers. The data collection of inventory A in the forecast should be timely and accurate, so as to avoid the situation of out-of-stock.
.
Economic Order Quantity
.
Next, we will talk about how to control inventory reasonably and effectively to achieve the enterprise’s supply chain objectives. The key point of inventory control is how to maintain operational efficiency while reducing those obvious or hidden inventory costs. Generally speaking, orders lead to inventory, so how many orders are placed, and how often the order frequency is needed to evaluate and optimize in order to control inventory costs. The common way to place orders is a fixed batch method. This method is simple, the order is executed according to a fixed batch, although the order interval is different, but the number of orders is the same; In order to more accurately assess the order quantity, the economic order batch method has been developed on the basis of the fixed batch method, which is explained as follows:
.
To maximize corporate profits, businesses must minimize the cost of ordering and storing inventory. Reduce inventory and storage costs by using EOQ
EOQ Formula Input: Carrying Costs
The holding cost of inventory, also known as the cost of holding or storage, is proportional to the amount of inventory you have on hand. That’s why you don’t want to put too much inventory in the warehouse. If you do this, the carrying cost of the inventory will affect your cash flow and profits.
If you have to borrow any money to buy inventory, the interest fee you pay on the loan is part of the holding cost. Because you may pay insurance for your inventory value, which is also part of the cost, and any taxes that you must pay for the inventory value.
Other possible costs of carrying inventory include potential theft and destruction of inventory and opportunity costs or lost profits because your funds are tied to inventory rather than used for more profitable venture capital.
You should also consider obsolescence and inventory deterioration.
As part of the economy order quantity formula, all costs should be variable because they vary with the amount of inventory you hold.
Cost of ordering
The order cost in the economic order quantity model is the cost of ordering and receiving orders.
If the cost of carrying is usually a variable cost, the subscription cost is often a fixed cost. They include spending time and resources spending e-mail or memos about orders, making phone calls, and receiving inventory orders.
It is usually best to divide the cost of ordering into purchases and manufacturing orders. The cost of an order to purchase an item includes initiating a purchase order, approval steps, processing receipts, and inspections. For manufacturing, the cost of the ordering process is slightly different. Costs will include work orders, production schedule times, and inspection times. These purchases and manufacturing cost lists are not all-inclusive.
Inventory usage or demand
The last input to the economic order quantity formula is your company’s annual usage or inventory turnover. This is a simple part of the EOQ formula. Estimate the annual inventory (units) you use, and you have this input.
How to calculate the amount of economic orders
Economic order volume is actually a simple concept. EOQ can be calculated by using a financial formula that reaches the point where the subscription cost and carrier cost combination are minimized.
This is what it means to reduce inventory costs.
The EOQ is calculated using the following formula:
The square root of EOQ (2SD)/P
Among them:
S – Set-up (order) cost – $2.00
D – Rate of demand (units) – 4,800
P – Production cost (carrying cost) – $6.00
Assuming XYZ uses 4,800 inventory units per year, their order costs about $2 per order. They calculated that the cost of carrying each unit was $6 per unit. Calculate XYZ’s EOQ:
EOQ s (2) (4800) (2) /(6) s 3,200
Next, take the square root to EOQ , 57 units
This means that if you order 57 inventory units each time you place an order, you can minimize inventory costs – whether it’s ordering or shipping.
Please note that this EOQ formula does not take into account any benefits or opportunity costs. You can take it into account by multiplying the production or carrying cost by using the current risk-free interest rate in the formula denominator.
.
To summarise, Inventory management is the setting of the rules that will be used to determine how much stock can or should be of each product as well as when and how much should be ordered or produced. Inventory Management includes the tasks and activities associated with managing inventory. The basis is of course that you provide enough stock, that you can easily access this and that this is stored safely.
.
But as the company grows, this can become an important part. So you don’t want to put too much stock on it because that can put too much strain on your working capital and you can stay with leftovers. The company’s strategy is translated into parameters and decision-making rules regarding stock. Inventory management is a static fact, once the parameters are determined, they will be fixed for a longer period of time.
.
FAQs
.
Some frequently asked questions about inventory management include:
.
What is inventory management?
Inventory management includes the tasks and tasks associated with managing inventory. The basis is of course that you provide enough stock, that you can easily access this and that this is stored safely. But as the company grows, additional wishes are often added to this, which can make this a complex event.
.
Can I outsource inventory management?
Sure! Both small and larger companies often choose to store part of their inventory externally. In particular, fulfilment and dropshipping are popular solutions for this.
.
How should I keep track of my inventory?
There are several ways to track your inventory. For inventory management, different software systems are in the market. Large warehouses sometimes use specialized warehouse management systems. You can also choose to outsource this part of your business.
.
Useful Health Tips – How to Boost your Immunity
.
Natural Beauty Tips – Beauty Tips
.
Search Jobs – CLICK HERE
.
Read Also :
.