What is inventory management:
Inventory management Is about the process of regulating the flow of inventory within the company, beginning with stage from order placement, Production, sale to re-stocking the stock, to meet consumer demands.
Inventory Classification:
Inventory can be Broadly categorized into 3 based on form. They are raw materials, consumables and spares, work in progress, finished goods.
While for a manufacturer, all three forms of inventory are applicable, for wholesaler/retailer: only Finished goods shall be his inventory, as he deals with ready for sale goods.
Why important?
Business must try maintain an optimum level of inventory, at any point of time.
This is an absolutely essential factor for a business’s profitability.
On one hand, with High inventory, company’s funds gets locked in working capital & also have to incur consequent higher inventory storage cost.
But with lower inventory, company might not have enough RM to adhere to production schedules or enough finished stock to meet consumer demand and orders.
So, the company should strategically plan to achieve optimum balance between the two.
To maintain a right chord in terms of inventory management, there are several inventory management techniques that are available. Some commonly used techniques are explained below.
VED classification | Vital, Essential and Desirable classification of inventory items based on their criticality to business sales and its shortage impact in terms of cost. |
FSN Analysis | Fast moving, slow moving and Non-moving inventory analysis- is categorising inventory according to their consumption pattern. Correlated with their inventory turnover ratio and their share in total inventory. |
JIT | Is an inventory mgt technique where goods are received from the suppliers, only when they are needed, so as to reduce inventory holding costs. |
EOQ model | Economic order quantity technique is about planning the ideal order quantity that a company should procure to minimize the inventory ordering, shortage and holding costs. |
SDE classification | Scarce, Difficult and easy- Classification of inventory based on their sourcing availability and lead time involved in procurement. Helps in guiding business in addressing issues faced in procurement. |
ABC analysis | Inventory management technique that classifies inventory in accordance with their respective values. The technique based on pareto principle '80/20 rules, identifies 20% of goods, that deliver about 80% of the value. |
HML classification | High, medium, low classification – Similar to ABC analysis but instead of value, unit price criterion is used. Helps in keeping control over materials at department level. |
