Inventory Management: Meaning, Objective and Techniques

Inventory Management

What is meant by Inventory Management?

The other name of Inventory is mainly maintaining ‘Stocks’. Inventory Management is a very important aspect to be taken care of in a business organization. Inventory is an important thing to be managed if the business is to be managed largely. Inventory Management is a systematic approach that includes storing stocks that are both raw materials and finished goods in a business organization. If we talk of Inventory Management in terms of business organizations, it means managing and maintaining stocks/ inventory and storing them at the right place at the right time and at a good cost.

Definition of Inventory Management

The method of purchasing, storing, and using a company’s inventory is referred to as inventory management. This involves the storage and handling of raw materials, components, and finished goods, as well as the maintenance of raw materials, parts, and final inventory.

Balancing the risks of inventory gluts and shortages is particularly difficult for businesses with diverse supply chains and manufacturing processes. Firms also developed two main approaches for inventory management to achieve these balances: just-in-time (JIT) and materials requirement preparation (MRP).

How Inventory Management Works

One of a company’s most important assets is its inventory. A company’s inputs and finished goods are the center of its industry in retail, manufacturing, food service, and other inventory-intensive industries. A lack of inventory when and where it is needed can be catastrophic.

Stock, on the other hand, maybe regarded as a liability (if not in an accounting sense). Large inventories are vulnerable to spoilage, theft, injury, and demand shifts. Stock must be insured, and if it is not sold promptly, it can be required to be sold at clearance prices—or lost entirely.

Inventory management is important for companies of all sizes for these reasons. Knowing when to restock inventory, how much to buy or make, what price to pay—as well as when and at what price to sell—can all be tough decisions. Small companies often keep track of stock manually and use Excel formulas to calculate reorder points and quantities. Enterprise resource planning (ERP) tools can be used by larger organizations. Software as a service (SaaS) systems that are highly customizable are used by the world’s largest companies.

Objectives of the Inventory Management System?

  • Inventory is a significant investment, especially for businesses that deal in manufacturing, wholesale, and retail trade.
  • The amount invested could be greater than the amount spent on the company’s other properties.
  • Inventories account for about 90 percent of a company’s working capital. Inventory management software can be used to better prepare how to buy, treat, store, and pay for inventory.
  • An inventory management system’s main purpose is to hold stock in such a way that it is neither overstocked nor understocked.
  • Overstock will slow down other manufacturing processes, while understock will cause work to be halted.
  • Inventory management has both organizational and financial targets. Materials and stock should be available in adequate amounts for operating purposes, while minimum working capital should be locked in for practical purposes.

The following are the inventory management goals:

  • To ensure a reliable supply of materials and inventory such that production does not suffer as customers need it.
  • To stop all inventory overstocking and understocking.
  • To ensure that materials are available in adequate quantities whenever and wherever they are needed.
  • Maintain a minimum amount of working capital for operating and revenue purposes.
  • To reduce various costs associated with inventories, such as purchasing costs, carrying costs, storage costs, and so on.
  • To hold material prices under control because they lead to lower production costs.
  • To avoid stock-ordering duplication.
  • To reduce the amount of money lost due to depreciation, pilferage, wastages, and losses.
  • To maintain continuous inventory control, all products listed in stock ledgers must be physically present in the warehouse.
  • To ensure that products are of high quality and are available at fair prices.
  • With a managed inventory, it will be easier to provide data for short and long-term planning.
  • To have the necessary material continuously.
  • To keep track of inventory systematically.
  • To achieve price stability.

The techniques involved in the Inventory Management System? 

Many companies choose one inventory management strategy, while others choose a particular mix of strategies to meet their specific needs.

Asset Infinity, on the other hand, incorporates inventory management software for your company.

Regardless of the approach your organization uses, if it can’t track, trace, and pay for your inventory in real-time, it’ll be in trouble.

You can monitor, track, and evaluate your production and sales system using a range of inventory management techniques.

The following are the three most popular Inventory Management techniques:

  1. Just-in-Time (JIT) Delivery – The Just-in-Time (JIT) delivery technique is a method for improving production and eliminating waste by receiving products in quantity necessary for the manufacturing process, lowering inventory costs. In the following ways, JIT distribution reduces costs and increases performance and profit margins:
  • Stock levels have fallen.
  • Labor costs are smaller.
  • There are fewer factory rooms.
  • Reduction of stock
  • Productivity increases
  • Quality has increased.
  • Throughput times are shorter.
  1. ABC Inventory Analysis – ABC Inventory Analysis enables you to characterize your commodity-based on their needs. Some goods necessitate more focus than others. Link the product to each group according to their specifications.
  • Class A consists of high-quality goods with a low frequency of sales.
  • Class B Product of moderate quality with a moderate frequency of sales falls into this group.
  • Class C consists of low-quality goods with a high level of sales.
  1. Dropshipping – Dropshipping is a retail delivery method in which a retailer does not hold finished goods in stock to sell. Instead, when a store wants to sell a product, it buys it from a third party and sends it to the consumer directly. As a consequence, the commodity is never used or handled by the merchant.

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