 |
| Inventory Management |
What is inventory management
As the definition itself says, it is the process of managing the inventory. Inventory management is the process and technique of storing, buying, selling, using or in one word, controlling the company's Inventory. In today’s complex supply chain scenario, it is a very important aspect of business management as it controls each and every movement of materials, with every value addition process, As inventory is available in different forms like in the form of Raw Materials, Work in process, Finished goods, MRO inventory, the inventory management deals with the management of all these forms.
 |
| Why inventory management is important |
Why Inventory Management is important:
Inventory is considered as one of the most valuable assets of any company. Therefore, managing inventory is the management of money of that company.
Keeping inventory is directly proportional to the cost incurred on keeping the goods in stock. This is known as “Inventory carrying cost”. It is made up of the interest on the money invested on the materials in stock, warehousing cost (Rental, tax, insurance, labor cost, overheads, Material handling equipment cost), deterioration or spoilage of goods, evaporation, shrinkage etc.
Chance of obsolescence. In the highly changing world, technology and customer choice is evolving rapidly & to cope up with this situation, companies are evolving with new design & models. Due to this, components, finished goods are also changing which is increasing the fear of obsolescence. All the old models & materials are in no use & this is a big loss to the company. Therefore, it is very much important to keep a close eye on these types of inventories. Standardization in the engineering field can help to reduce the chances of obsolescence.
Avoid stock out situations. The fundamental objective of Inventory management is to satisfy the customers with managing the optimum inventory levels. And to manage this, it is important to know what is materials planning. Imagine that a company which runs out of finished goods stock and is unable to supply goods to its customers in time. Customers may go to other manufactures and by losing it’s goodwill, it may lose a number of customers forever. Inventory and materials management, therefore, is something a modern business set-up cannot do without.
There is a factor of idle time costs of man and machines. It is very much uneconomical to keep the man, machines un-utilized when there is no materials available or stock out situation. Therefore, a logical amount of inventory is always recommended and this logical amount of inventory can be obtained by different scientific techniques known as inventory management tools.
 |
| Inventory |
Factors influencing inventory:
In a manufacturing environment, there are so many variable factors and challenges in supply chain which can affect the inventory in all forms. Below are some fundamental factors which governs the inventory
Requirements:
This is the requirements or sales forecast or firm customer orders based on the information item-wise or time-wise. These requirements were later converted to production schedules.
Quantity in stock or on order:
This information can be obtained from the stock available in the system (in all forms) and the pending order ledger.
Procurement lead time:
This is the time required to get the material from placing the purchase order. Many times this includes the transportation time also.
Obsolescence:
Consideration is given to the possibility of design changes or other factors which would make the material obsolete.
Cost of Inventory:
Inventory Management & control deals with the situation where there is excess inventory or insufficient inventory. In both the conditions, the cost is affected badly.The extent and means of inventory control must be commensurate with the company’s needs.Below major three types of costs are involved here and most of these cost are hidden.
Purchasing cost:
This cost includes the rental of offices, order processing cost, system cost, salaries, stationery, vendor visit, inspection cost and other miscellaneous costs of purchasing.
Inventory carrying cost:
When an organization is carrying inventory, various costs are incurred to maintain that inventory. Below are some of the costs:
Interest on the capital locked up on the materials stocked in the company.This can be 16% to 20% of the costs of materials and it depends on the source from where the money has been borrowed.
Rentals for space occupied for storage and taxes payable.
Insurance premium on the goods.
Obsolescence
Evaporation
Deterioration
Overhead costs increase if excess inventory is stocked.
3. Stock out cost:
This is the third element of the cost of inventory. If a required material is not available at the right moment, certain consequences follow in this situation and there is a certain cost associated. Such as production stoppage, idle time of Man and Machine, loss of production and profit, failure of customer service and loss of goodwill are some of the major losses that happen due to the stock out situation. And to mitigate this situation, more efforts are given to expedite the deliveries in terms of vendor visits, special deals with vendors, special transportation cost and with extra costs.
How to Manage the Inventory:
One of the primary tasks in inventory control is to determine the stock levels.In modern concept of warehouse management does not accept the outworn idea of dumping the materials for future requirement if any. The new approach of store-keeping is considered to be a profit earning service to the business.
The various stock levels are explained below:
Deficiency level
Exhaust Bin level
Buffer stock
Danger warning level
Re-order level
Maximum stock level
Methods of controlling stock levels:
Re-order level system:
In this system, as it speaks, there is a level defined below which, whenever the stock goes, it will generate the purchase order/Purchase requisition. To define this re-order level one needs to consider the past and future consumption trend, lead time of the component or material. A periodic review mechanism is must as the demand keeps on changing. But there are some limitations of this system.
It is difficult to maintain the minimum order qty for a group of items as every item has separate re-order quantities.
It is very much important to do the cycle count & perpetual inventory for these types of items.
A stringent periodic review is very essential as this system is very insensitive to demand fluctuation.
Fixed time system:
It is also known as a constant cycle system. In this case, quality is not considered, in place of that, time is considered as an ordering factor.Orders are placed at a constant interval of time.The time of replenishment purely based on the administrative convenience, like weekly, fortnight basis, monthly or even yearly basis where the consumption and demand is very much know and steady.limitations of this system are;
Inventory costs are not considered explicitly.
It is difficult to meet the MOQ or packing quantity.
How much to order- Economic order quantity:
This is a very strong concept, how to calculate, how much to order. Here comes the Economic order quality concept. “Buying the right quantity: is the key of this idea and the basic approach is to match the TWO basic costs involved in the inventory, The Procurement cost and the Inventory carrying cost. The formula is mentioned below.
Conclusion:
Inventory management nowadays is the most focused topic in material management. Every organization is trying to make profit but the challenge is the competitive market with availability of low cost product
0 Comments
Please share your views in this comment section.