Inventory Management
Inventory management or control refers to the management of idle resources that have future economic value. Alternatively, Inventory may be defined as usable but idle resources that have economic value.
Inventory management is one important aspect of the total management of an enterprise. It is ultimately the responsibility of the top management to achieve trade-offs among marketing, finance, production, and other functions so as to obtain, as far as possible, an optimized and relatively balanced trade-off so as to maximize the overall performance of the enterprise.
This has to be not only in the short-run but also keeping the long-run interests of the Company in view.
Inventory Management refers to maintaining, for a given financial investment, an adequate supply of something to meet an expected demand pattern. It thus deals with the determination of optima policies and procedures for procurement. In business management, inventory consists of a list of goods and materials held or available in stock.
Management of inventory or Inventory management is all about handling functions related to the tracking and management of material. Inventory management is very important in the case of Production Oriented Enterprises. However, it is also relevant to the Service Sector. In India, the emphasis in the early years was on production and on acquiring the skills and capability to manufacture a host of items required to meet the vast need of the country which had just achieved independence and had embarked on a program of industrialization. Therefore, the attention got focused on marketing and profitability. However, now there is a gradual appreciation of the need to keep our enterprises profitable. R&D, Corporate Planning, Productivity, etc., are tightly getting their due importance. In simple terms, productivity is the positive relationship of output viz-a-viz inputs. Inventory management can be considered an important facet of output & input management.
This includes the monitoring of material moved into and out of stockroom locations and reconciling the inventory balances, setting targets, providing replenishment techniques, reporting actual and projected inventory status.
The task of ABC analysis, lot tracking, cycle counting support, etc. can even be a part of inventory management. Inventory control is concerned with minimizing the total cost of inventory. The three main factors in inventory control decision-making process are:
The cost of holding the stock (e.g., based on the interest rate).
The cost of placing an order (e.g., for row material stocks) or the set-up cost of production.
The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.
The third element is the most difficult to measure and is often handled by establishing a “service level” policy, e. g, a certain percentage of demand will be met from stock without delay.
The terminology used in Inventory management/control:
Maximum Limit: When devising a suitable Inventory model, the Maximum limit establishes the upper limit to which the stock of an inventory item shall be allowed.
Minimum Limit: It is the lower limit to which the stock can be allowed to fall in course of replenishment of the stock of an item. Normally, this is taken to be the safety stock also.
Safety Stock: This is the stock that is maintained to counter the variation in demand for an item during the replenishment lead time.
Demand or Usage: Replenishment of stock and usage of an item is an ongoing phenomenon in inventory control. The demand thus is the rate of usage of an item. Over a period of the time demand is considered to be stable. However, demand can be seasonal or cyclical in nature depending upon an item’s nature.