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Inventory Management


Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an organization in its custody awaiting packing, processing, transformation, use or sale in a future point of time.

Any organization which is into production, trading, sale and service of a product will necessarily hold stock of various physical resources to aid in future consumption and sale. While inventory is a necessary evil of any such business, it may be noted that the organizations hold inventories for various reasons, which include speculative purposes, functional purposes, physical necessities etc.

From the above definition the following points stand out with reference to inventory:

  • All organizations engaged in production or sale of products hold inventory in one form or other.
  • Inventory can be in complete state or incomplete state.
  • Inventory is held to facilitate future consumption, sale or further processing/value addition.
  • All inventoried resources have economic value and can be considered as assets of the organization.

Functions of Inventory Management:

The functions of inventory management are as below:

  • An inventory manager should manage the time well and should know about each unit like the time taken by a unit for processing and reaching inventory because there should not be any scarcity in inventory.
  • Inventory management is also supplied with the value of raw materials and their cost in making finished products.
  • It also keeps a check-in not increasing the price of a product after adding all taxes. It has to be careful to complete prices right from production cost to packaging cost so that the value per product does not get enhanced.
  • Inventory management also notices the presence of raw items that are availed in finishing orders. It is the duty of managers to do the above task to finish in time.
  • Inventory management also has the responsibility of keeping the account of raw materials and also makes orders of it at a required time by not disturbing the processing operations.
  • Inventory management also keeps a document of finished goods and their shipping. People under this department should be very smart in making calculations as they manage the complete work of products and raw materials.

The below figure explains about core inventory management process and functions:

Fig1: Core Inventory Management Process and Functions

The relationship between a function of inventory management team and inventory management systems:

The below diagram explains about the functional access of relationship between the function of inventory management and the function of inventory management systems:

fig2: a functional access relationship between function of inventory management and function of inventory management systems

fig2: a functional access relationship between function of inventory management and function of inventory management systems

Purpose of Inventory:

All the organizations have a supply of inventory because of below reasons:

  • To maintain independence of operations
  • To meet variation in product demand
  • To allow flexibility in product scheduling
  • To furnish a safeguard for variation in raw material delivery To take benefit of economic purchase order size
  • Many other domain-specific reasons

Inventory costs:

In making the decisions which affect the size of inventory, the below costs have to be considered and they are:

  • Holding costs or carrying costs
  • Setup cost or manufacturing cost
  • Cost of ordering
  • Shortage costs

Inventory systems:

The below are the inventory systems:

  • A single period inventory model
  • Multiperiod inventory systems

The single period inventory models are used in following services:

  • Overbooking of airline flights
  • Ordering of fashion items
  • Any type of one-time order

There are two types of multiperiod inventory systems and they are:

  • Fixed order quantity model
  • Fixed-time period models

Inventory control:

It is a vital parameter for managers to identify the running of products by availing the logic of inventory control. The relation between prices of a sold product, the value of average inventory, and inventory turn.

  • Average inventory value * inventory turn = cost of goods sold