Reviewed by Oct 05, 2020| Updated on
Inventory management is one of the processes under supply-chain management, where the flow of inventory is supervised, right from manufacture to the point-of-sale. It manages the process of ordering, processing, and storing a company’s inventory, which includes raw materials, consumables, packing materials, and finished goods.
Time Lags: There are time lags involved in the process of raw materials being purchased, processed, and sold. During these time lags, a certain amount of inventory at each stage will need to be maintained in order for each process to continue to run smoothly.
Economies of Scale: Bulk-buying of raw materials and other components results in reduced costs, and hence better economics and efficiency for the organisation as a whole. This also applies to the storage and transport of inventory.
Perishable Stock: Certain goods of perishable nature could lead to heavy losses in case of wastage if these goods are ordered in excess instead of an optimal level of inventory being maintained.
Some of the commonly used methods to manage inventory are:
1. Just-in-time Management (JIT) This is a popular method of inventory management where only the inventory required for processing or sale is kept in stock in any given time period. This avoids carrying costs, as well as prevents wastage.
2. ABC Analysis Method (ABC) ABC stands for Always Better Control (ABC) Analysis. Here, the inventory is categorised in terms of decreasing importance, with more attention given to popular products. Category A is highly valuable and hence, closely controlled. Category B would be less valuable or important, and so on.
3. Material Requirements Planning Method (MRP) This method is based on sales forecasts. A manufacturer can opt for this method when he has accurate information on sales projections. Based on this, orders are placed with the suppliers of raw materials.
4. Economic Order Quantity Method (EOQ) Economic order quantity is a commonly used method to assess the optimal level of inventory required for processing and sale. The consumer demand is assumed to be constant for a product in this case. This helps minimise the ordering and carrying costs of inventory for the organisation, without affecting goods produced or sales.