1. Importance of Inventory Management
Inventory Management involves activities which allow an entity to have a better control over various inventory items from the time goods are received to the point of sale.
This inventory management is more critical for the manufacturers or retailers dealing with perishable stock which has a short expiry period.
Listed below are some of the important benefits to an entity from a good inventory management:
I. Stock Out
One of the important advantages of inventory management is that an entity will not face stock out issues. It plays a vital role in the smooth functioning of an entity’s business by ensuring production process is not paused due to insufficient raw materials or sales is not affected due to insufficient finished goods.
When demand for the products increases suddenly due to market conditions, such close monitoring of the inventories will help the entity to gear up for increasing the purchase and production process thereby retaining the customer orders.
II. Minimum Stock
Having a good inventory management is essential for an entity to avoid overstocking of goods. If the inventory is not managed well, an entity might end up having excess stock which has to be stored & handled until it is moved out of the warehouse. Such overstocking will add to the company’s cost and also there are huge chances that it might turn into obsolete inventory.
The longer the stock is stored in the warehouse, the greater is the chance for it to become obsolete and the entity might end up writing off such obsolete inventory. Inventory management allows an entity to maintain minimum stock per the requirement and thereby avoiding the overstocking issues.
III. Working Capital
Generally, inventory is an expensive asset possessed by an entity and major part of its working capital is blocked. If an entity’s inventory is well managed, it will help in cost saving and ensure minimum cash is blocked in the process.
For example, an entity spends Rs.1000 on the raw material purchase and processes the same for conversion into finished goods. It expects that the finished goods will be sold for a higher price including the entity’s margin. But if the finished good is not sold for a long time and the product is stored in the warehouse, then the entity’s working capital is blocked to this extent.
So inventory management is not about just dealing with the receipt and issue of raw materials or finished goods, it is also about managing an entity’ working capital by having minimum cash tied in operations.
2. Inventory Management Concerns
Some of the common issues w.r.t inventory management is:
i. Lack of having good control systems
ii. Failure to use the management tools as required
iii. Not following the steps per the set process
iv. Proper transportation structure
v. Lack of visibility in the supply chain
vi. Lack of knowledge of the responsible staff in handling the inventories
vii. Not segregating the stock per required categorization
viii. Failure to secure the stock against risk (fire, theft etc)
Inventory management problem is not just in the inventory only; it is also about addressing the root causes for the inventory which will enable the above issues are handled smoothly.
Leading organizations have managed to establish means of reducing these issues through superior inventory management and training.
3. Disclosure of Inventory in the Financial Statement
For companies having various categories of inventories, it is suggested that the inventories are reported separately category-wise for better disclosure purpose and analysis.
Where the inventories represent a substantial part of entities asset structure, this kind of disclosure give better investor perspective than reporting as a single line: