Introduction
Inventory management helps the company to decide which and how many goods to order at a particular time. It is the process of purchasing, storing, and selling the stocks of a company. This means managing the process of inventory management from start to end, such as storing raw materials as well as finished goods, keeping them in a warehouse, and finally processing finished goods. It tracks inventory right from purchase to the sale of goods.
In short, it means having the right number of stocks, at the right place and at the right time.
A company’s inventory is the most valuable asset. In retail, manufacturing, industries, and other inventory-intensive sectors, a company’s raw materials, and its finished products are the core of its business. Inventory can also be viewed as a liability due to the possibility of spoilage, theft, damage, or changes in demand. It must be insured, and if it isn’t sold, it must be cleared at a discount.
The Objectives of Inventory management
To gain a better understanding of inventory management it is important that we understand what are the objectives which it seeks to achieve first. Given below are the key objectives of effective inventory management.
Objectives of Inventory Management
-Material availability: The main goal here is to ensure that all types of items are accessible whenever the production department needs them so that production is not hampered due to their unavailability.
-Improved customer service: Having the finished product available at all points of time so that even varying demands of the customers are met satisfactorily goes a long way in ensuring great customer service.
-Avoid waste: When there is no inventory management system in place, it is common for items to be wasted. In addition, theft can also be a major preventable complaint.
-Maintaining sufficient stock levels: Effective inventory management ensures that stocks are available at all points of time to the production department as well as the fact that retailers do not run out of stocks thereby ensuring efficient delivery.
-Cost-effectiveness: Cutting down on costs in terms of inventory hoarding ensures cost-effectiveness for the company.
-Cost value of inventories reduce: Regularly purchasing the stocks in bulk, can help in negotiations and getting discounts on the inventories.
-Optimizing product sales: It helps to determine the volume of the product sales. It helps in understanding the present condition as well as future consumption of the goods.
The Types of Inventories
Inventory has different classifications under different stages of the supply chain. Typically, there are four types:
-Raw materials: This refers to the raw materials which are then turned into finished goods. There are two types of raw materials:
-Direct materials: These are used directly in finished goods, such as leather used in making belts.
-Indirect materials: These are part of the overhead or factory costs, such as glue, tape, and oil, which can be considered indirect materials for the factory.
-Work-In-Process: The inventory that is being used by businesses to create the final goods, whether its direct or indirect inventory, is called Work-In-Process (WIP). For example, the packaging of a finished good is WIP.
-Maintenance, Repair, and Operations (MRO): Inventory is what is needed to assemble and sell a finished product but is not built into the product itself. For example, basic office supplies such as paper, pens, and so on.
-Finished goods: This refers to the finished goods that are available for purchase by customers. This category includes any product that is ready to sell.
The Techniques of Inventory Management
Inventory management techniques can be used to control inventories regardless of the size of the business:
Techniques of Inventory Management
-Bulk Shipments: This method states that the goods are cheaper when they are bought in bulk. This is done when there are high consumer demands. This technique has the downside of keeping the bulk shipments in the warehouse, which results in higher costs overall. On the other hand, it reduces the shipping cost and it works well with the staple goods having long shelf lives.
-Backordering: It refers to the decision of taking orders and receiving the payments in advance for out-of-stock products. It’s a desire for most businesses but can be a logistical nightmare for the ones who are not prepared. Enabling backorders, increases sales and it’s just like a juggling act.
-Just in Time: Under this arrangement, finished goods are made available at just the right time. This means that the supplies of raw materials arrive as soon as the finished goods are ready to be shipped. This technique thereby helps businesses meet consumer demand without overfilling inventory and incurring any holding costs
-ABC Analysis: This is a technique based on putting the goods into different criteria in order of high importance, i.e. A being the most valuable and C being the least. Not all products are equal in value, and more emphasis should be placed on more valuable products. It improves time management and resource allocation.
-Drop shipping and cross-docking: This method completely removes the cost of maintaining inventories. When you have a drop shipping arrangement, you can transfer the client orders and shipping details to the wholesaler or manufacturer, who then ships the product.
Key statistics and facts about Inventory Management
The below points highlight some of the key statistics about the global supply chain market.
-The global supply chain market is estimated to be $15.85 Billion.
-The global supply chain is projected to grow by a CAGR of 2%
–43% of small businesses in the United States do not track inventory or do so using a hands-on system
–The #1 cause of U.S. supply chain disruptions is random IT shutdowns which is approximately 68%.
-The average US retail operation has an inventory accuracy of only 63%.
–34 % of businesses have shipped an order late because they sold a product that was not in stock.
-Inventory losses cost an estimated $1.1 Trillion
-Prevention of stockouts can lower inventory costs by 10%.
-As of June 2019, US retailers are sitting on approximately $1.36 of inventory for every $1 sold.
-The number of private warehouses in the US has risen from 15,763 to 18,182 since 2013.
-The industry in the US has moved towards having smaller warehouses – from an average of 400,000 sqft to 50,000-200,000 sqft.
Magistral’s service offerings for Inventory Management
Capital tied up in inventory leads to requirements for higher working capital. Apart from higher working capital requirements, the non-moving list also leads to wasteful inventory carrying costs. Our services span from requirement gathering, ordering, delivery and maintenance to ensure you only carry the inventory optimum for your required performance.
-ABC Analysis: This includes inventory management strategies and the services related to working capital reduction.
–Inventory reduction: Working capital optimization as well as monetizing non-moving items are provided under this head.
–Ordering and Refill: In this minimum order quantity is calculated, also logistics cost optimization is done.
About Magistral Consulting
Magistral Consulting has helped multiple companies to reduce operations costs through its offerings in Procurement and Supply Chain.
About the Author
The article is Authored by the Marketing Department of Magistral Consulting. For any business inquiries, you could reach out to prabhash.choudhary@magistralconsulting.com