Understanding Inventory Management

Updated on Sept. 5, 2022, 12:33 p.m.

Inventory Management is a unique term dealing with the process of ordering, storing, using and selling company inventory. This process also deals with process of managing the raw materials, components, and the products along with the warehousing facilities like normal and cold storage available.

Banking sector in India has got a marvellous role to play by strengthening the economic activity of the nation by taking the micro and macro-economic needs of many segments of economy like the Manufacturing, Agriculture and other linked services in India.

Most of the banking segments will consist of various Public Sector banks and Private Sector banks and most of them are also governed and controlled by the RBI that acts as a driving force for the banking segments in India.

Now let us analyse the concept of Inventory Management, it is not a term just associated with accounting techniques, but also associated with the banking technologies.

Understanding Inventory Management

The inventory of a company is one of the major assets and it is also considered as a liability. Furthermore, a huge inventory will always deal with the risks related to theft, spoilages, damages or changes in the demand and supply.

If you look at the Food services, Manufacturing centres, Automobiles, BPO, the finished products and services will be the core of its business activities.

Insurance for an inventory is vital for the development of any business big or small. The complex decision about inventory will be to decide or forecast about certain things like:

  • What price to pay.
  • What price to sell.
  • What amount to purchase or produce.

During establishment of the small business enterprises, one can always keep track of the stocks manually and also analyse quantities to be ordered and reordered using advanced Microsoft Excel formulas.

The larger establishments will use the advanced techniques like the Enterprise Resource Planning (ERP) Software as well. Most of the big corporations like SAIL, Tata Steel, Amazon, Tesla, Microsoft use the Software as A Service Applications (SAAS) in a logical manner.

Proper inventory management strategies depend on the nature of the industry as in the case of Cement Manufacturing Plant is able to store huge inventory for longer periods of time, as inventory management is good and wait for the demand for cement to rise.

Methods of Inventory Management

Inventory Management techniques differs from sector to sector and if you look at the status of vegetables like Onions, and other they come under perishable goods, and demand is highly sensitive in nature. During this moment the timing and misjudging quantities of the orders is very costly in nature.

It is said that storing oil and oil related products is risky and expensive in nature, as it happened in UK in 2005, where in there was a huge fire near an oil complex and this led to huge loss of pounds in damages.

There are various companies big and small in India and balancing the inventory shortages is very difficult in nature. In order to achieve a robust inventory management, there are certain techniques available like the

  • First In First Out (FIFO).
  • Last in First Out (LIFO).
  • Weighted Average Costing (WAC).

FIFO: A unique method of assets and valuation methods where in the assets acquired and produced are sold and disposed. If you take up the tax angle, then the items purchased first will be given importance.

LIFO: Another method of valuation of the assets, where in it records the recently purchased items are sold first, and the cost of most recently purchased goods is categorised as Cost of Goods Sold (COGS). If you look at the COGS, it deals with the cost of producing goods sold by a company. This includes cost of materials and labour used to manufacture the goods.

WAC: This is a unique inventory valuation method used in a systematic manner to calculate average cost of the goods when different quantities of the goods are purchased at various cost per unit.

There are various component of the inventory management and they are given below as follows:

  • Raw Materials:  It deals with various raw materials a company purchases for undertaking the production.  These components of production will undergo lot of work before a firm can convert them into finished goods.
  • Work in Process: They are also known as goods in process as it refers to products in manufacturing activity and not ready for sale.
  • Completed Goods: It refers to the set of products that are available for sale to the valuable customers of a company.
  • Full Merchandise: This refers to the finished products a firm purchase from a supplier for resale in the future.

Benefits of Inventory Management

  • It helps the person to save money in the process.
  • This helps to know the number of stock available and also allows to rotate products in a logical manner.
  • Using effective inventory management, one can spend the money on various inventory used for sales.
  • We will have a great bunch of satisfied customers and their valuable feedback will helps us to get the products in a logical manner.

Terms Used in Inventory Management

  • Batch Tracking: It deals with finding out the defective goods and also to track the expiration dates of the goods. It is also used in accounting to track some accounts.
  • ABC Analysis: Using these techniques one can ascertain the least and the most promising types of stock markets.
  • Consignments: Under this process you will not be able to pay the supplier, until the allotted goods are sold. Furthermore, the supplier will also get the ownership of the inventory until your company sells them.
  • Cross Docking:  A unique process, where in the goods are unloaded from the supplier truck to the delivery truck. This eliminates the menace of warehousing.
  • Materials Requirement Planning: This system will handle the scheduling, planning and inventory controls in a logical manner.
  • Lean Six Sigma: Ideal for removing waste from business, where in 6 sigma and management policies are used to raise efficiency.
  • Safety Stock: A unique management system dealing with various security check ensuring that there is extra stock in place if the company cannot sort out the things.

It is said that choosing an inventory management system is ideal in analysing your business needs. You will always need to give importance to three features like

  • Using the Data Analytics.
  • Real Time Demand Planning.
  • Near and Real time Data Reporting.

You must be careful in analysing inventory and if a company regularly changes its method of changing inventory, then there is something wrong and management is trying to paint a brighter picture of the business than things present in real scenarios.

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