Inventory Management

What Is Inventory Management?

Inventory management alludes to the process of ordering, storing, using, and selling a company's inventory. This includes the management of raw materials, parts, and finished products, as well as warehousing and processing of such things.

Understanding Inventory Management

A company's inventory is quite possibly of its most valuable asset. In retail, manufacturing, food services, and other inventory-intensive sectors, a company's inputs and finished products are the core of its business. A shortage of inventory when and where it's required can be incredibly negative.

Simultaneously, inventory can be considered a liability (while possibly not in an accounting sense). A large inventory conveys the risk of spoilage, theft, damage, or changes in demand. Inventory must be insured, and on the off chance that it isn't sold in time it might need to be discarded at clearance prices — or just annihilated.

Therefore, inventory management is important for businesses of any size. Knowing when to restock inventory, what amounts to purchase or deliver, what price to pay — as well as when to sell and at what price — can undoubtedly become complex choices. Small businesses will frequently keep track of stock physically and determine the reorder points and amounts using spreadsheet (Excel) recipes. Larger businesses will utilize specific enterprise resource planning (ERP) software. The largest corporations utilize profoundly tweaked software as a service (SaaS) applications.

Suitable inventory management strategies shift depending on the industry. An oil terminal can store large amounts of inventory for extended periods of time, allowing it to trust that demand will get. While storing oil is costly and risky — a fire in the UK in 2005 prompted huge number of pounds in damage and fines — there is no risk that the inventory will spoil or become dated. For businesses dealing in perishable goods or products for which demand is very time-delicate — 2021 schedules or quick style things, for instance — sitting on inventory isn't an option, and misjudging the timing or amounts of orders can be costly.

For companies with complex supply chains and manufacturing processes, balancing the risks of inventory overabundances and shortages is particularly troublesome. To accomplish these balances, firms have developed several methods for inventory management, including just-in-time (JIT) and materials requirement planning (MRP).

A few firms like financial services firms don't have physical inventory thus must depend on service process management.

Accounting for Inventory

Inventory addresses a current asset since a company regularly intends to sell its finished goods within a short amount of time, commonly a year. Inventory must be physically counted or measured before it tends to be put on a balance sheet. Companies ordinarily maintain sophisticated inventory management systems capable of tracking real-time inventory levels.

Inventory is accounted for using one of three methods: first-in-first-out (FIFO) costing; last-in-first-out (LIFO) costing; or weighted-average costing. An inventory account ordinarily comprises of four separate categories:

1. Raw materials — address different materials a company purchases for its production process. These materials must go through critical work before a company can transform them into a finished decent ready available to be purchased.
2. Work in process (otherwise called goods-in-process) — addresses raw materials in the process of being transformed into a finished product.
3. Finished goods — are completed products promptly available to be purchased to a company's customers.
4. Merchandise — addresses finished goods a company purchases from a provider for future resale.

Inventory Management Methods

Depending on the type of business or product being investigated, a company will utilize different inventory management methods. A portion of these management methods include just-in-time (JIT) manufacturing, materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory (DSI).

• Just-in-Time Management (JIT) — This manufacturing model originated in Japan in the 1960s and 1970s. Toyota Motor (TM) contributed the most to its development. The method permits companies to set aside critical amounts of cash and reduce squander by keeping just the inventory they need to deliver and sell products. This approach reduces storage and insurance costs, as well as the cost of liquidating or discarding excess inventory. JIT inventory management can be risky. Assuming demand suddenly spikes, the manufacturer will be unable to source the inventory it necessities to fulfill that need, damaging its reputation with customers and driving business toward contenders. Even the smallest deferrals can be tricky; on the off chance that a key input doesn't show up "just in time," a bottleneck can result.
• Materials requirement planning (MRP) — This inventory management method is sales-forecast dependent, meaning that manufacturers must have accurate sales records to enable accurate planning of inventory needs and to discuss those necessities with materials providers in a timely way. For instance, a ski manufacturer using a MRP inventory system could guarantee that materials like plastic, fiberglass, wood, and aluminum are in stock in light of forecasted orders. Inability to accurately forecast sales and plan inventory acquisitions brings about a manufacturer's inability to satisfy orders.
• Economic Order Quantity (EOQ) — This model is utilized in inventory management by calculating the number of units a company ought to add to its inventory with each batch order to reduce the total costs of its inventory while assuming consistent consumer demand. The costs of inventory in the model include holding and setup costs. The EOQ model looks to guarantee that the right amount of inventory is ordered per batch so a company doesn't need to make orders too regularly and there is definitely not an excess of inventory sitting close by. It expects that there is a compromise between inventory holding costs and inventory setup costs, and total inventory costs are minimized when both setup costs and it are minimized to hold costs.
• Days sales of inventory (DSI) — is a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales. DSI is otherwise called the average age of inventory, days inventory outstanding (DIO), days in inventory (DII), days sales in inventory or days inventory and is interpreted in various ways. Indicating the liquidity of the inventory, the figure addresses how long a company's current stock of inventory will last. Generally, a lower DSI is preferred as it indicates a shorter duration to clean up the inventory, however the average DSI differs starting with one industry then onto the next.

There are different methods to break down inventory. On the off chance that a company regularly switches its method of inventory accounting without reasonable justification, it is logical its management is trying to paint a brighter image of its business than what is true. The SEC requires public companies to reveal LIFO reserve that can make inventories under LIFO costing comparable to FIFO costing.

Incessant inventory benefits can indicate a company's issues with selling its finished goods or inventory obsolescence. This can likewise raise red banners with a company's ability to remain competitive and fabricate products that appeal to consumers going forward.

Features

• Inventory management attempts to productively streamline inventories to stay away from the two overabundances and shortages.
• Inventory management is the whole process of managing inventories from raw materials to finished products.
• Two major methods for inventory management are just-in-time (JIT) and materials requirement planning (MRP).