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Introduction to Inventory management
Inventory management is an important aspect of any successful business. It is the process of overseeing and controlling the flow of inventory units used by a business in the production or manufacture of goods for sale or distribution.
Inventories are usually made up of a combination of goods, raw materials and finished products, and effective management of these item is essential to ensure optimal stock levels and to maximize the earning potential of a company.
Definition of Inventory
Inventory is as stock of an item held to meet future demand. Generally it is a list of goods and materials held available.
Importance of inventory management
Inventory management is a very important function that determines the health of the supply chain as well as the impacts the financial health of the balance sheet. Effective inventory management is important as not only is inventory one of the most valuable assets to a business.
Investment in inventory should neither be excessive nor inadequate. Maintaining optimum level of inventory is the main aim of inventory management.
Purpose of Inventory management
The main purpose of inventory management is to
- Meet the customer demands
- Protect against supply shortages and delivery delays.
- Separate operations in process
- Smoothing production requirements
- Taking advantage of quality discounts
Types of inventory
Generally inventory types can be grouped into four classifications.
Raw material, Work-in-progress, Finished goods and Transit inventory.
Type of Inventory
- Raw material
Generally raw materials are used in the manufacture of components. Raw materials are inventory items that are used in the manufactures conversion process to produce components, subassemblies, or finished goods. These inventory items may be commodities or extracted materials that the firm or its subsidiary has produced or extracted.
Typically raw materials are commodities such as ore, grain, minerals, petroleum, chemicals, paper, wood, paint, steel, and food items forever.
Type of Inventory
Second type of inventory is Work-in-process and it is made up of all the materials, part (components), assemblies, and subassemblies that are being processed or waiting to be processed within the system.
This generally includes all raw materials that have been released for initial processing up to material that has been completely processed and is awaiting final inspection and acceptance before inclusion in finished goods.
Type of inventory
- Finished Goods
A finished good is a completed part that is ready for a customer order. Therefore, finished goods inventory is the stock of completed products. These goods have been inspected and have passed final inspection requirements so that they can be transferred out f work-in-process and into finished goods inventory.
Types of inventory
- Transit inventory
Transit inventories result from the need to transport items, or material from one location to another. Sometimes this is referred to as pipeline inventory. Merchandise shipped by truck or rail can sometimes take days or even weeks to go from a regional warehouse to a retail facility. Being on a plane, truck or boat does not erase it from your inventory and in transit-inventory is very important to keep track of.
In order to calculate the cost involved in inventory management, inventory cost is classified into three Carrying costs, ordering costs, Shortage costs.
Carrying costs is the cost of holding an item in inventory. Ordering costs is the cost of replenishing the inventory and shortage costs are the costs due to temporary or permanent loss of sales when demand cannot be met.