Nature and Importance of Inventory
Inventories are necessary for a firm to operate efficiently and almost all business transactions involve the delivery of a product or service in exchange for currency. For this reason, inventory management is a very important part of core operations activities. Most retail businesses and wholesale organizations acquire most of their revenue through the sale of merchandise (inventory). In order for business and supply chains to run effectively, and efficiently they must meet all the listed requirements for effective inventory management. Some of the main concerns are the level of customer service and the cost of ordering, storing, and carrying inventory. Therefore, in order to be a successful and profitable company, inventory management must be managed wisely.
There are certain requirements that must be taken into consideration during the inventory management process. These requirements are: keep track of the inventory, have a reliable forecast of demand, knowledge of lead times and lead time variability, reliable estimates of inventory holding costs, ordering costs, and shortage costs, and have a classification system for inventory items.
Some important Functions of inventories include -
1. to meet anticipated customer demand (to meet the anticipation stocks, average demand)
2. to smooth production requirements (create seasonal inventories to meet seasonal demand)
3. to decouple operations (eliminate sources of disruptions)
4. to protect against stock-outs (hold safety stocks to prevent the risk of shortages)
5. to take advantage of order cycles (buys more quantities than immediate requirements - cycle stock, periodic orders, or order cycles)
6. to hedge against price increases (purchase large order to hedge future price increase or implement volumn discount)
7. to permit operations (Little's Law: the average amount of inventory in a system is equal to the product of the average demand rate and the average time a unit is in the system)
8. to take advantage of quantity discounts (supplies may give discount on large orders)
For company's management, the most important reasons for having an inventory management system is to:
1. track existing inventory
2. know what quantity will be needed
3. know when these items will be needed
4. know how much items will cost
There are two types of inventory control used- Perpetual and Periodic. In a perpetual inventory system (usually used in supermarkets or department stores), a continuous flow of inventory count is tracked using a point of sale (POS) check out system. This system is perfect for companies to manage what is sold and reorder when a reorder point is reached. Another advantage of this system is its ability to account for shrinkage (theft) and inventory turnover. The periodic system (used in smaller retailers) is used to take a physical count of inventory at periodic intervals to replenish the inventory. This system would be most beneficial for companies that do not have products with UPC or bar codes, such as nuts and bolts and are purchased in large quantities at a time. In this case, someone on a line would monitor the level of the bin and notify a manager when an order would need to be placed.
Economic Order Quantity Models- the order size that minimizes annual costs ( 3 types)1)Basic economic order quantity model (EOQ)1. Only one product involved
2. Annual demand requirements are known
3. Demand is spread evenly throughout the year so that the demand rate is reasonably constant
4. Lead time does not vary
5. Each order is received in a single delivery
6. There are no quantity discounts
2)Economic production quantity model (EPQ)Assumptions:
1. Only one item is involved
2. Annual demand is known
3. Has a constant usage rate
4. Usage occurs continually, but production occurs periodically
5. The production rate is constant
6. Lead time does not vary
7. There are no quantity discounts
3)Quantity discount modelPrice reductions for large orders offered to customers to induce them to buy in large quantities; If quantity discounts are offered, the buyer must weigh the potential benefits of reduced purchase price and fewer orders that will result from buying in large quantities against the increase in carrying costs caused by higher average inventories; The buyers goal is to select the order quantity that will minimize total cost (see total cost formula below);
Equations to know:
Annual carrying cost = (Q/2)*H [Q = Order quantity in units, H = Holding (carrying) cost per unit]
Annual ordering cost = (D/Q)*S [ D = Demand, S = Ordering cost]
Total cost (TC) =(Q/2)*H + (D/Q)*S
EPQ= square root[(2DS)/H]*square root[p/(p-u)]
p=production or delivery rate
u=usage rate
Reorder Point: ROP=d*LT
d=demand rate(units per period/day/week)
LT=lead time(same units as d)
EOQ=square root of (2DS)/H
Inventory point-of-sale (POS) systems, which record items at time of sale electronically, can help make forecasting more accurate. Knowing the lead time of a product, which is the time interval between ordering and receiving the order, is crucial to the success of a business. Long lead times impair the ability of a supply chain to quickly respond to changing conditions, such as changes in the quantity demanded, product or service design, and logistics.
An inventory management system is a process by which you track your goods throughout your entire supply chain, from purchasing to production to end sales. It governs how you approach inventory management for your business. An inventory management system is the combination of technology (hardware and software) and processes and procedures that oversee the monitoring and maintenance of stocked products, whether those products are company assets, raw materials, and supplies, or finished products ready to be sent to vendors or end consumers.
Inventory management helps businesses have the right products available for customers. Inventory management includes choosing the right suppliers for the business.
Effective inventory management can help you to reduce inventory holding thus increase your profit. Inventory data accuracy will be improved as all the incoming and outgoing stocks are recorded properly in the system. With proper inventory management, you can increase productivity by reducing the head counts and overtime.
what are the management Functions?Briefly explain each one.
Inventory management is the process whereby a company oversees the constant flow of records which are used for accessing any taxes due on any inventory type.
An inventory management system is a process by which you track your goods throughout your entire supply chain, from purchasing to production to end sales. It governs how you approach inventory management for your business. An inventory management system is the combination of technology (hardware and software) and processes and procedures that oversee the monitoring and maintenance of stocked products, whether those products are company assets, raw materials, and supplies, or finished products ready to be sent to vendors or end consumers.
Yes. calculations systems are systems that relieve workers of repetitive functions such as inventory and payroll systems.
An it asset management is the set of business practices that join financial, contractual and inventory functions to support life cycle management and to make decision making.
Inventory management helps businesses have the right products available for customers. Inventory management includes choosing the right suppliers for the business.
5 Business Functions are: Fiance and Accounts Sales and Marketing HRA Purchase & Inventory Management, Production / Service & Despatch
Inventory management is a science primarily about specifying the shape and percentage of stocked goods.
IT asset management is not a company, but group of business practices. The practices link various business functions, such as financial and inventory, to help manage the IT environment and with decision making therein.
what is definition of inventory? what is the difference between inventory and asset?
1.design and development 2.facility location3.facilty layout4.production forecasting5.quality control6.inventory management
The advantages of inventory management are to help you to reduce inventory holding thus increase your profit. Inventory data accuracy will be improved as all the incoming and outgoing stocks are recorded properly in the system. With proper inventory management, you can increase productivity by reducing the head counts and overtime.
An inventory is a warehouse or storage location where a business maintains stocks of its products so that it can ensure swift delivery of those products on the order. Inventory Management Techniques may include: 1. Order Management 2. Shipping Management 3. Returns Management 4. Purchase Management 5. Report and Analysis Returns Management
the role of inventory mangement