Inventory Management

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Summary
Inventory Management

What is Inventory? Meaning

Inventory (INV) refers to a stock or store of goods or services kept for use or for sale in the future. INV includes raw materials and supplies/purchased parts, partially completed goods that is work-in-progress (WIP), finished goods and goods-in-transit (GIT).

Motives for holding INV include transactional motives, precautionary motives, speculative motives, seasonal and dead stock holding.


Inventory versus Stock

The terms are sometimes used interchangeably. However "inventory" refers to all finished products, work-in-progress products, and raw materials. "Stock" typically refers only to finished products (that could be sold in any form to a customer). Note that "company stock" can also refer in a financial sense to shares of a company that are held by owners and investors.


What is Inventory Management? Meaning

Inventory Management (INVM) is an umbrella term for all processes, methods and approaches for ordering, replenishing, storing, holding, organizing, and using a company's inventory at optimal levels with the objective of achieving satisfactory levels of customer service while maintaining INV costs at reasonable bounds. Again, INVM includes the management of raw materials, components, finished products, as well as warehousing and processing items.

INVM is also referred to as "stock management". This term likewise refers to methods that are used to keep INV at optimal levels without stockouts and excesses.

In business terms, INVM means keeping the right stock, at the right levels, in the right place, at the right time, and at the right cost as well as price. It also involves the development and administration of INVM policy systems and procedures which will minimize costs related to INV decisions and related functions such as production scheduling, purchasing and transportation.

INVM should be considered as a main part of logistics management.


Origin of Inventory Management. History

Archaeologists discovered the use of clay tokens which dates back to approximately 4000 years ago. These tokens included symbols backed into clay which were used to count or record things especially livestock.

Another early form of INVM can be found in the story about Adam and Noah in the Bible, when Adam named all the animals and when Noah counted the clean and unclean beasts for the Ark.

INVM developed into slightly more accurate systems of accounting and record keeping in the Greek and Egyptians times.

Prior to industrial age, INVM was basic with little in terms of accuracy. During that era, people used the tally method to count.

A breakthrough was achieved in the 19th century industrial age when the first modern automatic computation machine known as the tabulator and sorter machine was developed by Herman Hollerith. The machine recorded information using punch cards which later developed into computer technology invented by IBM.

In the late 1940s, Norman Woodland invented the Barcode which became industrys primary INVM tool.

In the 1970s, Radio Frequency Identification (RFID) technology was invented.


Use of Inventory Management. Applications

  • Supply chain management
    For example, managing INV levels at optimal levels is important in order to avoid the Bull Whip Effect in the supply chain, caused by either having stockouts or excess supply of INV.
  • Marketing management
    Used to assess and match demand and supply in order to determine which products to order from what source of supply for each item in order to ensure effective customer service.
  • Maintenance management
    Production and ordering fluctuations have to be managed in order to reduce operational costs associated with machine set-up, idle time, workforce hiring or firing, etc.
  • Finance and investment management
    The use of INV control methods like ABC Analysis or Cycle Counting in order to come up with accurate, complete and timely INV transactions records.

Steps in Inventory Management. Process

The INVM process varies by industry, by size of the company, etc. The following is a highly simplified version of the actual process which is far more complex and non-linear:

  • Customer needs are determined, and demand forecasted.
  • Stock orders are placed and approved.
  • Goods are delivered to the warehouse which includes raw materials, purchased parts and supplies, work in progress (partially completed products), finished goods and good-in-transit.
  • Goods are reviewed, sorted, and stored in warehouse.
  • Goods are taken from stock to respective business units.
  • INV levels are updated, monitored and goods restocking is done when INV levels deplete or when need arises.

Benefits of Inventory Management? Advantages

  • Minimizes the chance of stockouts, dead stock, missed or duplicate orders and risk of theft or fraud and uncertainties associated with unpredicted demand.
  • Enables organizations to reach a trade-off between the cost of carrying stock and good customer service.
  • Leads to improved processes and staff efficiency.
  • Reduces INV costs like carrying costs (cost of holding excess INV), ordering costs (cost of replenishing INV), and shortage cost (temporary or permanent loss of sales when demand cannot be met).
  • Helps organizations to control investments in stock and keep it at an optimum level.

Disadvantages of Inventory Management? Limitations

  • Prone to errors and inconsistencies. These can be costly. For example if one item is not available, this can disrupt an entire asssembly line.
  • Can be time-consuming, labor-intensive depending on industry and company.
  • Implementation and maintenance costs.

Inventory Accuracy and Control Methods

  • ABC Analysis
    Used for classifying INV items basing on the items consumption values and prioritize high value INV items.
  • Cycle Counting
    Is a process by which portions of INV (high value or fast moving products) are selected for counting (actual-to-book on-hand counts) on a regular basis.

Inventory Planning/Forecasting Approaches

  • Probabilistic Models (unknown demand and cost forecasts)
    • Newsvendor model
      An INVM model used for making one time decisions for single period stochastic or unknown demand.
  • Deterministic models (known demand and cost forecast)
    • Economic Order Quantity (EOQ)
      Reveals order quantity a company should purchase to minimize costs like order, holding and shortage costs.
    • Economic Production Quantity (EPQ)
      Shows the optimal quantity of an item to be produced per each production to minimize production and holding costs.
    • Multiple-period Stochastic Model
      Used for periodic reviews and for goods with recurring demand which varies from period to period.

Sources:
Ali M.M. and Boylan J.E. (2012), "On the Effect of Non-optimal Forecasting Methods on Supply Chain Downstream Demand", MA Journal of Mnagement Mathematics 23, 81-98
Donglei Du (2014), "Supply Chain Management: Inventory Management", Faculty of Business Administration, University of New Brunswick, NB Canada
Li Z. and Choi S. (2017), "Impact of Order Cycle Time and Bull Whip Effect, A Numerical Study", Journal of Management 5(2),4-17


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Compare with: Bull Whip Effect  |  Vendor Managed Inventory  |  Cross-Docking  |  RFID Technology  |  CPFR  |  3rd Party Logistics (3PL)  |  Logistics Management  |  Last-In First-Out (LIFO)  |  First-In First-Out (FIFO)


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