Inventory Management - Explained
What is Inventory Management?
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Table of ContentsWhat is Inventory?What are the Types of inventory?Types of Demand:What is Dependent Demand?What is Independent Demand?What are the Functions of Inventory?What is Inventory Management?What are Inventory Costs?How Inventory Management WorksWhat is Just in Time Inventory?What is Materials Requirement Planning?Requirements for Effective Inventory ManagementWhat are Stock taking Systems?What is a Periodic System?What is a Perpetual Inventory System?What is the Two-bin-system method?What is a Tracking System?Safety Stock and Service LevelWhat is the Service Level?What is stock-Out Risk?Consideration for the Safety Stock Level?
What is Inventory?
Inventory is a stock or store of goods (including raw materials in production) for resale.
What are the Types of inventory?
- Raw materials
- Partially Completed Goods
- Finished-Goods inventories or merchandise
- Replacement Parts and Supplies
- Goods-in-Transit (to warehouses)
Types of Demand:
The types of demand for inventory include:
- Dependent Demand
- Independent Demand
What is Dependent Demand?
Dependent demand items are generally subassemblies or component parts used to produce a final product.
What is Independent Demand?
Independent demand inventory is a finished or final product to be sold.
What are the Functions of Inventory?
Inventory is often used for numerous functions:
- Inventory can be held to meet planned or expected demand.
- Inventory can be held to smooth production requirement variations caused by demand seasonal patterns
- Inventory can be held to decouple operations from demand, such that other units can continue in the event of a production disruption.
- Inventory can protect against stock-outs - Delayed deliveries and unexpected increases in demand.
- Inventory allows One to Take advantage of order cycles (buy in lots).
- Inventory allows to hedge against price increase.
- Inventories can permit operation by the constant presence of some work-in-process inventory.
What is Inventory Management?
Inventory, otherwise called stock, is the total list of goods, raw materials, finished products and other contents available in a company or store for sale. Inventory Management entails the way the inventory of a business are ordered, stored, arranged, counted, tracked, maintained, and sorted for sale. Inventory management is a element of supply chain management.
What are Inventory Costs?
- Holding or Carrying Cost - The costs to carry an item in inventory for a length of time usually a year. Cost includes interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, pilferage, breakage, etc.
- Ordering Cost - The cost of ordering and receiving inventory. These include determining how much is needed, preparing invoices, inspecting goods upon arrival for quality and quantity, and moving the goods to temporary storage.
- Storage Cost - The cost resulting when demand exceeds the supply of inventory on hand. These costs can include the opportunity cost of not making a sale, loss of customer goodwill, late charges, and similar costs
How Inventory Management Works
Inventory planning is a very important activity for all sizes of company. While small businesses do inventory management manually, large business employ the use of customized software such as ERP and SaaS for their inventory.
What is Just in Time Inventory?
Just-in-Time (JIT) is a system used in inventory management. Using the JIT method means that a company will order and receive materials needed for sales or production per time. The order is based on production or sales schedule. They only keep stock of materials or goods needed for a particular sales period.
What is Materials Requirement Planning?
Materials Requirement Planning (MRP) is an inventory management technique used in calculating the materials needed to manufacture a product. It is based on sales-forecast which requires manufacturers depend on the accuracy of a sales record to accurately plan for inventory needs.
Requirements for Effective Inventory Management
To be effective, management must have the following:
- Inventory Tracking System
- Demand forecast with indication of possible error
- Knowledge of Lead times and Variability.
- Cost Estimates (inventory holding costs, ordering costs, and shortage costs)
- Inventory Classification System
What are Stock taking Systems?
Stock taking systems are used to keep track of inventory and inventory demands/needs.
What is a Periodic System?
A periodic system physically counts each item of inventory on a specific schedule.
What is a Perpetual Inventory System?
A perpetual inventory system, also known as a continual system, keeps constant track of all purchases or removals of inventory in real time. This allows for real-time knowledge of inventory levels.
What is the Two-bin-system method?
The two-bin method uses two containers or bins of inventory. When one bid is empty, the second bin replaces it. At that time, an order for another bin is placed.
What is a Tracking System?
A tracking system is a method of tracking individual items of inventory. The industry standard is the Universal Product Code (UPC) bar code printed on a label. It has information about the item to which it is attached.
Safety Stock and Service Level
Safety stock is an extra level of inventory above that needed to meet predicted demand. The inventory is held to cope with variations in demand over a time period and to prevent a stock-out occurring.
What is the Service Level?
The service level is the probability that the inventory on hand during the lead time is sufficient to meet expected demand
What is stock-Out Risk?
Stock-Out risk is the risk of running out of the inventory and the costs thereof.
The risk occurs due to variability in the rate of demand and due to variability in the delivery lead time between the reorder point and zero stock level.
Consideration for the Safety Stock Level?
To calculate the safety stock level a number of factors should be taken into account including:
- cost due to stock-out
- cost of holding safety stock
- variability in rate of demand
- variability in delivery lead time