Inventory management forms an important segment of working capital management. Inventory is basically a record of materials and commodities or that commodities and materials, which are maintained obtainable in the stock by a commercial enterprise.
The purpose of keeping inventory is handling and concealing from the client the truth that production or supply time lag is more than the delivery time lag. Inventory is also kept to alleviate the result of defects in the production procedure, which cause efficiency in manufacturing to go down in case manufacturing facility remains still or inoperative due to shortage of raw materials or inputs.
Following are the reasons why inventory is kept:
Safety stock: This type of stock is maintained for the purpose of protection from equipment or production breakdown in the anticipation that the breakdown can be mended earlier than the stock is finished.
Buffer stock: Buffer stock is maintained in single workstations for the purpose of providing protection from the probability that there might be a small delay in the upstream workstation for supplying the subsequent article for manufacturing.
Overproduction: This type of stock is maintained simply due to the reason that the estimated sales and the actual amount of sales have not tallied.
Lot delay stock: This stock is maintained due to the reason that a portion of manufacturing has been planned to function based on a batch at the same time as the articles are being processed separately. Hence every article of the batch should wait for the entire batch to be processed previous to going to the subsequent workstation.
Line balance stock: This is maintained due to various sub-procedures in an assembly line function at various rates. Thus stock would build up following a rapid sub-procedure or prior to a huge batch of sub-procedures
Demand fluctuation stock: Demand fluctuation stock is maintained wherever the manufacturing capability is not able to appropriate the demand. Thus a stock is assembled at the time of smaller usage to be provided to the clients where demand is more than the manufacturing capability.
Changeover stock: This stock is kept following a sub-procedure, which has an extensive switchover time or setup period. This type of stock is utilized at that time when the switchover is taking place. These types of stock maintenance are evidenced in case of Supply Chain Management (SCM).
Examples of Inventory
The examples of inventory can be categorized into the following types:
Raw materials: The constituents and resources listed for utilization for manufacturing a commodity.
Work in Progress or WIP: The resources and constituents, which have started their conversion to finished goods.
Finished Goods: Commodities that are prepared for the purpose of selling to clients.
Goods for resale: Returned commodities, which are salable.
The logistics or distribution chain involves various channels that an article moves from the beginning to the end between the original production and ultimate buying by a customer. This function can be categorized into the following constituents:
The formulas that are used for high-level inventory management are the following:
Cost of Goods Sold = Cost of Goods – Cost of Ending Inventory (at the end of this period)
Cost of Goods = Cost of Beginning Inventory (at the start of this period)+ Inventory Purchases (within this period)+ Cost of Production (within this period)
The ratios that are used in case of inventory management are the following:
Inventory Turn Over Ratio (or Inventory turns) = Cost of Goods Sold/Average Inventory = Cost of Goods Sold/((Opening Inventory + Closing Inventory)/2)
And its opposite:
Average Days to Sell Inventory = Number of Days a Year/Inventory Turn Over Ratio = 365 days a year/Inventory Turn Over Ratio
Some other methods that are used for inventory management are the following:
Weighted Average Cost
FIFO and LIFO
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Last Updated on : 27th June 2013