Inventory represents the major portion of the total current assets of most of the business enterprises. So it is important to manage inventory efficiently.
When the term ‘inventory’ is applied to a manufacturing concern, materials used in the process of production are considered to be inventory, and on the other hand, when the term‘inventory’ is applied to a non-manufacturing concern, it includes finished goods owned by the business for sale to customers in the normal course of business.
Inventory available in the business should be according to the needs of the business enterprise. Therefore, inventory management should strike a balance between excess inventory and inadequate inventory. The proper and efficient management of inventories enables in achieving better working results and reduction in working capital while neglecting the inventory management may affect the profitability of the business enterprise.
In other words, inventory management plays an inevitable role in the growth and survival of the organization in the sense that failure to an effective and efficient management of inventory, will mean that the organization will lose customers and sales will decline.
There are many reasons that motivate companies to hold inventory. These are as follows:
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Sale motive: An organization must maintain sufficient stock of finished goods for smooth sales operation and thereby earn profit.
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Customer's service: For providing efficient service to customers, an organization must hold adequate level of inventory.
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Economics of scale: An organization can realize economies of scale in purchasing and transportation by holding inventory. If the firm purchase in bulk, it gets the inventory at lower price. In turn, transportation can move larger volumes and get economies of scale through better equipment utilization.
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Uncertainties in demand: One of the reasons to hold inventory is to offsetuncertainties in demand. If there is unavailability or shortage of finished goods inventory, it will lead to lost customers.
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Quantity discounts: An organization also take advantage of quantity discounts offered by the supplier by making bulk purchase and holding inventory.
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High demand products: It may be happen that a particular product is in high demand. For fulfilling the demand of customer’s for this particular product,an organization needs to hold inventory for satisfying them.
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Goodwill: If an organization have inadequate inventory and thereby not able to meet customer’s demand, it will affect the goodwill of the firm. Therefore, to maintain goodwill of the firm an organization must hold adequate inventory.
After stating the need of an effective inventory system, let us see what elements one can look for while creating or managing inventory. All the elements stated below has their own benefits in management of inventory. Here they go, first with title followed by brief description of each:
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Unambiguous and well-organized location names & label
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Classify each item with unique item number
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Install a suitable inventory system
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Make policies & provide training to people
Every product in inventory, whether raw or finished must be labelled with proper location, name, details, etc. This saves most of your unnecessary inventory search time. Also, make sure these information does not have ambiguity; name each item uniquely, name the locations in the manner which can be connected in reference the stored items. For example name the shelf as Home Cleaning Corner or Shelf for area that contains products which are mostly available to be used in household cleaning.
As the heading states, each item, whether huge as land rover or tiny as needle, must have their identification as item number. These numbers come real handy at times of making transactions, fulfilling customer orders, etc. You are advised to follow some naming conventions for Item number, for instance, prefix the company name initials or inventory location initials combined with company name, followed by some meaningful series of number. Consider this naming style for Item number: ABCParis012014
Globalization and scaling of businesses has changed the dimension of inventory and its management. Mere relying of paper and pen for all the processes involved in inventory control may not offer what it is expected. Hence, search for a software solution that would deal in inventory management or inventory control, close to the manner you want them to perform.
People, responsible for inventory management, are most critical element of any type of inventory. Management professionals has to decide over the following while recruiting people for inventory management
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Formulate the functional model of inventory and its transactions.
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Decide a professional hierarchal structure for people in inventory area.
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Define tasks of each professional in hierarchy.
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Provide all facilities that are needed by each of the professional.
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Provide training to people in guidance of experts, from within or outside the organization.
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Review inventory reports periodically to understand how people are performing and what needs to be modified.
As well said, Experience is the best teacher; but there is no harm in applying successful methods that were implemented and provided good results. Same applies with inventory management. You have to do your homework of knowing what inventory management is all about before you decide to become the successful business professional.