Tuesday, February 5, 2013

Inventory Management & Control - Part III

In this session we will review about Inventory Management & Control System.

Before proceeding further, let us understand the Inventory Management and Inventory Control.   Inventory management focuses on getting necessary / essential inventory to the right places at the right time , and inventory control focuses on maintaining and using that inventory most effectively to keep costs down.

The primary objectives of inventory management are:

  • To minimize the possibility of disruption in the production schedule of a firm for want of raw material, stock and spares.  A low level of inventories may result in frequent interruptions in the production schedule resulting in under-utilization of production capacity and it lower sales.  So it is important to have necessary  / essential inventories  to the right places at the right time.
  • To keep down capital investment in inventories. This activity is effective inventory control method.  The investment in inventories should be just sufficient in the optimum level. Excessive inventory is an idle resource and it should be avoided. The major issues related to excessive inventories are:                 #   the unnecessary tie up of the firm’s funds and loss of profit.  The excessive level of inventories consumes the funds of business, which cannot be used for any other purpose and thus involves an opportunity cost                                                                                                                               #   excessive carrying cost, The carrying cost, such as the cost of storage (warehouse), handling Charges (put away, stacking,), insurance,  recording and inspection (quantity and quality),  are also increased in proportion to the volume of inventories. This cost will impair the concern profitability further and                                                                                                                                        #   the risk of liquidity / not selling due to fast technology changes and severe competition. 

Hence Inventory control activity is a subset of Inventory Management activity.

The aim of inventory manager to  maintain adequate inventory (avoid excess / low inventory) for smooth running of the business operations. Efforts should be made to place orders at the right time with the right source to purchase the right quantity at the right price and quality. The effective inventory management should
  • maintain sufficient stock of raw material in the period of short supply and anticipate price changes.
  • ensure a continuous supply of material to production department facilitating uninterrupted production.
  • minimize investment in inventories and minimize the carrying cost and time.
  • maintain sufficient stock of finished goods and  ensure that finished goods are available for delivery to customers to fulfill orders, smooth sales operation and efficient customer service.

What is Inventory Control ?

Inventory control is a set of policies and operating procedures that are designed to maintain and maximize the use of inventory, so that it generates the maximum profit from the least amount of inventory investment without affecting customer satisfaction levels.

Most companies have a never-ending goal to find the best or suitable method to control one of their largest assets (inventory). Many different methods of inventory control exist, from the very basic to the very complex (Refer given below chart).  All methods aim toward one target to have the lowest total cost of ownership against inventory, while having the highest possible service levels. Some methods find a balance between the cost and service level components, while others favor one component over the other.  Basically the inventory control method should be linked to company objective.  The top management of the compnay decides that service level between Inventory and production department should be 95% on monthly basis then the inventory manager has to work out the inventory level accordingly.

Inventory control methods vary from company to company, product to product and component to component. In a company there are few fast moving items along with slow moving items.   The inventory control method that works best for fast-moving items might not work as well for slow-moving items.  A company might have  lot of products and components,  but use only few different inventory control methods. We need to understand that there is no perfect or standard method to manage inventory. A magic formula that computes correct inventory levels does not exist. A company can only seek to find the best method that results in reduced cost and increased service levels.

In the next session we will explore more about  inventory control methods with more practical example.


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