INTRODUCTION:

Inventory means goods and materials, or those goods and materials themselves, held
available in stock by a business. This word is also used for a list of the contents of a
household and for a list for testamentary purposes of the possessions of someone who has
died. In accounting, inventory is considered an asset.

In business management, inventory consists of a list of goods and materials held available
in stock.

Inventory management is required at different locations within a facility or within

multiple locations of a supply network to protect the regular and planned course of
production against the random disturbance of running out of materials or goods. The
scope of inventory management also concerns the fine lines between replenishment lead
time, carrying costs of inventory, asset management, inventory forecasting, inventory
valuation, inventory visibility, future inventory price forecasting, physical inventory,
available physical space for inventory, quality management, replenishment, returns and
defective goods and demand forecasting. Balancing these competing requirements leads
to optimal inventory levels, which is an on-going process as the business needs shift and
react to the wider environment.

Inventory management involves a retailer seeking to acquire and maintain a proper

merchandise assortment while ordering, shipping, handling, and related costs are kept in
check.

Systems and processes that identify inventory requirements, set targets, provide
replenishment techniques and report actual and projected inventory status.

Handles all functions related to the tracking and management of material. This would
include the monitoring of material moved into and out of stockroom locations and the
reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle
counting support etc.

Management of the inventories, with the primary objective of determining/controlling

stock levels within the physical distribution function to balance the need for product
availability against the need for minimizing stock holding and handling costs.

The reasons for keeping stock

There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at every
stage, requires that you maintain certain amounts of inventory to use in this "lead
time."
 2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in
demand, supply and movements of goods.
3. Economies of scale - Ideal condition of "one unit at a time at a place where a user
needs it, when he needs it" principle tends to incur lots of costs in terms of
logistics. So bulk buying, movement and storing brings in economies of scale,
thus inventory.

Figure l- Planning Inventory Management

Mission
Effective inventory management
I
Broad Goals
Service
Efficiency
Cost containment
Competitiveness
Performance Goals
Sales
Capital investment
Gross margins
Turnover
Management index
Strategies
(1) attain proper inventory mix;
(2) maintain efficient inventory levels;
(3) minimize costs of inventory;
(4) order efficiently;
(5) understand pricing, markup, and margin concepts;
(6) track inventory performance;
(7) make physical inventory counts;
(8) handle inventory like dollars;
(9) merchandise and promote; and
(IO) coordinate inventory between multiple branches.

Feedback:
Achieving goals?
If not, examine/modify
strategies and/or goals

Steps to Planning Inventory Management:

1. state mission
2. Define broad goals
3. Define specific performance goals
4. Develop and implement strategies
5. Measure results-feedback
6. Examine/modify strategies, goals?
(Strategic considerations)

Economic Order Quantity EOQ is a useful inventory management concept for finding the
efficient quantity of select inventory items to order. The EOQ quantity corresponds with the
minimum total inventory cost (ordering and maintenance costs are equal). The concept is most
adaptable to merchandise regularly in high demand (fast turnover). Using this tool requires
knowing how much of an item is needed during a given period (usually a year), the cost of
processing an order, maintaining inventory, and the per-unit price. Some fundamental mechanics
must be followed to successfully meet these requirements:
Keep accurate inventory figures.

Record sale rates of individual items that account for seasonal variations and ranges of

unexpected variations in sales (i.e., management should analyze within year trends, year to year
trends, 3- to-5 year moving averages, etc.). . Record costs associated with processing
orders, purchase prices, and maintaining inventory. The EQQ minimizes total costs calculated by
knowing the units of merchandise needed during a given period, the cost of processing an order,
the per-unit purchase price of merchandise, and the annual cost of maintaining the inventory. This
tool determines the amount of inventory to order, but to be pragmatic, managers should use
the derived quantity to determine the order range. Using a range around the optimal point usually
will not significantly increase total costs.

Inventory Management and the Inventory Control:

The Inventory Management system and the Inventory Control Process provides
information to efficiently manage the flow of materials, effectively utilize people and
equipment, coordinate internal activities, and communicate with customers. Inventory
Management and the activities of Inventory Control do not make decisions or manage
operations; they provide the information to Managers who make more accurate and
timely decisions to manage their operations.

The basic building blocks for the Inventory Management system and Inventory Control
activities are:

 Sales Forecasting or Demand Management

 Sales and Operations Planning
 Production Planning
 Material Requirements Planning
 Inventory Reduction
Inventory Control:

The inventory control group puts the plans of inventory management into
operation. These plans are seldom complete in every detail. The day-to-day
planning required to meet production requirements – the second phase of
planning for inventory control –is the responsibility of this group.

Inventory Control Systems:

Control of manufacturing inventories is basically a problem of industrial
communications. Earlier, we indicated that the complexity of these systems is
directly proportional to the number of items in the inventories and to the number
of transactions that have to be recorded to keep abreast of the movement of the
material. It should be emphasized here that a great many of the inventory control
systems in use in industry today are computer-oriented systems, however, the
initial part of the discussion in this section will be concerned with basic concepts
and data associated with inventory control procedures in general, without
reference to capabilities of computer systems. When inventory forms are
discussed, it is implied that these could also be records associated with a file in a
database management system.

The basic information normally carried on perpetual inventory records includes:

1. On order. This part of the record shows the quantity of material ordered
but not received. Now order are added in this column and receipts
subtracted.
2. Received. All receipts are posted here; there is no balance quantity in this
column.
3. On hand. This balance figure represents the quantity of the item that
should be in the stock room. Receipts are added to this column and issues
subtracted.
4. Issued. A record of all quantities issued to the factory is entered in this
column.
5. Allocated. In this column are entered the quantities to be reserved for later
issue for specific order. Reserving of materials still in this stock room will
ensure their availability when they are needed on the manufacturing floor.
6. Available. This is the quantity of material “on hand” that is still available for
assignment to future orders.

Pricing Inventories.
There are four basic ways to price inventories for accounting purposes:

1. First in – first out (FIFO) Under this procedure, all issues are priced at the
cost of the oldest lot until that lot is used up. Then the price of the next
oldest lot is used, and so on. In other words the first price into the
inventory is the first price out of the inventory when issuing materials.

2. Last-in-first out (LIFO) under this procedure, all issues are priced at the
cost of the newest lot until that lot is used up. Then the price of the next to
newest lot is used, and so on. If, in the meantime, another lot comes in,
the price of this even newer lot is used when issuing material until the
entire quantity involved is issued, at which time the price reverts to the
next newest unused quantity.

3. Average value. Under this system, the values of issues are computed by
using the weighted average cost of the material in stock. As new material
is received at slightly different prices a new computation must be made as
to the weighted average cost of the total material on hand.

4. Standard costs. A standard cost is established for each material, and all
disbursements are charged out at this standard value regardless of the
price actually paid for the material.

Coordinating role of MRP.