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Inventory management in the organization

Author: Liam James Published on: Monday Jul 19, 2021
Inventory management in the organization

Inventory management covers the principles, concepts, and techniques for their planning and control in all their states - from raw materials to finished products, with the main purpose of meeting the financial objectives of the enterprise and customer service tasks.

Inventories serve as the basis of production activity or are the result of it. Therefore, they must be precisely planned, managed, optimized, and controlled at every level.

Material flows

Material flows are the main economic activity of a commercial or manufacturing enterprise. The rational management of inventories, minimization of inventories in combination with the guaranteed provision of economic activity are a guarantee for the effective operation of the enterprise.

The use of the inventory management subsystem allows efficiently organized warehousing, increasing the productivity of employees in the warehouse, employees of sales structures.

Kaizen is an excellent model for inventory and supply management. Japanese control systems aim for optimal flow and minimal losses. At the same time, Kaizen offers customer and warehouse needs with a Just In Time (JIT) approach. Reference: "What is Kaizen",

In the applied decision a detailed operational report for materials, production, and goods in stock is realized. Full control of inventories in the enterprise is provided.

The application solution allows:

  • Inventory management in various units of measure for multiple warehouses;
  • Keeping a separate record of own goods, goods accepted and handed over for sale, returnable packaging;
  • Detailing the location of the goods in the warehouse by place of storage, which allows optimizing the collection of orders for customers (goods in the bill of lading) in stock;
  • Reporting of serial numbers, expiration date, and certificates;
  • Controlling the correct spelling of serial numbers and goods with a certain expiration date and certificates;
  • Set random batch characteristics (color, size, etc.) and keep a batch report in section warehouses;
  • Reporting customs and country of origin;
  • Assembling and disassembling inventories;
  • Reservation of inventories.

Organization of a warehouse

The organization of the warehouse can be different, the structure can be both simple and sufficiently hierarchically complex. Warehouses or storage space can be both on the territory of the enterprise and located remotely.

Reports on stocks can be entered into the information system with a high degree of detail: up to the level of product characteristics (color, size, dimensions, etc.), up to the level of serial numbers, and expiration date of the goods. It is possible to obtain valuations of inventories at cost and potential sales volume in sales prices.

An inventory of the inventories and automatic processing of the results of its implementation is envisaged. As a result of the inventory it automatically calculates the difference between the reported quantities (registered in the information base when conducting documents for receipts and transfers) and the actual quantity of materials. . Then documents are drawn up for writing off (in case of absences) or accounting (in case of manifested surpluses).

The means for statistical analysis of stocks allow the assessment of the attractiveness of each product by its participation in the turnover or profit of the enterprise, stability of sales, disclosure of low-selling products by such criteria as average shelf life, cost per period, and turnover ratio.

Why should we manage inventory?

Inventory management is the most important activity of physical distribution due to the investment of 20 to 80% of investments in current assets.

Its storage requires storage capacity and investment for construction and maintenance. Costs are incurred for the storage of stocks, the risk of slowing down turnover and lowering profits is assumed.

The main goals in inventory management are to increase the profit from the activity, to predict the result of the company's strategy and the policy for inventory maintenance, to minimize the total distribution costs.

Costs are reduced by limiting and eliminating delayed and unfulfilled deliveries, exemption from hard-to-sell and pledged goods, balancing the size and frequency of deliveries and transport services. Commodity stocks at wholesalers and retailers increase with increasing sales and expanding the product range.

Manufacturers maintain larger stocks, which include stocks of raw materials, materials, parts, and finished products.

Those who work with produced raw materials maintain large stocks, which gradually disappear, if they do not have this opportunity, they risk buying at a higher price until the new marketing year.

Need to maintain inventories

The need for inventories depends on the physicochemical characteristics of goods and prices. Stocks of material goods are much smaller than durable goods with a long shelf life and a higher price. Technical goods and spare parts for stocks are even larger due to their high price.

The difference in the number of maintained stocks depending on the nature of the activity and the functions they perform in the distribution channels characterize differently the ratio between stocks and average inventories.

In business, this ratio is the main criterion for the return on the investment channel.

Dependence between stocks and demand

In the management of physical distribution, qualification is important depending on the specifics of demand.

Continuous demand - include goods of a homogeneous nature or meet the needs for a short period and are purchased in the presence of new needs. They have a long life cycle, sales are constant and weakly influenced by market factors.

In the case of continuous demand, inventories must be maintained at a level satisfactory for the execution of orders by customers close to 100%.

Periodic demand - refers to goods with a longer period of physical and moral wear, with a higher price and the ability to replace. They depend on many factors that are not always accurately quantified. The management of this type of inventory should be aimed at more careful clearing and forecasting for the future period due to the dependence on service, potential sales, and the cost of securing them.

Seasonal demand - is typical for the demand for goods only in certain seasons. For example winter and summer clothes, sports accessories, school supplies, Christmas and New Year gifts, etc. This search name is peak or disposable.

Limited demand - includes goods sought at certain times, after which new goods are offered on the market that replace them. These are goods with a very short life cycle. The decline can be smooth and predictable and planned.

The management of this type of goods should be focused on accurate planning, when, how much, and where to accumulate stocks for the realization of optimal sales.

Bound demand - this type of goods are tied to a complementary type of goods. For example, the increased demand for personal motor vehicles is related to the demand for spare parts and services, fuel, oil. The demand for shampoos, creams is related to the increased demand for vials and packaging boxes, etc.

Here, the management must anticipate and forecast how much of the complementary goods will be produced and delivered to meet the needs.

Inventory management problems are related to the forecasting, payment, and control of inventories.

Relationship between the amount of inventory and maintenance costs

Maintaining the high demand of customers is characterized by constant stocks of the offered product groups and varieties ready for orders over 90% or about 100%.

Under these conditions, more capital is invested in current tangible assets, risk in their turnover, more investment in maintaining storage capacity, and storage costs.

Maintaining larger stocks requires the delivery of larger quantities, which contributes to lower transport costs due to more efficient use of the vehicle, loading and unloading technologies, etc.

Larger sales are expected while maintaining smaller stocks if deliveries are more frequent and in smaller quantities. This provides for an increase in transport costs.

Inventory management must balance two interdependent elements of distribution costs so that transport, supply, maintenance, and storage costs are minimized.

The maintenance of minimum stocks depends on many factors, the volume, and structure of sales and their fluctuations over time, the relationship with suppliers - how many they are, what is the order execution cycle, their reliability, etc., transportation time, modes of transport. control of stocks and determination of the moment for submission of a new purchase order, etc.

There is a deviation in the theoretical and practical management of stocks. With current inventory management, it is not always optimal.

Optimality is achieved with good coordination between theoretical principles and practical experience.

When the management does not have financial resources

When management does not have the financial resources and professional experience to research, analyze, control, forecast, and plan demand, sales and inventories can achieve good results in management and by applying more widely available methods of inventory control and management.

An example is the ready-made software products, if possible for the use by the company of a computer information system and one for computer connections with the company's warehouses.

Inventory control must ensure that the goods demanded by customers are met and satisfied at minimal cost for the maintenance and replenishment of stocks.

The control is applied upon receipt of goods in the storage warehouse, during the execution of orders and shipment of goods, and during storage.

The control covers the stocks stored simultaneously in all warehouses of the company.

The order to replenish stocks covers all varieties, stocks close to the critical point.

When ordering more than the minimum quantity, it provides more efficient use of vehicle capacity and lower transportation costs.

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