Inventory is often the largest priced asset of the business after the fixed assets. The inventory of a business is often defined to be a list of all items that are present in the stock of raw materials. Inventory management majorly describes the shape and percentage of stocked goods. With this introduction, let's look at the salient attributes of inventory management.
Prominent Features
Inventory management is the act of directing the affairs of a business, with a complete listing of merchandise or stock on hand, raw materials, finished goods, etc., made each year by a business organization.
Keeping the inventory also means keeping a tab on the realizable value, market value, and the book value of all the stocks, stock in production, and finished stock.
Often inventory control methods are mistaken with inventory management methods, due to the almost synonymous meaning of the terms. Nevertheless, the two terms are different.
- Inventory control methods are practical models that help the organization to curb overconsumption of a particular item of the inventory. It also involves the measurement of time element that is required to consume a given volume of raw materials.
- Inventory management methods are nothing but supervising and controlling the order, keeping a track of existing inventory, and forecasting the quantity of products to purchase. It costs money to store high amount of inventory that could get expired, spoiled, or obsolete.
- Allotment of resources at the right time
- Minimization of reorder time and cost
- Maintaining a constant and equivalent inflow and outflow of raw materials
Modern techniques to manage inventory are basically formulas and models that are established by firms on the basis of the need of the raw material and availability of the raw material.
The Different Techniques
The following are some techniques that are based upon the Economic Order Quantity (EOQ), but have some or the other modification as per the necessity.
Fixed Order Quantity Model: The fixed order quantity model is used when the supply of a raw material is done only in specified denominations such as 10 m of cloth, 10 kg of stainless steel, etc. In such a situation, the carrying costs, cost per order or even carrying cost per unit are constant. The annual requirement is, however, uniform and has to be set according to the supply denominations.
Fixed Order Interval Model: The fixed order interval models are used when the supply has to be uniform at uniform intervals, such as 10 m cloth per week. Here, all the costs and annual requirements are uniform, with an occasional rise or fall in ordering costs.
Single Period Models: Single period models are used in cases where the inventory items are of perishable nature. Here, all the time elements of the Economic Order Quantity (EOQ) are uniform and unchangeable.
The basic equation that is used for the ordering and reordering of goods by all firms is through the EOQ.
The formula of EOQ is,
2.A.R.C.O. / C.U.C.C.%
where,
A.R. stands for Annual Requirement
C.O. stands for Cost per Order
C.U. stands for Cost per Unit
C.C. stands for Carrying Cost % of CU
C.U. x C.C. = Carrying cost per unit
The answer of the formula is the precise level of fall in the stock that indicates a reorder. It basically means that if your inventory has 1000 units, and your EOQ, is say 250, then the moment this stock reaches 250, you should be placing an order for a new stock. Such an order will ensure that the stock arrives on time and the stock is also cheap. The given formula is quite complex and there are a considerable number of modifications that can be included. Though the economic order and reorder quantity formula is just the basic formula, there are several constraints and problems due to which this model has to be modified.
There are countless inventory management models that are formulated by companies for their own requirements. The key to formulate really good techniques is to have better order cost, frequency and amount of ordered material. Many companies have also programmed different inventory software that simplify the process even further.
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