Inventory management is the supervision of noncapitalized assets -- or inventory -- and stock items. As a component of supply chain management, inventory management supervises the flow of goods from manufacturers to warehouses and from these facilities to point of sale. A key function of inventory management is to keep a detailed record of each new or returned product as it enters or leaves a warehouse or point of sale. Show
Organizations from small to large businesses can make use of inventory management to track their flow of goods. There are numerous inventory management techniques, and using the right one can lead to providing the correct goods at the correct amount, place and time. Inventory control is a separate area of inventory management that is concerned with minimizing the total cost of inventory, while maximizing the ability to provide customers with products in a timely manner. In some countries, the two terms are used synonymously. Why is inventory management important?Effective inventory management enables businesses to balance the amount of inventory they have coming in and going out. The better a business controls its inventory, the more money it can save in business operations. A business that has too much stock has overstock. Overstocked businesses have money tied up in inventory, limiting cash flow and potentially creating a budget deficit. This overstocked inventory, which is also called dead stock, will often sit in storage, unable to be sold, and eat into a business's profit margin. But if a business doesn't have enough inventory, it can negatively affect customer service. Lack of inventory means that a business may lose sales. Telling customers they don't have something, and continually backordering items, can cause customers to take their business elsewhere. An inventory management system can help businesses strike the balance between being under- and overstocked for optimal efficiency and profitability. The inventory management processInventory management is a complex process, particularly for larger organizations, but the basics are essentially the same, regardless of the organization's size or type. In inventory management, goods are delivered in the receiving area of a warehouse -- typically, in the form of raw materials or components -- and are put into stock areas or onto shelves. Compared to larger organizations with more physical space, in smaller companies, the goods may go directly to the stock area instead of a receiving location. If the business is a wholesale distributor, the goods may be finished products, rather than raw materials or components. Unfinished goods are then pulled from the stock areas and moved to production facilities where they are made into finished goods. The finished goods may be returned to stock areas where they are held prior to shipment, or they may be shipped directly to customers. Inventory management uses a variety of data to keep track of the goods as they move through the process, including lot numbers, serial numbers, cost of goods, quantity of goods and the dates when they move through the process. Inventory management systemsInventory management software systems generally began as simple spreadsheets that track the quantities of goods in a warehouse but have become more complex since. Inventory management software can now go several layers deep and integrate with accounting and enterprise resource planning (ERP) systems. The systems keep track of goods in inventory, sometimes across several warehouse locations. Inventory management software can also be used to calculate costs -- often in multiple currencies -- so accounting systems always have an accurate assessment of the value of the goods. Some inventory management software systems are designed for large enterprises and can be heavily customized for the particular requirements of an organization. Large systems were traditionally run on premises but are now also deployed in public cloud, private cloud and hybrid cloud environments. Small and midsize companies typically don't need such complex and costly systems, and they often rely on standalone inventory management products, generally through software as a service (SaaS) applications. Inventory management software helps businesses track inventory, so purchasing departments know what they need to order and sales teams know what is available to sell.Inventory management techniquesInventory management uses several methodologies to keep the right amount of goods on hand to fulfill customer demand and operate profitably. This task is particularly complex when organizations need to deal with thousands of stock-keeping units (SKUs) that can span multiple warehouses. The methodologies include:
Inventory management vs. inventory controlBoth inventory management and inventory control are essential to running a successful direct sales and channel operation. Inventory management is the overall strategy to ensure adequate inventory, and inventory control encompasses the processes and tools used to track existing inventory. Businesses may choose to use an inventory control system on its own but will benefit from using both together. Here are the essential differences: Inventory managementInventory management is a strategy that ensures businesses always have the right amount of inventory at the right time and in the right place. Inventory management tools enable businesses to:
Inventory controlInventory control addresses inventory already in a business's possession. It works at the transactional layer of an ERP system and enables businesses to: Which of the following are considered types of inventory in a manufacturing facility?Goods you're making (manufacturing)
Manufacturers deal with three types of inventory. They are raw materials (which are waiting to be worked on), work-in-progress (which are being worked on), and finished goods (which are ready for shipping).
Which is the correct formula for the total annual cost in the EOQ model?Economic Order Quantity
Usually the time period is one year. The total cost of inventory is the sum of the purchase, ordering and holding costs. As a formula: TC = PC + OC + HC, where TC is the Total Cost; PC is Purchase Cost; OC is Ordering Cost; and HC is Holding Cost.
Which type of inventory is held to reduce the probability of a stockout?Safety stock simply is inventory that is carried to prevent stockouts. Stockouts stem from factors such as fluctuating customer demand, forecast inaccuracy, and variability in lead times for raw materials or manufacturing.
Is a physical count of items in inventory used to reduce the discrepancies between inventory records and the actual items on hand?Inventory reconciliation, or the process of comparing physical inventory counts with records of inventory on hand, helps reduce stock discrepancies and understand why there are discrepancies in the first place.
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