What is Inventory Management? Types of Inventory Management & Techniques of inventory management

What is Inventory Management?

Inventory Management System 
What  is Inventory Management? Types of Inventory Management & Techniques of inventory management?

Introduction

Inventory is the stock that a firm maintains to meet its future requirement for production and selling. The basic reason for holding inventory is to keep up the production activities unhampered. Inventories are a part of current manufacturing organization maintains the inventory of raw materials, work-in-progress, finished goods, spare parts, suppliers etc. in case

of manufacturing concern, inventories link the production and sales. Trading organization is unsold goods i.e. finished goods. Investment on inventory depends on certain risk and costs. Therefore, the inventory manager should try to maintain optimal size of inventory without disturbing the production and sales needs.

Types of inventory

Following are the important types of inventory:

1. Raw material: raw material is a very important and inevitable factor of production. It includes physical commodities used to manufacture the final product.

2. Work-in-progress: work in progress inventories are semi-manufactured products, the products that need more work before they are converted to finished products for sales. In other words, goods partially worked on but not fully completed are called work in progress.

3. Finished goods: inventories of finished products are the stock of goods which are ready for sales. Stock of finished goods is required for smooth marketing operations of the products.

Objectives of inventory management

The following of inventory management are mentioned below:

1. To regular supply of material: there should be a continuous availability of materials in the factory of finished goods for trade. The main objective of inventory management is to maintain required so that production and sales process run smoothly.

2. To minimization of over stocking: if a company keeps inventory without proper analysis, there will be a chance of overstocking, which will increase the cost of carting the inventories or under stocking of inventories that create problem in smooth operation of a business. So one of the main objectives of the inventory management is to minimize the risk caused due to under and over stocking of inventory.

3. To reduce material losses: inventory management aims to reduce or remove the losses and misappropriation of materials. This is done by maintaining the proper stock of materials with utmost care.

4. To maintain systematic record of inventory: management needs different information regarding inventories for planning and decision-making. A systematic record of inventory helps provide such information to the management. It also assists to evaluate the current inventory management policy.

5. To minimize the costs: the proper maintenance of the in formation regarding inventories helps to make decision like whether to take discounts or not discount or not, the size of order to be placed, when to order etc. the total costs associated with inventory may be minimized by analyzing the lot size to be acquired, the offer of discount on various lot size and the timing of order.

REASON OR MOTIVES OF HOLDING INVENTORY

The main reason or motive of holding inventory is to supply the required quantity of inventory to different departments as needed so that production/ sales process does not get hampered. The motives or reasons of holding inventory are:

1. Transaction motive: the manufacturing concerns need inventories of raw material and work in progress so as to maintain regular production activities. Similar, the tra

ding organization needs the inventories of finished goods for supplying the goods and services to the customers' regularly. In this way, holding of inventory helps to have regular transactions.

2. Precautionary motive: due to different reasons, like shortage of inventory with the supplier, weak relation with the supplier, disturbances in transportation, delay in inventory supply etc. might take place. It is also an important objective of holding the inventory to take precaution from the above.

3. Speculative motive: generally the price of inventories rise, so the companies may keep additional amount of inventory to get benefit by selling the surplus inventory at higher price that purchase price. It crates risk when the of inventory falls.

Techniques of inventory management
To achieve the objectives of the inventory management, different techniques are used such as; stock level, economic order quantity, just-in-time purchase, perpetual inventory system, ABC analysis etc. stock level and economic order quantity are very popular of managing inventory.
Stock level
Stock level is essential for the control materials. Determination of stock level is required to avoid and under stocking of materials. Excess and inadequate stocks both are harmful to the organization. Over stock results in extra investment of capital and under stock affect the production. So, the organization should have adequate stock for normal requirement storekeeper must determine the stock level in such materials which are regularly used in an organization. In order to have proper control on materials, the following techniques are used in cost accounting:
Re-order level
The manager has to decide when we should purchase next time after the first purchase. When the quantity of materials reaches a certain figure, new order is sent to get material again. So, reorder level is that level of material where new order should be placed considering the daily usage rate and reorder period. This level somewhere between the maximum and minimum level. If the inventory falls below the re-ordering level, store keeper starts purchasing the fresh goods. It is also called re-order point.
Maximum stock level
It shows the minimum quantity of the material which must be maintained in hand at every time. It is needed to avoid shortage of the materials in the production. The stock of goods should not be below minimum level. In other worlds, the stock level is normally not allowed to fall below minimum level. While determining minimum level, rate of consumption and nature of the materials should be considered. It is necessary to maintain the minimum stock level due to the following reasons:

• A manufacturing company does not face the shortage of the materials.
• A trading company does not face the shortage of merchandise goods for re-selling minimum level can be calculated by the following formula:
Maximum stock level
In store, stock should not exceed maximum level, it shows the maximum output of an item of materials which can be held in stock at any time. The level of maximum stock is fixed to remove the problem of over stocking. Stock is normally not allowed to rise above maximum level. Stock exceeding this level will lead to blocking of capital and unnecessary increase in stock holding cost. So, the maximum stock means the maximum quantity of an item of material which can be held in stock at any time.
Re-order quantity
Re-order quantity is the quantity of materials that is purchase each time. This is also termed as order size. The re-order quantity is also termed as economic order quantity if it can be acquired at the minimum cost. Re-order quantity can be calculated by the following formula:
Average stock level
Average stock level refers the normal or moderate stock level. If the store manager thinks that the demand and supply of inventory are normal or moderate, he/she recommends keeping stock at average level. The average stock level is calculated by the following formula:
Danger level
This is the level of material at which the issues of material is temporarily stopped. From this level, materials are issued for some abnormal suctions only. The issue of material can be made against the special order from the top level. Since it is a danger level, some serious actions should be taken to acquire materials.
Economic order quantity (EOQ)
One of the major problems of inventory management is the determination of order size. The quantity to be purchase should be neither small nor big because cost of ordering and carrying materials are very high. Economic order quantity is the size of the lot to be purchased which is economically viable or which can be purchased at minimum costs. So, the economic order quantity is that quantity when the total cost of an inventory is minimum. It is determined to keeping in view the ordering cost and carrying cost are minimized. While the interaction of them two cost, the economic ordering costs during a particular period are equal to carrying costs and ordering costs. During that period, total cost to order and carry is the lowest. It is also known as re-ordering quantity. Economic order quantity involves two types of cost:
Carrying cost
All those cost which are incurred when we carry (or keep) the inventory in the store for a certain period of time are knows a s total carrying cost. It is the cost of holding the materials in the store. In next word, carrying cost is related with the storing of materials. Cost incurred for maintaining a given level of inventory is called carrying cost will increase when we purchase more and more and more quantity of inventory at a time. The carrying cost includes the following cost:

i. Clerical cost/ store administrative overhead cost
ii. Insurance and rent charges of inventory
iii. Transportation cost in relation to stock
iv. Cost of spoilage in store of handling
v. Cost of storage space
vi. Interest on capital or loan blocked on material
vii. Opportunity cost
viii. Cost of maintaining the material
ix. Cost of bin & rack for the storage of material.
x. Losses and thefts
xi. Inventory taxes
Ordering cost
All those costs which are related with the purchase activities of inventory are ordering costs. It is the cost of placing order for the purchase of material. Ordering cost varies with the number of order. The ordering cost normally include clerical cost of preparing a  purchase order or production order and special processing and receiving costs related to number of order processed. Ordering cost tend to increase or decrease in proportion with the number of order placed. When we purchase more and more quantity at a time, the number of order will decreased.
Calculation of economic order quantity
The order quantity where the total ordering cost and carrying costs are equal is known as the economic order quantity. The economic order quantity can be calculated under the following methods;
a. Formula method
b. Graphic method

c. Trial and error method