logistics

Here’s A Guide To Understanding Inventory And Its Management

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Logistic and Supply Chain Management

June 14, 2019

In financial terms, inventory refers to goods that are in the process of being ready for sale. To keep all these accounting documents up to date, inventory management is critical. It primarily consists of managing non-capitalised assets and keeping track of each product – both returned and new – from the point it leaves the warehouse till the sale. In other words, inventory management is a process of supply chain management that deals with tasks like tracking raw materials, managing components, and other processes along the same lines.

If inventory management is not done efficiently, then the inventory – which is the biggest strength of the company – can turn into a liability. While it is true that Inventory Management can be tricky, especially for larger organisations, a couple of techniques can be adapted to keep it in place. Let us talk about a few such techniques that can simplify Inventory Management for your business.

ABC ANALYSIS OF INVENTORY: The ABC method of managing inventory deals with categorising inventory based on cost significance. Category A represents high value – low quantity goods, category B is reserved for moderate value – moderate quantity goods, and category C indicates low value – high quantity goods. This kind of categorisation helps manage inventory accordingly. Through this method, companies can have greater control over their high-value items. It also lets business reduce staff expenses and keep track of stocks at all times. In a nutshell, the ABC method of inventory management is a way to focus on the most crucial items present in the inventory, helping control costs and keeping a check on the stocks.  

JUST IN TIME METHODOLOGY (JIT) : This method works by analysing consumer behaviour. In this method,  stocks are brought in as per consumer demand. This could be as and when an order is received or by studying demand patterns.  This method allows for the meeting of customer demands, without having to stock up on large quantities of products. However, it is vital to consider customer demand patterns thoroughly for this method to work effectively.

STOCK REVIEW: This method can be called as one of the most straightforward inventory management techniques. This technique works through the frequent analysis of stock and forecasting of future demand. However, while stock review as a method can prove to be very useful, it can be labour-intensive if done manually. This makes the consideration of different ways to automate it all the more important.

DAY SALES OF INVENTORY: Day sales of inventory is a technique that calculates the average number of days in which the company can convert inventory into sales. This helps the company to estimate the number of days till the stock will last. This method avoids the over-ordering of products and keeps the stock aligned with the sales.While these are the most popular methods of inventory management, there is still a lot to learn in this domain. We at ILAM believe in providing future-ready courses like MBA in Logistics & Supply Chain Management, which help students understand the process of inventory management and other components of supply chain management in detail.