Inventory consists of raw materials, work-in-process and finished goods.
An inventory is basically a detailed list of all the items in stock. Inventory consists of raw materials, work-in-process and finished goods. In today’s highly competitive market, businesses need to maintain an appropriate level of stock to meet the customer demands at any time. Inventory management is part of the supply chain management.
Over the past years, the concept of supply chain management SCM has been given a considerable attention. This is an approach to view the supply chain as a whole rather than as a set of separate processes (Weele, 2002). Mentzer, Dewitt, Keebler, Min, Nix, Smith and Zacharia defined Supply chain management SCM “as the systematic and strategic coordination of the traditional business operations”. The main aim of supply chain management SCM is to improve the long term performance of each firm as well as the whole supply chain (Mentzer, Dewitt, Keebler, Min, Nix, Smith and Zacharia, 2001).
Inventory management involves “system and processes of maintaining the appropriate level of stock in a warehouse” (Barcodes, 2010). These activities includes identifying necessary inventory requirements, and creating replenishment processes, tracking and monitoring the usage of items/stock, reconciling inventory balances as well as reporting inventory status.(Barcodes , 2010). It is basically the process of efficiently controlling the amount of stock in order to avoid excess inventory. Reliable inventory management will therefore minimise the cost associated with inventory (Barcodes, 2010).
Inventory management involves a wide scope of processes ranging from inventory forecasting , replenishment, demand forecasting as well as quality management (Wikipedia, 2009).
Objectives and benefits of inventory management
According to Stylus Systems, The 3 main objectives in inventory management are:
- Improved customer service
- Reduce inventory investment
- To increased productivity of business (Stylus, 2008)
Benefits of inventory management (Stylus, 2008):
- Inventory management systems can help reduce the time to respond to changing market demand of products and can help control excess stock
- IMS provide a means for business to effectively manage or control their inventory
- IMS helps businesses to constantly analyse their business processes such as sales and purchasing in order to make efficient inventory decisions
- Stylus systems also reported that inventory management systems IMS can provide total insight on stock transactions
- Â Stylus systems also stated that IMS can provide hands on knowledge on inventory which might lead to increased sales and efficient customer services.
Development in inventory management
Presently, there are two major approaches to inventory management
- Materials requirement planning (MRP):Â MRP is simply a management system in which sales are converted into loads on the facility by sub-unit and time period. Here, orders are “scheduled more closely thereby reducing inventory and delivery times becomes shorter and more predictable” (Hedrick, 2003).Â MPR review order quantities periodically and as such allow ordering only what is currently needed. This helps keep inventory levels very low.
- Just-in-Time (JIT): JIT approach ensures that a business should only keepÂ inventory in the right quantity at the right time with the right quality (David, 2004) .Most organizations adapt to this system to integrate inventory managementÂ for a more competitive advantage (Kaynak, 2005). It eliminates inventories rather than optimize them.
Why keep Inventory
Inventory refers to a detailed list of all the items in store or warehouse. According to Inman, Inventory refers to the items that are stored in warehouses or distribution centres in excess of what the store needs (Inman, 2010).
The following are the reason why business keeps more inventory than they currently need (Inventory Management, 2010).
- Meet Demand: this ensures that customers get the product or item that they want when they want it.
- Keep Operations running: When for example manufacturers run out of stock to manufacture certain product, the whole production process or operations will be halted and thus manufacture of the finished product. In order to prevent this, most manufacturers purchase excess inventory.
- Lead time: When a shop or a factory places an order for a particular item, the period of time between the order placements and when the order is received is known as lead time. Business therefore should have hands on inventory during the lead time in order to keep its operations running.
- Hedge: This involves keeping inventory against inflation in price of products. This allows the buyer to buy at a lower price than when the price increases.
- Quantity Discount: Quantity discount refers to reduction in price of an item when purchasing in bulk. This always influences most businesses to buy more than it needs which might lead to excess inventory.
- Smoothing Requirements: businesses sometimes acquire access inventory for products that have unpredictable demands in order to meet demand.
Best practice in inventory management
In an effort to maximise their return on investment (ROI) and avoid excess inventory, many businesses invest a fortune in inventory management systems.
In a report by Philip Slater (Slater, 2009), he stated that most of these systems fails to render expected services and rather result in excess inventory. This is because software can only optimise the values it has and not what it could be and as a result, it neglects some important external influences like changes in the management process. He stated that “World’s best practice inventory management demands that the inventory management system is optimised not just the inventory”. Inventory management therefore goes beyond software system and as stated by Philip Slater (Slater, 2009) inventory management involves combination of ‘know-how, process and reporting’ that collectively provide a means of maximizing availability while minimizing cash investment. In the report, he stated five level of world’s best practice inventory management that when fully implemented, can enable businesses to reduce their inventory investment or cost. These levels are:
- Ad Hoc: this level require less control as inventory is expensed when purchased on an ‘as needed’ basis and used immediately.
- Storage: this level involves the storage of items for use and not strictly controlled. Here, inventory is expensed when purchased. This approach tends to increase total expenditure as items are purchased in ‘economic quantities’ and discourage review and development due to lack of control
- Capitalisation: This approach entails the use of software solution to control inventory and provide good availability. Unfortunately, most businesses use their software mostly for counting and accounting.
- Software Optimisation: at this level, inventory is capitalised and the levels of stock are optimised based on a risk/return algorithm. Software solution can automatically adjust stock levels based on the history of demand and supply but these level are not trusted by most business because they believe the supply and demand may not represent actual usage
- System Optimisation: At this level, all factors influencing inventory investment are reviewed periodically. The main purpose of inventory management is to minimise overall cash investment without increasing risk. This according to Philip Slater is the world’s best practice in inventory management (Slater, 2009).
Capitalisation and system optimisation goes hand-in-hand. For an effective system, the management is therefore required to possess the know-how, policy development, measures and reporting required to take the business to level 5 (System Optimization) and not just the software alone(Slater, 2009).