Inventory management is a very important function that determines the health of the supply chain as well as the impacts the financial health of the balance sheet. Every organization constantly strives to maintain optimum inventory to be able to meet its requirements and avoid over or under inventory that can impact the financial figures.
Inventory is always dynamic. Inventory management requires constant and careful evaluation of external and internal factors and control through planning and review. Most of the organizations have a separate department or job function called inventory planners who continuously monitor, control and review inventory and interface with production, procurement and finance departments.
Defining Inventory
Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an organization in its custody awaiting packing, processing, transformation, use or sale in a future point of time.
Any organization which is into production, trading, sale and service of a product will necessarily hold stock of various physical resources to aid in future consumption and sale. While inventory is a necessary evil of any such business, it may be noted that the organizations hold inventories for various reasons, which include speculative purposes, functional purposes, physical necessities etc.
From the above definition the following points stand out with reference to inventory:
- All organizations engaged in production or sale of products hold inventory in one form or other.
- Inventory can be in complete state or incomplete state.
- Inventory is held to facilitate future consumption, sale or further processing/value addition.
- All inventoried resources have economic value and can be considered as assets of the organization.
Different Types of Inventory
Inventory of materials occurs at various stages and departments of an organization. A manufacturing organization holds inventory of raw materials and consumables required for production. It also holds inventory of semi-finished goods at various stages in the plant with various departments. Finished goods inventory is held at plant, FG Stores, distribution centers etc. Further both raw materials and finished goods those that are in transit at various locations also form a part of inventory depending upon who owns the inventory at the particular juncture. Finished goods inventory is held by the organization at various stocking points or with dealers and stockiest until it reaches the market and end customers.
Besides Raw materials and finished goods, organizations also hold inventories of spare parts to service the products. Defective products, defective parts and scrap also forms a part of inventory as long as these items are inventoried in the books of the company and have economic value.
Types of Inventory by Function
| INPUT | PROCESS | OUTPUT |
| Raw Materials | Work In Process | Finished Goods |
| Consumables required for processing. Eg : Fuel, Stationary, Bolts & Nuts etc. required in manufacturing | Semi Finished Production in various stages, lying with various departments like Production, WIP Stores, QC, Final Assembly, Paint Shop, Packing, Outbound Store etc. | Finished Goods at Distribution Centers throughout Supply Chain |
| Maintenance Items/Consumables | Production Waste and Scrap | Finished Goods in transit |
| Packing Materials | Rejections and Defectives | Finished Goods with Stockiest and Dealers |
| Local purchased Items required for production | Spare Parts Stocks & Bought Out items | |
| Defectives, Rejects and Sales Returns | ||
| Repaired Stock and Parts | ||
| Sales Promotion & Sample Stocks |
An Inventory Analysis is a process of comprehending the mix of business products while being aware of the demand for certain products. When running a business, it is important for managers to practice a periodic Inventory Analysis to have a better Inventory Control.
Benefits of Inventory Analysis
First of all, some of the reasons why Inventory Analysis is so important is because it contributes a lot to an Inventory Manager’s decision on what steps to take in protecting valuable assets. Additionally, an Inventory Analysis, along with the classification of your products, can help improve your policies for better Inventory Control.
Furthermore, the most significant benefit businesses can achieve from Inventory Analysis is a better R.O.I. or Return on Investment. Lastly, for many, if not all businesses, the R.O.I. is the deciding factor of whether a company meets its money rules and if it is still worth continuing its operations.
Other Benefits of Inventory Analysis
- Establishing a proper warehouse layout
- Reducing lead time in acquiring sellable items
- Implementation of proper authorization
- Proper item classification for better cost management
- Proper management of dormant inventory items
- Improved utilization of the company’s capital
- Better and positive cash flow
- Future identification of possible opportunities or losses
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