What is Inventory Management?
Inventory management is the practice of managing inventory in such a way that would simultaneously match the inventory needs as well lessen the costs associated with procuring and holding inventory. Good management of inventory is one of the most important characteristics of successful businesses. Key business functions such as finance, marketing, and operations have high interest in the proper management of inventory. Poor management of inventory hinders operations, raises operating costs, and reduces customer satisfaction.
An inventory is a stock of store of goods. It is an extremely important part of the business. The amount and monetary value of inventory carried by different types of firms vary widely; however, a normal firm generally invests 30 percent of its current assets and 90 percent of its working capital in inventory. One widely used measure of managerial performance relates to return on investment (ROI), which is profit after taxes divided by total assets. Because inventory may represent a significant portion of total assets, a reduction in inventory can result in a significant increase in ‘ROI’.
Management has two basic functions regarding inventory. One is to establish a system of keeping track of items in inventory, and the other is to make decisions about the quantity to order and when to order. For effective inventory management, a company must have the following:
- A system for tracking the inventory on hand
- A reliable demand forecasting system that includes the possible forecasting error
- Exact information about lead time and lead time variability
- Knowledge of inventory holding costs, ordering costs and shortage costs
- A classification system for inventory items
Absence of proper inventory management system can result in both under-stocking and overstocking of items. Under-stocking results in missed deliveries, lost sales, dissatisfied customers and production bottleneck; overstocking unnecessarily ties up funds that might be more productive elsewhere. So, proper management of inventory is a must for successful companies.