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Inventory Management – Types and Characteristics

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.

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.

Inventory Management Challenges
Without a doubt, inventory management is an important part of doing business. It is the means by which companies remain stocked with all of the essential goods they need to sell to customers and complete daily operations. When products are sold, they must be replenished at a rate that doesn’t lead to huge overstocks or frequent stock-outs. Successfully managing inventory means hitting a moving target because supply and demand aren’t constant, but they often change with the season and over the course of a product’s life-cycle. There’s also the problem of keeping track of inventory with different units of measure and suppliers in different countries with different tax rates and laws.

Inventory Management Usefulness
It includes
Manufacturers that work with hundreds and even thousands of parts, components, and other materials.
Wholesale distributors with multiple warehouses and suppliers both inside and outside their home country.
Service providers that must maintain specific numbers of cleaning supplies, replacement parts, and other items to serve their customers.
Food producers using ingredients that must be consumed before reaching certain expiration dates.
Government agencies looking to track their assets across wide expanses and to serve a large number of people.
And many others, ranging from SMBs to large organizations.

Lot Size Reorder Point Policy
Under this operating policy the inventory status is continuously reviewed and as soon as the inventory level falls to a prescribed value called `Reorder Point’. A fresh replenishment order of fixed quantity called Economic Order Quantity (EOQ) is initiated. Thus the order size is constant and is economically determined. This is one of the very classical types of inventory policies and a lot of mathematical analysis has appeared on this type of policy. Lot size and reorder point are the two decision variables involved in the design of the policy.

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