Inventory Management

 Bcom II Year

ENGLISH TO HINDI 

Inventory Management 

Inventory management

Inventory management refers to the process of storing, ordering, and selling of goods and services. The discipline also involves the management of various supplies and processes.

One of the most critical aspects of inventory management is managing the flow of raw materials from their procurement to finished products. The goal is to minimize overstocks and improve efficiency so that projects can stay on time and within budget. 

The proper inventory management technique for a particular industry can vary depending on the size of the company and the number of products needed. 

One way to account for inventory is by grouping it into four categories: first-in-first-out, last-in-first-out, weighted-average, and first-in-first-out. Raw materials are the components used by a company to make its finished products.

Depending on the type of company that it is dealing with, different inventory management methods are used. Some of these include JIT, material requirement planning, and days sales of inventory.

An inventory management system is a tool that helps small business owners and managers maintain a steady stock of goods and products. Moreover, it provides a record of all the items in storage, from raw materials to finished products.

For example, suppose you have an inventory management system for your clothing store. In that case, you’ll know immediately if one of your suppliers fails to deliver an order on time, so you can reorder from another company or get it elsewhere while supplies last.

Inventory management is the process of managing inventory levels, physical location, pricing, and movement to ensure that all items are available for sale at the proper time. As a result, it is a vital part of every business. An effective inventory management system will track critical information about your products, including availability, price, quantity on hand, cost value, and product lifecycle status.

Steps and types of inventory management:- Most product inventory management systems follow the same basic steps for finished products: 

a)      Products arrive at your warehouse 

b)      Products are checked and stored 

c)      Managers or crew update inventory levels 

d)     Customers place an order 

e)      Orders are approved based on inventory 

f)       Products are pulled and packaged 

g)      Inventory levels are updated again 

This process is fairly straightforward and often involves help from software. There may be variations depending on what type of inventory management you are doing. Here are the main types you should know: 

·      Raw materials:- This refers to pieces of your product that need to be shipped to you and assembled by your team. Inventory systems that track these must account for supplier timelines. 

·      In progress:- Products made from raw materials and are currently being assembled or grouped fall under this category. This stage of inventory management may have one or several active projects at a time. 

·  Repair:- Scheduled maintenance, updates, and refurbished goods all count toward this segment. Repairs may be handled in-house or in collaboration with a third party. 

·    Finished goods:- Any good that is ready to ship to businesses or consumers is considered finished. These need to be updated regularly and constantly monitored to meet demand.

 

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Benefits of inventory management:- The main benefit of inventory management is resource efficiency. The goal of inventory control is to prevent the accumulation of dead stocks that are not being used. Doing so can help prevent the company from wasting its resources and space.

Inventory management is also known to help: 

·         Order and time supply shipments correctly 

·         Prevent theft or loss of product

·         Manage seasonal items throughout the year

·         Deal with sudden demand or market changes 

·         Ensure maximum resource efficiency

·         Improve sales strategies using real-life data

 

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Inventory management process: These are the basic steps covered. There are five essential steps required for any inventory management process: 

1. Receive and inspect products: The first step in the inventory management process includes receiving your order from the supplier. Getting this part right is crucial for the following steps to function as efficiently as possible. The first thing that should be done after the order arrives it to inspect the products. It’s important to check that the quantity, product code and serial code are all correct. You should also ensure handling conditions, such as temperature, are accurate for perishables, and that all products are in good condition. 

2. Sort and stock products: After inspecting the products, they must be properly stored in the warehouse and inputted into your leave management system. At this stage, it is a good idea to be strategic about how products are stored. Warehouse slotting techniques, such as organising products based on SKU and product type can be beneficial. It is also important to minimise the distance to bestselling products by storing them where they are most accessible. 

3. Accept customer order: The next step in the inventory management process involves accepting customer orders. The orders will typically go through a point of sale system (POS), which processes the orders and accepts payments. The POS system will either have a built-in inventory management feature, or be integrated with an inventory management software that will enable the order details to be viewed by the warehouse staff. 

4. Fulfil, package and ship order: Once a customer has placed an order, the next step is to accurately and expediently fulfil, package and ship the order. If the second step in the process was optimised, searching for and selecting the products in the warehouse should be relatively straightforward. Some important aspects to consider when packaging the product are the customer experience, durability and sustainability. When shipping the product, be sure to send the customer a confirmation email with tracking information.  

5. Reorder new stock: When reordering new stock, it is crucial to ensure the timing of new orders and amount of goods are correct. By leveraging the reorder point formula, you can minimise the risk of both stockouts and deadstock – two problems that negatively impact your bottom line. Certain inventory management systems automate the process of reordering, which saves time and prevents any mistakes from human error.

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Inventory Cost: The costs of ordering and holding goods and the associated documentation are included in inventory costs. This cost is considered by management when deciding how much inventory to maintain on hand. Some of the most common inventory-related expenditures include ordering, holding, carrying, shortages, and spoiling. These classifications are used to categorise the many distinct inventory expenses that exist.

The costs of inventory purchase, storage, and management are referred to as inventory costs. It comprises expenses such as ordering, carrying, and shortage / stock-out charges. Inventory is one of a company's or manufacturer's most valuable assets. They must manage it well, and it comes at a cost in terms of inventory maintenance, storage, replacement, and movement. All of these expenses are referred to as inventory costs.

Inventory Costs Types:- The three basic categories of inventory-related costs are ordering, holding, and shortage costs. These categories serve to categorise the many various inventory costs that exist, and we will identify and describe some of the numerous sorts of expenses below.

1.Ordering Costs:- Ordering costs embrace payroll taxes, advantages, the procurement department's wages, labour costs, etc. These costs area units are sometimes engulfed within the Associate in Nursing overhead price pool and assigned to the number of units created in each amount.

• Transportation costs
• Cost of finding suppliers and expediting orders
• Receiving costs
• Clerical costs of preparing to get orders
• Cost of electronic info interchange

2. Inventory Holding Costs:- The total cost of maintaining unsold inventory is known as inventory holding costs. Within a single supply chain, inventory holding costs are considered as part of the total inventory costs. Warehousing, insurance, labour, transportation, depreciation, inventory shrinkage, damaged or spoilt goods, obsolescence, and opportunity expenses are all expenditures that must be considered.

• Inventory services costs
• Inventory risk costs
• Opportunity cost - money invested within Inventory
• Storage space costs
• Inventory funding costs

3. Shortage Costs:- Shortage costs are the expenses experienced by a company when it does not have enough inventory on hand. These expenses include lost revenues from clients who go elsewhere to make purchases, lost margin on unfinished orders, and overnight shipping charges to acquire goods, not in stock. This is a crucial factor when selecting how much inventory to keep on hand, especially for businesses that compete on customer service.

• Emergency shipments costs
• Disrupted production costs
• Customer loyalty and name

4. Spoilage Costs:- If perishable goods are not sold quickly enough, they can decay or spoil; hence inventory control is critical to avoid spoilage. Many sectors are concerned about products that expire. The expiration and use-by dates of their products have an impact on businesses such as food and beverage, pharmaceutical, healthcare, and cosmetics.

5. Inventory Carrying Costs:- This is a facet of inventory cost that is less well-known. To determine the magnitude of this cost's influence on your P&L statement, you'll need to do some math. The amount of interest a company loses on unsold stock sitting in warehouses is referred to as inventory carrying costs. When considering the impact of inventory on a business, business owners sometimes overlook the impact of the above aspects. The inventory holding expenses appear on the Profit & Loss statement as part of the rental charge. 

While inventory carrying costs are rarely considered when calculating gross profit, we normally only consider the principle cost of products stored in warehouses.

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How to improve inventory management:- The essential tips to effectively manage your inventory for increased profitability and cash flow management.

1. Prioritize your inventory. Categorizing your inventory into priority groups can help you understand which items you need to order more of and more frequently, and which are important to your business but may cost more and move more slowly. Experts typically suggest segregating your inventory into A, B and C groups. Items in the A group are higher-ticket items that you need fewer of. Items in the C category are lower-cost items that turn over quickly. The B group is what’s in between: items that are moderately priced and move out the door more slowly than C items but more quickly than A items.

2. Track all product information. Make sure to keep records of the product information for items in your inventory. This information should include SKUs, barcode data, suppliers, countries of origin and lot numbers. You might also consider tracking the cost of each item over time so you’re aware of factors that may change the cost, like scarcity and seasonality.

3. Audit your inventory. Some businesses do a comprehensive count once a year. Others do monthly, weekly or even daily spot checks of their hottest items. Many do all of the above. Regardless of how often you do it, make it a point to physically count your inventory regularly to ensure it matches up with what you think you have.

4. Analyze supplier performance. An unreliable supplier can cause problems for your inventory. If you have a supplier that is habitually late with deliveries or frequently shorts an order, it’s time to take action. Discuss the issues with your supplier and find out what the problem is. Be prepared to switch partners, or deal with uncertain stock levels and the possibility of running out of inventory as a result.

5. Practice the 80/20 inventory rule. As a general rule, 80% of your profits come from 20% of your stock. Prioritize inventory management of this 20% of items. You should understand the complete sales lifecycle of these items, including how many you sell in a week or a month, and closely monitor them. These are the items that make you the most money; don’t fall short in managing them.

6. Be consistent in how you receive stock. It may seem like common sense to make sure incoming inventory is processed, but do you have a standard process that everyone follows, or does each employee receiving and processing incoming stock do it differently? Small discrepancies in how new stock is taken in could leave you scratching your head at the end of the month or year, wondering why your numbers don’t align with your purchase orders. Make sure all staff that receives stock does it the same way, and that all boxes are verified, received and unpacked together, accurately counted, and checked for accuracy.

7. Track sales. Again, this seems like a no-brainer, but it goes beyond simply adding up sales at the end of the day. You should understand, on a daily basis, what items you sold and how many, and update your inventory totals. But beyond that, you’ll need to analyze this data. Do you know when certain items sell faster or drop off? Is it seasonal? Is there a specific day of the week when you sell certain items? Do some items almost always sell together? Understanding not just your sales totals but the broader picture of how items sell is important to keeping your inventory under control.

8. Order restocks yourself. Some vendors offer to do inventory reorders for you. On the surface, this seems like a good thing – you save on staff and time by letting someone else manage the process for at least a few of your items. But remember that your vendors don’t have the same priorities you do. They are looking to move their items, while you’re looking to stock the items that are most profitable for your business. Take the time to check inventory and order restocks of all your items yourself.

9. Invest in inventory management technology. If you’re a small enough business, managing the first eight things on this list manually, with spreadsheets and notebooks, is doable. But as your business grows, you’ll spend more time on inventory than you do on your business, or risk your stock getting out of control. Good inventory management software makes all these tasks easier. Before you choose a software solution, make sure you understand what you need, that it provides the analytics important to your business and that it’s easy to use.

10. Use technology that integrates well. Inventory management software isn’t the only technology that can help you manage stock. Things like mobile scanners and POS systems can help you stay on track. When investing in technology, prioritize systems that work together. Having a POS system that can’t communicate with your inventory management software isn’t the end of the world, but it might cost you extra time to transfer the data from one system to another, making it easy to end up with inaccurate inventory counts. 

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Benefit of good Inventory management: Inventory management is a good practice for any company. If you are not keeping a watchful eye on your inventory or counting stock regularly, you are setting yourself up for potential inventory errors and challenges. Proper inventory management really can make or break your business! Keep the following benefits in mind as you weigh the cost of not implementing an inventory management strategy:

 

1.A good inventory management strategy improves the accuracy of inventory orders:- Proper inventory management helps you figure out exactly how much inventory you need to have on-hand. This will help prevent product shortages and allow you to keep just enough inventory without having too much in the warehouse.

 

2. A good inventory management strategy leads to a more organized warehouse:- A good inventory management strategy supports an organized warehouse. If your warehouse is not organized, you will have a hard time managing your inventory. Many companies choose to optimize their warehouses by putting the highest selling products together and in easily accessible places in the warehouse. This, in turn, helps speed up the order fulfillment process and keeps customers happy.

 

3.A good inventory management strategy helps save time and money:-  Inventory management can have real-time and monetary benefits. By keeping track of which products you have on-hand or ordered, you save yourself the effort of having to do an inventory recount to ensure your records are accurate. A good inventory management strategy also helps you save money that could otherwise be wasted on slow-moving products.

 

4.A good inventory management strategy increases efficiency and productivity:- Inventory management devices, such as barcode scanners and inventory management software, can help drastically improve your efficiency and productivity. These devices will help eliminate manual processes so your employees can focus on other – more important – areas of the business. 

 

5.  A good inventory management strategy keeps your customers coming back for more:- It’s a fact that good inventory management leads to what you are constantly striving for—repeat customers. If you want your hard-earned customers to come back for your products and services, you need to be able to meet customer demand quickly. Inventory management helps you meet this demand by allowing you to have the right products on-hand as soon as your customers need them.

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Perpetual Inventory System:- The inventory control method in which every inflow and outflow of stock are constantly updated, through an electronic point of sale system, is known as Perpetual Inventory System. The records maintained under this system are always up to date. In this system an inventory ledger is maintained to keep complete and continuous record of the receipts and issue of inventory in which the closing balance is the inventory in hand. The calculation of closing inventory can be done as under:

Inventory at the Beginning + Receipts – Issues = Inventory at the end

 

The inventory records are kept in Bin Card (Stores Keeper) and Stores Ledger (Cost Accounting Department). To ensure accuracy, physical verification of stock takes place at regular intervals, and they are compared with the recorded figures. If there is any shortage due to loss or theft, then it can be easily located, and corrective actions can also be taken immediately. Although the system is costly and complicated.

Periodic Inventory System:- The inventory record system in which the movement of inventory is captured at a regular interval, say once or twice in a year, only after taking physical verification of stock is known as Periodic Inventory System. Normally, at the end of the financial year, the physical count of stock takes place after which the records are adjusted and updated accordingly. The following formula is used to track the cost of goods sold during the year:

Inventory at the Beginning + Purchases – Inventory at the end = Cost of Goods Sold

There are various shortcomings of this system as the amount of the cost of goods sold may include the goods lost or theft during the year. However, with the help of sales revenue, an estimation could be made regarding the lost inventory but this figure is not accurate. If the physical valuation of the stock is done more than once in a year, then this system can also cost higher. Discrepancies can be detected only at the end of the accounting period.

Unit II

Benefits of Inventory Planning & Control:- Inventory planning and control are functions relating to inventory management. Business owners pay close attention to inventory as it usually represents the second largest expense in their businesses. Inventory planning includes creating forecasts to determine how much inventory should be on hand to meet consumer demand. Inventory control is the process by which managers count and maintain inventory items in the business.

 

 

The management of any business needs to implement a robust inventory planning system to forecast how much it should produce and supply to its customers to meet market demand.

 

·         Cash Flow:- Inventory control and planning allows small businesses to manage their cash flow opportunities. SMEs aren’t always able to purchase large amounts of inventory, due to limited capital. By having better control of their inventory, they can know exactly how much inventory they will need and when they need it. This can free up other capital to re-invest in other areas of the business.

·         Business intelligence:- An inventory control and planning solution allows small businesses to gain insights into the fast-selling products. This allows them to adjust their product line and to make quick and smart business decisions.

·         Maximize profits:- By being able to make better business decisions the inevitable outcome for a small business will be an increase in profits. This is because the stock in their inventory will only be stock that’s actually selling. Other stock that doesn’t grab customer’s attention can be deemed obsolete and can be abandoned. This makes the general business practice more efficient.

·         Limits employee mishandling:- Inventory planning and control limits the ability of employees to steal from the inventory. Often employees use items from a business’ inventory for personal use. Without inventory control, the business owner would be none-the-wiser. This practice ultimately reduces the profitability of the business. By limiting the ability of the employee to steal, the employer is reducing potential ‘hidden’ costs.

·         Reduce labour costs:- Improved inventory planning and control techniques allow small businesses to reduce labour costs associated with inventory. These include the time spent counting stock and the transportation of stock. Employing an intelligent inventory planning and control solution can significantly reduce all these labour - intensive activities.

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Effect of Excess Inventory on Business: It includes advantages & disadvantages on inventory control system.

Advantages:

Wholesale Pricing:- Many business owners can take advantages of lower wholesale costs when they buy larger quantities of units. This makes sense for regular items that the business knows will sell, because the business is confident it will move product effectively and not be left with it. The lower costs could be significant depending on the price points of the product.

Fast Fulfillment:- When things are in stock, customers get products in hand much faster. Even when customers don't have an immediate need for the product, when the decision to buy is made, the customer likes to walk out with the product in hand. This is a fundamental part of quality customer service.

Low Risk of Shortages:- There are times when demand spikes higher. For some items, demand might be cyclical around a specific holiday or season. When you have excess inventory, you don't run the risk of being the business that ran out of stock when everyone was looking for one particular product.

Full Shelves:- When you keep just enough inventory to get through the normal sales cycle, shelves can look sparse as you get closer to the next time to order. The appearance of full shelves sends a positive message to the customer that business is good and the store is ready for business. Keeping a store stocked with items to sell requires adequate inventory. Business owners should look at several types of inventory control to determine the best method.

Disadvantages:

Obsolete Inventory:- Overstocking on products runs the risk of the product becoming obsolete. This is true especially in technology sectors such as smartphones and televisions, but no industry is exempt. Even the latest kid's game craze might inspire you to place a large order. If the buzz dissipates quickly and kids aren't looking for the game, you'll be left holding a lot of inventory you can't move.

Storage Costs:- The more stuff you have, the more space you need. Commercial space is leased per square foot. Consider the costs to store excess inventory compared to the savings on wholesale orders. It also costs to do more inventory control and audits, potentially requiring additional manpower to work the warehouse.

Potential Insurance Costs and Loss:- Insurance costs go up with larger storage areas and larger inventory values. This factor needs to be considered and compared to wholesale savings. If there is a fire, theft or another natural disaster, and so on.

Tying Up Capital:- When you have excess inventory, you pay for the order, the storage and insurance. You can't get around this. For businesses that are working with small margins and on tight monthly budgets, this can hamper business development decisions because they don't have cash on hand.

Business owners might examine the disadvantages pertinent to the business and then decide whether carrying excess inventory makes sense. It is up to each business owner to review the financial health of his company. Inventory is one key factor in that.

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Product Classification:

Product classification involves grouping or categorizing similar products based on shared characteristics or attributes. It is essential for organizing and managing a large inventory efficiently. Some aspects of product classification include:

• Categorization: Products are grouped into categories based on common features, such as type, function, or industry-specific criteria.
• Hierarchy: Classification systems often involve hierarchies, where broad categories are further divided into subcategories, allowing for a more detailed organization of products.
• Attributes: Classification can be based on attributes like size, weight, material, and color, making it easier to manage and search for products.
• Standardization: Using standardized classification systems, such as industry-specific coding schemes or taxonomies, can help ensure consistency in categorization.
• Facilitating Search and Analysis: Proper classification simplifies the process of searching for products, analyzing data, and making informed decisions about inventory management and purchasing.
• Streamlining Procurement: In supply chain management, product classification helps in selecting appropriate suppliers and negotiating contracts.

 

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Product Coding:- Product Coding, also known as SKU (Stock Keeping Unit) coding, is a system of alphanumeric or numeric identifiers used in inventory management to uniquely distinguish and track individual products within a company's inventory. These codes play a crucial role in effectively organizing and managing inventory, and they serve various purposes, such as:

1. Identification: Product codes provide a unique reference for each item in the inventory. This distinct identification allows for accurate and efficient tracking, reducing the risk of errors.

2. Categorization: Product codes often include information that categorizes items. For instance, the code may include details about the product's category, brand, size, color, and more. This categorization can help with sorting and organizing products.

3. Easy Retrieval: When products are organized and labeled with product codes, it becomes easier to locate them in a warehouse or storage facility. Employees can quickly find the specific items they need.

4. Inventory Control: Product coding is essential for maintaining accurate inventory records. It allows for real-time tracking of stock levels, reordering, and managing restocking needs.

5. Sales and Reporting: Product codes are useful in tracking sales and generating reports. They provide data that helps businesses understand which products are popular, which are slow-moving, and how to optimize their inventory.

6. Pricing: In retail, product codes are often linked to pricing. Barcodes, for example, can be scanned at the point of sale to determine the product's price.

Product coding systems can vary in complexity. They can be as simple as a numeric code, like a UPC (Universal Product Code), or more complex alphanumeric combinations that include information about the product. The choice of product coding system depends on the specific needs and requirements of the business, but the primary goal is to create a system that helps streamline inventory management and improve overall efficiency.

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Lead Time:- Lead time is the amount of time that passes from the start of a process until its conclusion. Companies review lead time in manufacturing, supply chain management, and project management during pre-processing, processing, and post-processing stages. By comparing results against established benchmarks, they can determine where inefficiencies exist.

Reducing lead time can streamline operations and improve productivity, increasing output and revenue. By contrast, longer lead times negatively affect sales and manufacturing processes.

Calculate Lead Time:- Lead time can be broken in several different components: the pre-processing, the processing, and the post-processing. These may be defined or stated differently, but the general formula to calculate lead time is:

Lead Time = Pre-Processing Time + Processing Time + Post-Processing Time

For a manufacturing company, the pre-processing time is the procurement stage where raw materials are sourced and delivered to its manufacturing headquarters or processing plant. The processing time is the manufacturing stage. The post-processing time is the stage of processing the order and delivering the final good to the customer.

Lead Time for Manufacturing Company = Procurement Time (for raw materials) + Manufacturing Time + Shipping Time

For a retail company, there is no manufacturing time as the retail firm does not manufacture its own good. In addition, the procurement time is different as instead of procuring raw materials, it sources final products to then sell directly to customers.

Lead Time for Retail Company = Procurement Time (for final products) + Shipping Time

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Types of Lead Time:- There are three primary types of lead time; each must be considered in conjunction with each other to set overall expectations of a manufacturing process. Therefore, these three primary types often flow into a fourth type of aggregated lead time.

Customer Lead Time:- The customer lead time is the amount of time between when a customer places an order and when the customer receives the product. This includes the time between when a customer places an online order and the company receives the order confirmation. Then, it includes the entire manufacturing process, shipping process, and delivery process.

Material Lead Time:- The material lead time is the amount of time between when a company becomes aware of a need for raw materials and when the materials are physically obtained. Companies are often alerted by inventory management systems when orders are processed. This lead time may be influenced by information systems that notify management when current inventory levels are low. It may also be impacted by ordering, shipping, delivery, and fulfillment by suppliers.

Production Lead Time:- Once materials have been received, the production lead time kicks off. This is the amount of time between when a company has all necessary resources on hand to manufacture a product and when it completes the manufacturing process. Unlike other lead times, this entire lead time should be internally manageable and depends on internal factors such as waste, labor, equipment efficiency, PPE availability, and machinery downtime.

Cumulative Lead Time

Lead times above may be aggregated to create a fourth lead time, and companies may track different cumulative lead times. For example, a company may be interested in the internal lead time (i.e. when raw materials are sourced to when the final product is manufactured).

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Product classifications:- There are four main product classifications. Professionals base these categories on consumer habits, costs and their general characteristics. The four product classifications are:

1.    Convenience products:- Convenience products describe the items and services that customers purchase on a regular basis with little thought. Typically, consumers use the same or similar brands for convenience products unless they are compelled to do otherwise through an advertisement or availability. For example, dish soap is a convenience product. Another characteristic of convenience products is that they are easy to find. Most consumers can buy dish soap without conducting research or making a special trip to the store for it.

2.    Informed purchases:- Informed purchases, also known as shopping goods, refers to the products and services that consumers don't make often and usually perform research before doing so. These types of products can range from more expensive items, such as a house or car, or more regular purchases, such as a pair of shoes. Consumers typically take more time to make informed purchases, which can change the way marketers advertise them.

3.    Specialty items:- Specialty items are unique products that marketers can advertise to a certain demographic of consumers without worrying about their competition. These products can include innovative goods that are one of a kind on the market or brand-name products that have a loyal fan base. While these items may be more expensive than others, consumers often feel less of a need to deliberate or research their decision to purchase a specialty them.

4.    Mandatory purchases:-  Mandatory purchases, also known as unsought goods, are products that consumers buy out of necessity rather than desire. Typically, these products are household or safety items that customers don't feel excited to buy, such as batteries, smoke detectors, air filters and cleaning products. Sometimes, consumers may buy these items out of fear or an obligatory response, such as buying a fire extinguisher or a car maintenance membership just in case of an emergency.