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Meaning of Inventory Management
Inventory Management is a practice of tracking and controlling the inventory orders, its usage and storage along with the management of finished goods that are ready for sale. If the inventory in not managed properly, it can lead to increase in storage cost, working capital crunch, wastage of labor resources, increase in idle time, disruption of the supply chain, etc. All this leads to a reduction in sales and unsatisfied customers. Therefore, inventory management is an important aspect of the business which should not be ignored and must be managed properly.
7 Most Effective Inventory Management Techniques are as follows:
There are various types of inventory management techniques which can help in efficient inventory management. They are as follows:
ABC stands for Always Better Control technique. ABC analysis is an inventory management technique where inventory items are classified into three categories namely: A, B, and C. The items in A category of inventory are closely controlled as it consists of high-priced inventory which may be less in number but are very expensive. The items in B category are relatively lesser expensive inventory as compared to A category and the number of items in B category is moderate so control level is also moderate. The C category consists of a high number of inventory items which require lesser investments so the control level is minimum.
Just In Time (JIT) Method
In Just in time method of inventory control, the company keeps only as much inventory as it needs during the production process. With no excess inventory in hand, the company saves the cost of storage and insurance. The company orders further inventory when the old stock of inventory is close to replenishment. This is a little risky method of inventory management because a little delay in ordering new inventory can lead to stock out situation. Thus this method requires proper planning so that new orders can be timely placed.
Material Requirements Planning (MRP) Method
Material Requirements Planning is an inventory control method in which the manufacturers order the inventory after considering the sales forecast. MRP system integrates data from various areas of the business where inventory is utilized. Based on the data and demand in the market, order for new inventory is placed with the material suppliers.
Economic Order Quantity (EOQ) Model
Economic Order Quantity technique focuses on taking a decision regarding how much quantity of inventory should the company order at any point of time and when should they place the order. In this model, inventory is reordered when it reaches the minimum level. EOQ model helps to save the ordering cost and carrying costs incurred while placing the order. With EOQ model the organization is able to place the right quantity of inventory.
Minimum Safety Stocks
The minimum safety stock is the level of inventory which an organization maintains to avoid stock out situation. It is the level at which the new order is placed before the existing inventory is over. Like for example, if the total inventory in an organization is 18,000 units, they place a new order when the inventory reaches 15,000 units. Therefore, the 3,000 units of inventory shall form part of minimum safety stock level.
VED stands for Vital essential and desirable. Organizations mainly use this technique for controlling spare parts of inventory. Like, high level of inventory is required for vital parts that are very costly and essential for production. Others are essential spare parts, whose absence may slow down the production process, hence it is necessary to maintain such inventory. Similarly, an organization can maintain a low level of inventory for desirable parts, which are not often required for production.
Fast, Slow & Non-moving (FSN) Method
This method of inventory control is very useful for controlling obsolescence. All the items of inventory are not used in the same order; some are required frequently, while some are not required at all. So this method classifies inventory into three categories, fast moving inventory, slow-moving inventory and non-moving inventory. The order for new inventory is placed based on the utilization of inventory.
Inventory management is an essential part of every business. With effective inventory management system in place, the business can significantly reduce its various costs like warehousing cost, inventory carrying cost, ordering cost, cost of obsolescence, etc. It improves the supply chain of the business. Managers are able to forecast the level of production at which they need to place new orders for inventory. Hence, organizations should take all the necessary steps to maintain an effective inventory management and control system.