INVENTORY MANAGEMENT
Every enterprise needs inventory for smooth running of the business. It serves as
a link between production and distribution process. There is, a time lag between
the recognition of a need and its fulfilment. The greater the time-lag, the higher
the requirements for inventory. It also provides a cushion for future flotations.
The investment in inventories constitutes the most significant part of current
assets/working capital in most of the undertakings. Thus, it is very essential to
have proper control and management of inventories. The propose of inventory
management is to ensure availability of materials in sufficient quantity as and
when required and also to minimize inventories.
Meaning and Nature of Inventory
The term inventory refers to the raw materials used in production as well as the
goods produced that are available for sale. A company's inventory represents one of
the most important assets it has because the turnover of inventory represents one of
the primary sources of revenue generation and subsequent earnings for the
company's shareholders. There are three types of inventories, including raw
materials, work-in-progress, and finished goods. It is categorized as a current asset on
a company's balance sheet.
Inventory is a very important asset for any company. It is defined as the array of
goods used in production or finished goods held by a company during its normal
course of business. There are three general categories of inventory, including raw
materials (any supplies that are used to produce finished goods), work-in-progress
(WIP), and finished goods or those that are ready for sale. inventory is classified as a
current asset on a company's balance sheet, and it serves as a buffer between
manufacturing and order fulfillment. When an inventory item is sold, its carrying cost
transfers to the cost of goods sold(COGS) category on the income statement.
Types of Inventory
Remember that inventory is generally categorized as raw materials, work-in-progress,
and finished goods. The IRS also classifies merchandise and supplies as additional
categories of inventory.1
Raw materials are unprocessed materials used to produce a good. Examples of raw
materials include:
• Aluminum and steel for the manufacture of cars
• Flour for bakeries that produce bread
• Crude oil held by refineries
Work-in-progress inventory is the partially finished goods waiting for completion and
resale. WIP inventory is also known as inventory on the production floor. A half-
assembled airliner or a partially completed yacht is often considered to be work-in-
process inventory.
Finished goods are products that go through the production process, and are
completed and ready for sale. Retailers typically refer to this inventory as
merchandise. Common examples of merchandise include electronics, clothes, and
, cars held by retailers.
Inventory Management
Inventory management helps companies identify which and how much stock to order
at what time. It tracks inventory from purchase to the sale of goods. The practice
identifies and responds to trends to ensure there’s always enough stock to fulfill
customer orders and proper warning of a shortage.
Once sold, inventory becomes revenue. Before it sells, inventory (although reported
as an asset on the balance sheet) ties up cash. Therefore, too much stock costs
money and reduces cash flow.
One measurement of good inventory management is inventory turnover. An
accounting measurement, inventory turnover reflects how often stock is sold in a
period. A business does not want more stock than sales. Poor inventory turnover can
lead to deadstock, or unsold stock.
Objectives of inventory management
Efficient Inventory Management is critical for manufacturers, retailers, and brands
because it is how they treat their core business and extract value from the process
of buying and selling. The following are the importance of inventory management;
• Saves Money:
Understanding stock trends means you see how much of and where you
have something in stock so you’re better able to use the stock you have.
This also allows you to keep less stock at each location (store, warehouse),
as you’re able to pull from anywhere to fulfill orders — all of this decrease's
costs tied up in inventory and decreases the amount of stock that goes
unsold before it’s obsolete.
• Improves Cash Flow:
With proper inventory management, you spend money on inventory that
sells, so cash is always moving through the business.
• Satisfies Customers:
One element of developing loyal customers is ensuring they receive the
items they want without waiting.
Tools and Techniques of Inventory Management
Inventory management helps with adequate supply change management. With the
proper inventory management methods and Materials are in place, and companies
enjoy the benefits of strategic cost management.
ABC analysis
ABC analysis, known as better control analysis, is an inventory management
technique where the items are classified into mainly three categories that are a, b
and c. A type of inventory is highly controlled because it consists of a high price
inventory, usually less in number.
Still, very expensive consists of relatively lesser expensive stock than the A. The
number of items is also of the moderate level, so control is also of average level.
The C category consists of a high number of inventory items; therefore, it requires
Every enterprise needs inventory for smooth running of the business. It serves as
a link between production and distribution process. There is, a time lag between
the recognition of a need and its fulfilment. The greater the time-lag, the higher
the requirements for inventory. It also provides a cushion for future flotations.
The investment in inventories constitutes the most significant part of current
assets/working capital in most of the undertakings. Thus, it is very essential to
have proper control and management of inventories. The propose of inventory
management is to ensure availability of materials in sufficient quantity as and
when required and also to minimize inventories.
Meaning and Nature of Inventory
The term inventory refers to the raw materials used in production as well as the
goods produced that are available for sale. A company's inventory represents one of
the most important assets it has because the turnover of inventory represents one of
the primary sources of revenue generation and subsequent earnings for the
company's shareholders. There are three types of inventories, including raw
materials, work-in-progress, and finished goods. It is categorized as a current asset on
a company's balance sheet.
Inventory is a very important asset for any company. It is defined as the array of
goods used in production or finished goods held by a company during its normal
course of business. There are three general categories of inventory, including raw
materials (any supplies that are used to produce finished goods), work-in-progress
(WIP), and finished goods or those that are ready for sale. inventory is classified as a
current asset on a company's balance sheet, and it serves as a buffer between
manufacturing and order fulfillment. When an inventory item is sold, its carrying cost
transfers to the cost of goods sold(COGS) category on the income statement.
Types of Inventory
Remember that inventory is generally categorized as raw materials, work-in-progress,
and finished goods. The IRS also classifies merchandise and supplies as additional
categories of inventory.1
Raw materials are unprocessed materials used to produce a good. Examples of raw
materials include:
• Aluminum and steel for the manufacture of cars
• Flour for bakeries that produce bread
• Crude oil held by refineries
Work-in-progress inventory is the partially finished goods waiting for completion and
resale. WIP inventory is also known as inventory on the production floor. A half-
assembled airliner or a partially completed yacht is often considered to be work-in-
process inventory.
Finished goods are products that go through the production process, and are
completed and ready for sale. Retailers typically refer to this inventory as
merchandise. Common examples of merchandise include electronics, clothes, and
, cars held by retailers.
Inventory Management
Inventory management helps companies identify which and how much stock to order
at what time. It tracks inventory from purchase to the sale of goods. The practice
identifies and responds to trends to ensure there’s always enough stock to fulfill
customer orders and proper warning of a shortage.
Once sold, inventory becomes revenue. Before it sells, inventory (although reported
as an asset on the balance sheet) ties up cash. Therefore, too much stock costs
money and reduces cash flow.
One measurement of good inventory management is inventory turnover. An
accounting measurement, inventory turnover reflects how often stock is sold in a
period. A business does not want more stock than sales. Poor inventory turnover can
lead to deadstock, or unsold stock.
Objectives of inventory management
Efficient Inventory Management is critical for manufacturers, retailers, and brands
because it is how they treat their core business and extract value from the process
of buying and selling. The following are the importance of inventory management;
• Saves Money:
Understanding stock trends means you see how much of and where you
have something in stock so you’re better able to use the stock you have.
This also allows you to keep less stock at each location (store, warehouse),
as you’re able to pull from anywhere to fulfill orders — all of this decrease's
costs tied up in inventory and decreases the amount of stock that goes
unsold before it’s obsolete.
• Improves Cash Flow:
With proper inventory management, you spend money on inventory that
sells, so cash is always moving through the business.
• Satisfies Customers:
One element of developing loyal customers is ensuring they receive the
items they want without waiting.
Tools and Techniques of Inventory Management
Inventory management helps with adequate supply change management. With the
proper inventory management methods and Materials are in place, and companies
enjoy the benefits of strategic cost management.
ABC analysis
ABC analysis, known as better control analysis, is an inventory management
technique where the items are classified into mainly three categories that are a, b
and c. A type of inventory is highly controlled because it consists of a high price
inventory, usually less in number.
Still, very expensive consists of relatively lesser expensive stock than the A. The
number of items is also of the moderate level, so control is also of average level.
The C category consists of a high number of inventory items; therefore, it requires
