Business Inventory control - Essay Example

Business inventory control Inventory analysis and control for an organization is a planned approach of determining what to order, when to order, how much to order and how much to stock so that the costs associated with buying and storing without interrupting production and sales (Kumar, 2006, pg: 67). Inventory control basically aims at finding answers to address two basic problems: a. When should an item from the inventory be ordered?b. How much an item should be ordered?If a firm maintains a large inventory, goods can be made available to quickly to customers.

However the same leads to high storage and maintenance costs. At the same time, very less amounts of inventory will lead to order not being fulfilled and customer dissatisfaction. At the same time, money which is tied in inventory can’t be used for other purposes (Dubrin, 2011, pg: 211). Because of these reasons, it is very important to monitor and keep a control over inventory. Inventory control takes all the more importance because of the following reasons (Jawahar – Lal, 2008, pg. 118):a.

Demand fluctuations –Demand for an organization’s products vary from season to season. In times of fluctuating demands, inventory plays a very critical role. Insufficient inventory will lead to frequent stock-outs whereas a very high inventory will lead to huge costs for storage and maintenance of inventory. b. Uncertainty in receiving the item from the supplier – Often there can be uncertainties in receiving inventory items from the supplier. An organization should keep buffer against such uncertainties by keeping sufficient stocks of the inventory. c. Avoid over-stocking and under-stocking of the items – over-stocking as well as under-stocking of items results in a cost which organization would want to prevent.

Many techniques that are used by firms for controlling inventory are:ABC analysis – the total value of the amount spent on an year for all the itemsHML analysis – Classification on the basis of unit price of items (high price, low price, medium price)VED analysis – Classification on the basis of criticality of items (e.g. vital, essential and desirable items)FSN analysis – Classification of items on the basis of consumption of items (moving and non-moving items)SDE analysisGOLF analysis – Classification of items on the basis of source of items (Government supply, ordinary available, local availability, foreign availability etc)SOS analysis – Classification of items on the basis of nature of supply of items (seasonal, off-seasonal etc)The technique used depends on the specific industry and the circumstances for the firm seeking inventory control.

Inventory is one of the most critical components of the order to cash conversion cycle. It is important for an organization to have a control over the inventory because the same affects the profitability of the firm considerably. A less amount of inventory will lead to stock-outs and customers being returned without the sales while a high amount of inventory on the other hand leads to high cost in storage and maintenance. ReferencesDubrin, A.J., 2011. Essentials of Management, 9th ed. USA: South-Western Cengage Learning.

Jawahar, Lal, 2008. Cost Accounting. Tata McGraw-Hill Education. Kumar, S.A., 2006. Production and Operations Management. New Delhi: New Age International (P) Limited Publishers