Importance of Inventory Management - Essay Example

Introduction Before going into the topic of discussing some of the important issues regarding inventory management, we must first get to know what inventory management is and the importance of inventory management in companies and organizations. The process of inventory management involves controlling of the inventory items in a way that neither they become too much in excess for the organization, nor do they get out of stock so that when the company needs them, they are not available in the stock. Morris (2006) states that Inventory management, if done properly, can bring down costs and increase the revenue of a firm. Inventory items usually consist of the goods, raw materials and finished products. All of these items are seen as money or profit for the owner of any specific organization. Campbell (2007) states that keeping track of raw materials, works-in-process and finished products are obviously critical to a companys bottom line. The aims and objectives of the research regarding inventory management are to analyze various issues which are associated with the inventory management process in any specific organization. Another purpose is to talk about the importance and significance of these issues in the process of inventory management. The plan of the report is that those matters or issues, which influence the inventory management process of any company or organization, will be critically examined and studied in order to see their impact on the inventory control and management system and suitable solutions will be found in order to properly tackle any sort of issue that may appear in the organization regarding the process of inventory management. Importance of inventory management If we talk about the importance of inventory management system, we can say that inventory management is the root cause for the success of any company or organization. Zierden (2009) states that to be successful in today’s market, dealers need to have concrete inventory strategies and processes in place. If the company contains required amount of inventory items in the stock, the company never faces a demand-supply problem. Demand-supply issue always occur when the company gets out of stock and when the inventory stock level of the company is balanced, the company will never face the issue of less stock and high demand. Muller (2003) found that balanced inventories are very important for the companies because all companies, whether they are medium sized or a large sized organization, inventory management is the key to productivity and success. Piasecki (2003) found that maintaining a required amount of stock is of crucial importance for a company in order to prevent the out of stock situation. Out of stock situation not only decreases the level of productivity and profitability of any specific company but also it makes a negative impact on customer retention factor. If the inventor is mismanaged, various problems may occur which include disappointed customers, slower sales and too much cash tied up in the warehouses. Toomey (2000) found that a perfect inventory management system includes record maintenance of track sales and available inventory, effective communication with suppliers, great knowledge of customer’s trends and availability of stock when needed. The factors which make implementation of inventory management system in any organization a necessity are quicker production cycles, multinational production contracts, proliferation of products, and product dominance in a competitive market. The benefits which come with an efficiently operating inventory management system include reduction in purchasing and inventory costs, balance between the demand and supply system, improved customer satisfaction, fast delivery of products into the market, increase in company’s operational efficiency, and increased productivity and profitability. Issues regarding inventory management There exist various issues regarding inventory management system. These issues are of key importance for the successful implementation and operation of an inventory management system in any company or organization. If the company doesn’t pay attention towards these issues or factors, inventory management system would lead towards mismanagement of inventory management and that would result in decrease in required levels of productivity. Not only productivity, profitability also gets affected due to this. Talking about issues regarding inventory management, it is to be mentioned here that these issues generally fall under three categories. These categories are general issues regarding inventory management, issues regarding single level inventory management systems, and issues regarding multi-level inventory management systems. Let’s discuss these issues in detail. Modeling of the time axis The modeling of time axis is of crucial importance for the analysis of an inventory policy. For the modeling of time axis, length of the review period and assumptions concerning the structure of the customer order arrivals must be determined. Review period, which is the length of interval between successive inventory reviews, is either continuous or a periodic review. In continuous review, the exact data on the inventory status are accessible at any point of time and the supplier launches and handles the replenishment orders without any holdup. But this only happens if the customer’s order is unit-sized. Length of the replenishment lead time is also considered as deterministic in continuous review. But with the periodic review, inventory records are rationalized in regular intervals which can be at the end of each day or every two weeks. Evidences have proved that the only possibility to react to a huge demand is through placing a replenishment order. Buying correct quantities Another critical issue is the decision which is to be taken by the inventory manager related to quantities of what the company is going to buy. The inventory manager must be capable of estimating the needs of the company regarding the product. A target market satisfying quantity should be maintained in order to fulfill the demand of the customer. Such products should never be bought buy the inventory manager which are not required by the company or for which the demand by the customers doesn’t seem to come in the near future. If the inventory manager buys such products, they will not only become a load on the company’s warehouse but also result in waste of capital as those products will not be required for the company. The inventory manager must know what to buy, how much to buy, when to buy any specific product, when the product would arrive at the company stocks, when the reorders for the product should not be submitted and when to make the product out of stock. Demand during risk period Another important issue regarding inventory management is the demand during the risk period that is consisted of the replenishment lead time and the review period. Schreibfeder (2009) states that minimum quantities should be set to equal anticipated demand during the lead time plus any desired safety stock. If the management wants to calculate the parameters of an inventory policy, they should be aware of the probability distribution of demand during the period of risk. Studies have shown that systematical monitoring of the development of demand is often not taken into much consideration but it is a crucial requirement of an inventory policy under stochastic situation. Purchasing the right products One of the key issues in inventory management is the purchasing of right products for the company. To handle this issue effectively, the management of the organization has to perform some important steps. First of those steps is that the inventory manager should explore the market to find out those products for the target market. Then he should perform an analysis of the sales from previous years and search for new products for the target markets. Then he should examine the economy forecast for the coming period and should find out how the purchasing power can get affected. Then he should compare the effects of the sales of competing companies on the company’s sales. And based on the analysis and studies, he should make up his mind regarding what to buy and how much to buy. Techniques to manage the inventory efficiently This issue is also very important for the inventory manager to learn those techniques which are required for the efficient inventory management. It is critical for the inventory manager to learn the skills related to the management of inventory. When the inventory management personal will learn the ways to manage the inventory efficiently and correctly, it will help the company in maintaining required stocks for the customer needs. Only those inventory items should be kept in the stock that the customer needs. Sheldon (2004) found that proper balance should be maintained for the purpose of inventory management. Not only shortage of stock is bad for the company but also the excess of products because it costs the business money. If we talk about the retail business, it makes money only when the products are sold out. Certain expenses incur win maintaining the inventory stock until it is sold. Some of these expenses are cost of the storage space, interest on loans that is taken to buy products, cost of moving stock and arranging the items for display, cost of time which is needed to manage the inventory, and cost of stolen or damaged products. Axsater (2000) found that if a company buys more products than needed, it will tie up the business money in the inventory. Company should buy only those products that are demanded by the customers. Those products which are not needed by the customers will affect both; the company’s capital and the management costs. If the inventory is managed efficiently, not only the costs are minimized but also it results in maximization of the profits. Finding a suitable supplier Another critical issue related to inventory management is to find a suitable supplier for the company. Such a supplier should be selected for the purpose of supplying products and inventory items to the company who should have good profile. It is important because only a high profiled supplier can deliver the products in required quantity to the company. The inventory manager has to make sure that the supplier who is going to deliver the products should be of good repute in the market. It’s the job of inventory manager to select a suitable supplier for the purpose of product delivery in required quantity. Lead times for the supply and delivery of products should be studies by the inventory manager in order to ensure ordering at the appropriate time and also to determine the delivery time for the customer if the company has to order some additional products. One vital point to be considered by the inventory manager is that he shouldn’t buy more than required products just because of some attractive deals by the supplier. Buying plans regarding products should be reviewed and adjusted weekly because the trends and customers’ demand may change after some time. And if the demand of the product rises, then the inventory manager should bring in more quantity of that product in order to avoid shortage. Managing inventory How to manage inventory and which mechanism to be used for managing stock is also a considerable issue in the process of inventory management. This issue has a great deal of importance in this fast paced world. Gone are the days when the inventory managers used notebooks for the purpose of inventory management. It not only used to take a lot of time in listing the records but also was a tedious method of saving the record. These days, a very fast and efficient method is being used by the inventory managers and that method is computer inventory management system. Time can be saved by the inventory managers using various computerized methods. These methods include point of sale terminals, barcodes and barcode readers, job costing inventory systems, and electronic supplier product catalogs. After selecting an appropriate method for inventory control, the inventory manager should take some important steps regarding goods stock. These steps include removal of goods from the system as soon as they get sold to the customer, regularly checking the accuracy of the stock system, and weekly review of stock reports in order to identify those products that are not demanded by the customers. Such products should be removed from the system to minimize space shortage and reduce costs. Focusing the customers’ trend Any organization of company must have a focus on the customers’ trends regarding the products. Such products should be made available in the stock which is demanded by the customers. If the company wants to increase its profitability, it should pay attention towards the customers’ demands. It is a critical issue related to inventory management because it directly influences the company’s profitability. Before planning to buy any specific product for the company, the inventory manager should perform a thorough analysis in order to make it sure that whether the product has got customers’ interest or not. If the product is not being demanded by the customers, it shouldn’t be brought into the inventory stock as it will overload the stock and nothing else. Conclusion Summing it up, it can be said that inventory management system is of extreme importance in any company or organization. The levels of productivity and profitability of a company is directly related to an efficient inventory control system in operation. More effective and efficient the inventory management system of a company, more will be the increase in the levels of productivity and profitability of the company. Without an effective inventory management system in operation, companies and organizations can never think of getting success in this world of competition. We have found from the research that if a company pays proper attention towards the key issues regarding inventory management, it surely gains dominance in any competitive market. Currently, inventory management system is being seen as the major focal point in almost all organizations. Not only big organizations, but also small enterprises and super stores are making use of computerized inventory management systems. These systems are helping the organizations and the enterprises in managing the inventories more quickly and efficiently. Many companies are using hosted inventory management system in which company’s inventory is managed by a separate host outside the company instead of being managed by the company itself. Brinlee (2009) states that with hosted inventory management, a company or institution purchases software packages from an inventory management provider. The hosted inventory management system makes use of software, SAAS, for managing the inventory. Companies now go for hosted inventory management which is providing a great help for the companies and organizations in getting their inventories managed by an outside host. If we talk about the future directions of inventory management system, we can say that the future of inventory management system will be based on the concepts of continuous improvements. These future improvement concepts include just-in-time, Kanban and lean manufacturing concepts. For the future of inventory management, various computerized applications are also being developed to ensure the inventory management operations to be as fast and secure as possible. References Axsater, S., 2000. Inventory Control. Massachusetts: Kluwer Academic Publishers. Brinlee, D., 2009. Hosted inventory management. askDeb.com. Available at: http://www.askdeb.com/inventory-management/hosted/ [Accessed 21 February 2010]. Campbell, K., 2007. For managing inventory, technology counts. Iconincs.com. Available at: http://www.iconics.com/news/article_display.asp?Article=070301_PlantEngineering.htm [Accessed 21 February 2010]. Morris, E., 2006. Inventory Management. ezinearticles.com. Available at: http://ezinearticles.com/?Inventory-Management&id=254707 [Accessed 21 February 2010]. Muller, M., 2003. Essentials of Inventory Management. New York, NY: AMACOM. Piasecki, D., 2003. Inventory Accuracy: People, Processes, & Technology. U.S.A: OPS publishing. Schreibfeder, J., 2009. Effective Inventory Management, Inc. effectiveinventory.com. Available at: http://www.effectiveinventory.com/article73.html [Accessed 21 February 2010]. Sheldon, D., 2004. Achieving inventory accuracy: A guide to sustainable Class A Excellence in 120 Days. U.S.A: J. Ross Publishing, Inc. Toomey, J., 2000. Inventory Management: Principles, Concepts and Techniques. Massachusetts: Kluwer Academic Publishers. Zierden, T., 2009. 4 Keys to Inventory Management. fi-magazine.com. Available at: http://www.fi-magazine.com/Channel/Certification-Training/Article/Story/2009/05/4-Keys-to-Inventory-Management.aspx [Accessed 21 February 2010]. Read More