Inventory is a term mostly to used in accounting and finance to refer to goods produced which are in distinct stages in the preparation of sale. In simple words, inventory is the company’s current assets which have already been converted or awaiting conversion to the final product so that the company can sell and benefit from this transaction. Just as it is vital to maintain an optimal balance of cash in an organization, a balance of inventory is also crucial because if it exceeds demand or a deficit of supply arises then it becomes a problem. Inventory can be grouped into the following categories;
Raw material inventory– These are essential materials required in the manufacturing process. A manufacturer procures these materials from suppliers and then apply some methods of manufacturing to get the final product. For instance, a company that manufactures aluminium ingots gets its raw materials from suppliers who supply aluminium scrap. It is very interesting to realize that the final product of one manufacturer is utilized as a raw material in another firm.
Work in progress inventory– These are semi-finished goods. These are raw materials that the conversion activity into final products has is underway. These kinds of inventory have not qualified to be called finished goods.
Finished goods inventory– These are the final products of the entire process of manufacturing. At these stages, the final product can be sold in the market for the company to earn revenue.
These are the techniques utilized by a company’s team of specialist to ensure maximum inventory use. The main objective of controlling inventory is to increase the company’s profit margin from least investment on inventory, without tampering with the consumers’ utility levels. Considering the more significant impact, it has on customers and the firm’s profits. Inventory control is very crucial, especially to those firms that have very large levels of inventories like the distributors and the retailers.
Inventory control is essential because it ensures there is a right stock balance in the warehouse. It is a loss of losing a big sale because of insufficiency of stock. Many backorders can make customers lose trust with a specific supplier and hence source another more reliable one. Customer service is very vital in carrying any business transaction, which is made possible controlling your inventory.
Keeping inventory is very costly because it needs a lot of storage space and appropriate measured put in place to ensure this stock does not get spoilt. For instance, a company that produces cornflour has to ensure that this corn is well kept and do not get in contact with any moisture because it will give bacteria a functional space for breeding, causing aflatoxins. It could be very detrimental with a loss of billions of money.
Inventory control covers many other aspects that contribute to monitoring the inventory of a firm. These aspects are shipping, purchasing, tracking, receiving, storage, warehousing, turnover and reordering. With current technological development, inventory control systems that are computerized enables integration of the subsystems, which are part and parcel of inventory management to a single cohesive system.
Most people cannot get the difference that exists between inventory management and control. Management of stock is the instances of having the right inventory quantities and payments of these stock made following the amount ordered. Inventory management also encompasses having knowledge of reorder points and making sure inventory is at the right place at the right time. Whereas, inventory control targets the already present inventory. This control is interested in everything that entails its storage and the design of the warehouses.
Some various techniques and methods are used to control inventory;
It is a unique analysis that classifies the inventory that currently exists based on the annual value of items and a consumption level. Through this method, items are put into distinct categories then organized in a descending manner. This analysis is carried out through a graph drawing based on the accumulation of the consumption cost and several items. The study is done as follows;
A items — These are high-value items that need due care. Control is carried out at the top-level authority
B items – The value of these items is moderate. Therefore, reasonable control is also required, which is carried out at the central authority level.
C items — These items are usually of a higher volume because their value is low. And control is carried in respective user departments.
Economic order quantity (E00)
The models of inventory are designed to deal with materials and money. The dilemma that managers face is are; time of placing an order that minimizes cost and the quantity to order. These two decisions affect the cost of carrying and acquiring stock. Through determining the E00, a company can decide on the order size that will reduce the cost of inventory. This model assumes that the lead time is known in advance, and it’s constant also the rate of demand is steady.
This method is also known as batch tracking, where it entails goods tracking using their distinct batch numbers along the chain of distribution. The batch tracks enable a firm to identify where the products were sourced from. Where they were taken to, how much was sold and shipped, and their specific expiring dates if any.
Points of reordering formula
This formula assists a firm to make an appropriate approximation on when to make an order of the inventory. It occurs especially when the inventory amount is at its minimum level.
FIFO AND LIFO
These are techniques used in accounting, that a firm could also utilize to control quality. FIFO means when selling your inventory. The items that arrived first should be sold first. Saying it is vital to get rid of old stock first. LIFO, on the other hand, means that the last inventory should be the first out. For stocks that are perishable such flowers. Then FIFO works. LIFO technique is usually suitable for the inventory that is non- perishable.
Just in time inventory management
This method entails manufacturing what is required, the time needed and in the exact ordered quantity.
From the illustrations above on inventory control, it is evident that most firms maximize their profits from inventory control and therefore, due care must be applied while dealing with inventory.