Inventory management

WHAT IS 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.

WHY IS INVENTORY MANAGEMENT IMPORTANT?

• Inventory management is vital to a company’s health because it helps make sure there
is rarely too much or too little stock on hand, limiting the risk of stock outs and inaccurate
records. Public companies must track inventory as a requirement for compliance with
Securities and Exchange Commission (SEC) rules and the Sarbanes-Oxley (SOX) Act.
Companies must document their management processes to prove compliance.
•
SEC
- The Securities and Exchange Commission (SEC) or the Commission is the national
government regulatory agency charged with supervision over the corporate sector, the capital
market participants, and the securities and investment instruments market, and the protection of
the investing public.

SOX
- The Sarbanes-Oxley Act of 2002, often simply called SOX or Sarbox, is U.S. law meant to
protect investors from fraudulent accounting activities by corporations.

THE BENEFITS OF AN EFFICIENT INVENTORY MANAGEMENT PLAN

There are so many great advantages that can result from managing inventory properly. Here
are some additional benefits to keep in mind:

• IMPROVED ACCURACY OF INVENTORY ORDERS

- of product orders, status, and tracking are critical to good inventory
management. An effective fulfillment partner will have real-time software and
systems in place to make sure no product is left untracked throughout the
fulfillment process.
-
• IMPROVED WAREHOUSE ORGANIZATION
- A good inventory management strategy leads to an organized fulfillment center.
An organized warehouse results in more efficient present and future fulfillment
plans. This also includes cost-savings and improved product fulfillment for
businesses utilizing the warehouse for managing inventory.
 • IMPROVED WAREHOUSE PRODUCTIVITY
- proper inventory management in place, less time and resources are spent
invested in managing inventory and can be allocated to other areas. Technology
is often used to speed up tracking and fulfillment operations, ensuring inventory
records are accurate.

• SAVE TIME AND MONEY

- to improved ordering accuracy, efficiency, and product flow, good inventory
management results in saved time and money.

• IMPROVED CUSTOMER RETENTION AND ENGAGEMENT

- inventory management and control protects from incorrect or damaged goods
being shipped to customers. This helps improve customer experience, protect
from issues such as refunds, and achieve more repeat buyers.

INVENTORY MANAGEMENT TOOLS AND TECHNIQUES

1. Barcode Data Collection

Manual reporting leaves plenty of opportunity for human error and inaccuracy. Because having
reliable data is crucial to inventory optimization, automate data collection by implementing a
barcode scanning system. This will take the burden off the workforce and greatly improve the
reliability and accuracy of the company's inventory data.

2. Cycle Counting
Utilizing a cycle counting system to replace the meticulous and labor-intensive physical stock
count will improve inventory accuracy and decrease labor costs. Cycle counting is a process
that counts important items more frequently than the less important ones. This method provides
a system for verifying and eliminating the place where errors originate in the supply chain.

3. ABC Analysis
Use ABC analysis to arrange items from most to least important. Organizing stock in this
fashion will simplify order fulfillment and save space in the warehouse.

In practice, ABC analysis may look like this

A-Items- These are the highest priority items that sell the best. A-items necessitate regular re-
ordering and review of their quality.
B-Items- are medium quality, average priority products that are reordered on a somewhat
consistent basis.
C-Items- are low-priority goods that don't sell very well and aren't re-ordered very often.
 4. an Inventory Management Software System
Integrate planning and implementation by incorporating a cloud-based inventory management
system into the company's supply chain practices. An inventory software solution coupled with
accounting software will improve inventory data accuracy, increase efficiency, minimize waste,
and decrease carrying costs. It is a user-friendly solution that decreases labor expenses by
automating many menial and labor-intensive tasks. A management tool has key features
including phone integration capabilities. This allows management to make updates from a
mobile app across multiple locations. This will help to increase productivity across all levels of
the supply chain.

5. Serial Number Traceability

Lot tracking allows the warehouse to track inventory along the distribution chain until an item is
shipped. Accurate serial number tracking is valuable to product development, engineering,
inventory management, and other areas of the company. Serial number traceability will increase
financial accountability and maximize efficiency throughout all areas of the supply chain. It is an
important resource for performance management and quality customer service.

WHAT IS THE COST OF INVENTORY?

Inventory cost includes the costs to order and hold inventory, as well as to administer the
related paperwork. This cost is examined by management as part of its evaluation of how much
inventory to keep on hand.

THERE ARE DIFFERENT KINDS OF INVENTORY MANAGEMENT AND INVENTORY

COSTS.

Ordering, holding, carrying, shortage and spoilage costs make up some of the main categories
of inventory-related costs. These groupings broadly separate the many different inventory costs
that exist, and below we will identify and describe some examples of the different types of cost
in each category. The other requires a certain amount of calculation to understand the impact it
has on your Gross Profit. Let's look at types of costs :

1. Ordering Costs
Ordering costs include payroll taxes, benefits and the wages of the procurement department,
labor costs etc. These costs are typically included in an overhead cost pool and allocated to the
number of units produced in each period.
• Transportation costs
• Cost of finding suppliers and expediting orders
• Receiving costs
• Clerical costs of preparing purchase orders
• Cost of electronic data interchange
 2. Holding Costs
This is simply the amount of rent a business pays for the storage area where they hold the
inventory. This can be either the direct rent the company pays for all the warehouses put
together or a percentage of the total rent of the office area utilized for storing inventory.
• Inventory services costs
• Inventory risk costs
• Opportunity cost - money invested in inventory
• Storage space costs
• Inventory financing costs

3. Costs
Shortage costs, also known as stock-out costs, occur when businesses become out of stock for
various reasons. Some of the reasons might be as below :
• Emergency shipments costs
• Disrupted production costs
• Customer loyalty and reputation

4. Costs
Perishable inventory stock can rot or spoil if not sold in time, so controlling inventory to prevent
spoilage is essential. Products that expire are a concern for many industries. Industries such as
the food and beverage, pharmaceutical, healthcare and cosmetic industries, are affected by the
expiration and use-by dates of their products.

5. Inventory Carrying Costs

This is the lesser-known aspect of inventory cost. This cost requires a certain amount of
calculation to understand the extent of its impact on your P&L statement. Inventory carrying
costs refers to the amount of interest a business loses out on the unsold stock value lying in the
warehouses.

Inventory Models
• is a mathematical model that helps business in determining the optimum level of
inventories that should be maintained in a production process, managing frequency of
ordering, deciding on quantity of goods or raw materials to be stored, tracking flow of
supply of raw materials and goods to provide uninterrupted service to customers without
any delay in delivery.

Two types of Inventory model

Fixed Reorder Quantity System
• is an Inventory Model, where an alarm is raised immediately when the inventory level
drops below a fixed quantity and new orders are raised to replenish the inventory to an
optimum level based on the demand. The point at which the inventory is ordered for
replenishment is termed as Reorder Point. The inventory quantity at Reorder Point is
 termed as Reorder Level and the quantity of new inventory ordered is referred as Order
Quantity.

Fixed Reorder Period System

• is an Inventory Model of managing inventories, where an alarm is raised after every fixed
period of time and orders are raised to replenish the inventory to an optimum level based
on the demand. In this case replenishment of inventory is a continuous process done
after every fixed interval of time.

What is the SCOR Model?

• A model for improving supply chain management The supply chain operations reference
(SCOR) model helps businesses evaluate and perfect supply chain management for
reliability, consistency, and efficiency.

SCOR’s six primary processes

Plan: Planning processes include determining resources, requirements, and the chain of
communication for a process to ensure it aligns with business goals. This includes developing
best practices for supply chain efficiency while considering compliance, transportation, assets,
inventory, and other required elements of SCM.

Source: Source processes involve obtaining goods and services to meet planned or actual
market demand. This includes purchasing, receipt, assay, and the supply of incoming material
and supplier agreements.

Make: This includes processes that take finished products and make them market-ready to
meet planned or actual demand. It defines when orders need to be made to order, made to
stock, or engineered to order and includes production management and bill of materials, as well
as all necessary equipment and facilities.

Deliver: Any processes involved in delivering finished products and services to meet either
planned or actual demand fall under this heading, including order, transportation, and
distribution management.

Return: Return processes are involved with returning or receiving returned products, either from
customers or suppliers. This includes post-delivery customer support processes.

Enable: This includes processes associated with SCM such as business rules, facilities
performance, data resources, contracts, compliance, and risk management.
The three levels of SCOR MODELS

Level 1: Defining scope, including geographies, segments, and context. At this level, the focus
is on the six main process configurations: plan, source, make, deliver, return, and enable.

Level 2: Configuration of the supply chain, including geographies, segments, and products. At
Level 2, metrics are high level and evaluated across multiple SCOR processes. This level
includes subtype categories that fall under the “parent” categories found in Level 1.

Level 3: Process element details, identifying key business activities within the chain. At this
level, you can associate any Level 2 process or subcategory with a Level 3 process.

Drivers and Participants of Supply Chain Management

Drivers of Supply Chain Management

• Production
This driver can be made very responsive by building factories that have a lot of excess capacity
and use flexible manufacturing techniques to produce a wide range of items. To be even more
responsive, a company could do their production in many smaller plants that are close to major
groups of customers so delivery times would be shorter.

• Inventory
Responsiveness can be had by stocking high levels of inventory for a wide range of
products. Additional responsiveness can be gained by stocking products at many locations to
have the inventory close to customers and available to them immediately.

• Location
A location decision that emphasizes responsiveness would be one where a company
establishes many locations that are close to its customer base. For example, fast-food chains
use location to be very responsive to their customers by opening lots of stores in high volume
markets.

• Transportation
Responsiveness can be achieved by a transportation mode that is fast and flexible such as
trucks and airplanes. Many companies that sell products through catalogs or on the Internet
can provide high levels of responsiveness by using transportation to deliver their products often
within 48 hours or less.

• Information
Information, much like money, is a very useful commodity because it can be applied directly to
enhance the performance of the other four supply chain drivers. High levels of responsiveness
can be achieved when companies collect and share accurate and timely data generated by the
operations of the other four drivers.

Participants of Supply Chain Management

• Producers
Producers (manufacturers or service providers) are organizations that make products or
services. This includes companies that are producers of raw materials and companies that are
producers of finished goods.

• Distributors
Distributors (or wholesalers) are companies that take inventory in bulk from producers and
deliver a bundle of related product lines to customers. Distributors are also known as
wholesalers. They typically sell to other businesses and they sell products in larger quantities
than an individual consumer would normally buy.

• Retailers
Retailers stock inventory and sell in smaller quantities to customers in the general public.
Discount stores attract customers using low price and wide product selection. Upscale stores
offer a unique line of products and high levels of service. Retailers offer products and services
to meet the demand of individual customers who buy in smaller quantities.

• Customers
Customers (or consumers) are individuals or organizations that purchase and use a product or
service. Customers depend on producers, distributors, and retailers to meet their needs for
products and services.

References:
investopedia inventory-management.asp

cio.com/what-is-scor-a-model-for-improving-supply-chain-management.html

accountingtools/what-is-included-in-inventory-cost.html