INVENTORY MANAGEMENT

1. Inventory
- an asset that is intended to be sold in the ordinary course of business. Inventory consist
of different categories:
a. Raw Materials - any items used to manufacture finished products, or the individual components
that go into them.
b. Work-in-process (WIP) - these are unfinished items or components currently in production, but
not yet ready for sale.
c. Finished goods - products that are complete and ready for sale.
d. MRO (Maintenance, Repair & Operations) - items used within the manufacture of products, but
without directly making up any part of a finished product.
- There are methods of purchasing inventory:
a. Bulk buying - referred to as 'just-in-case' inventory purchasing, this is where a company would
buy its inventory in bulk batches.
b. Drop shipping - a method of purchasing inventory where the retailer doesn't keep any of the
products it sells in stock.
c. Just-in-time (JIT) - this would involve ordering raw materials and assembling each product as
and when an order comes in.
 Reasons for Holding Inventory

a. It enables the firm to achieve economies of scale

b. It balances supply and demand
c. It enables specialization in manufacturing
d. It provides protection from uncertainties in demand and order cycle
e. It acts as a buffer
 Motives of Holding Inventory

a. Transaction Motive: The Company may be required to hold the inventory in order to facilitate the
smooth and uninterrupted production and sale operations.
b. Precaution Motive: In addition to the requirement to hold the inventory for routine transactions,
the company may like to hold them to guard against the risk of unpredictable changes in demand
and supply forces.
c. Speculative Motive: The Company may like to purchase and stock the inventory in the quantity
which is more than needed for production and sales purpose.
2. Inventory Management
- An essential process of tracking the stock of products.
- Inventory management all comes down to balance having the right amount stock, in the
right place, at the right time.
 Inventory Management Process
- Inventory management is a complex process, particularly for larger organizations, but the
basics are essentially the same, regardless of the organization's size or type.
a. In inventory management, goods are delivered in the receiving area of a warehouse typically, in
the form of raw materials or components and are put into stock areas or onto shelves.
b. Compared to larger organizations with more physical space, in smaller companies, the goods
may go directly to the stock area instead of a receiving location.
c. If the business is a wholesale distributor, the goods may be finished products, rather than raw
materials or components. Unfinished goods are then pulled from the stock areas and moved to
production facilities where they are made into finished goods. The finished goods may be returned
to stock areas where they are held prior to shipment, or they may be shipped directly to
customers.
d. Inventory management uses a variety of data to keep track of the goods as they move through
the process, including lot numbers, serial numbers, cost of goods, quantity of goods and the dates
when they move through the process

 Inventory Theory

1. Deterministic Demand Inventory Theory - used when all parameters and variables are known
and the demand does not present uncertainty.
a. ABC Analysis - ABC (Always Better Control) analysis is one of the most commonly used
inventory management methods. ABC analysis groups items into three categories (A, B, and C)
based on their level of value within a business.
b. EQO (Economic Order Quantity) - helps calculate exactly how much inventory to order.
c. Quantity Discounts - an incentive offered to buyers that results in a decreased cost per unit of
goods or materials when purchased in greater numbers.
d. One-time sales
e. MRP (Material Requirements Planning) a software-based integrated inventory and supply
management system designed for businesses.
2. Stochastic Demand Inventory Theory - used for demand behaviors with uncertainty or random
variables.
a. Safety stock
b. Continuous and periodic review systems
c. Newsvendor problems