Understanding Inventories

Inventories refer to the goods and materials a business holds for the ultimate goal
of resale or use in the production process. It includes raw materials, work-in-
progress, and finished goods. Effective inventory management is crucial for
ensuring the uninterrupted flow of production and meeting customer demand.

DN by Durgesh Nandan
Types of Inventories
Raw Materials Work-in-Progress Finished Goods

These are the basic materials that Refers to goods that are in These are the final products
a manufacturing company uses various stages of the production ready for sale to the end
to produce its goods. process. customer.
Importance of Inventory Management

1 Meeting Customer Demand 2 Cost Control

Ensures products are available when customers Prevents overstocking and stockouts,
need them. optimizing inventory carrying costs.

3 Supply Chain Efficiency 4 Business Continuity

Contributes to a smooth flow of materials and Helps in minimizing the impact of unexpected
products through the supply chain. events on the business operations.
Inventory Control Methods
ABC Analysis
Segments inventory based on its importance, enabling better control over high-value
items.

Just-in-Time (JIT)
Emphasizes producing goods only as they are needed in the production process.

Economic Order Quantity (EOQ)

Determines the optimal order quantity that minimizes total inventory costs.
Understanding Inventory Turnover Ratio

5.2 3.8
Interpretation Calculation
A higher ratio indicates efficient inventory Calculated as the cost of goods sold divided by the
management and effective sales strategies. average inventory value.
Economic Order Quantity (EOQ)
1 Optimal Ordering Quantity
Determines the ideal amount of
inventory to order that minimizes total
inventory costs.
2 Factors Considered
Includes ordering costs, holding costs,
and demand rate for the product.
The Just-in-Time (JIT) Inventory
System
1 Principles
Focuses on eliminating waste, improving efficiency, and continuously improving
production processes.

2 Implementation
Requires close coordination with suppliers and efficient production scheduling.
Common Inventory Management Mistakes
Excessive Stockpiling Inadequate Forecasting
Leads to high carrying costs, obsolescence, and Results in stockouts or surplus inventory, affecting
tie-up of funds. customer satisfaction and finances.

Manual Tracking Ignoring Technology

Prone to errors and inconsistencies, leading to Failure to leverage inventory management
inaccurate inventory levels. software and tools for optimization.