Inventory Management

INVENTORY
MANAGEMENT
Inventory management
◦ is a discipline primarily about specifying the shape and placement
of stocked goods. It is required at different locations within a
facility or within many locations of a supply network to precede the
regular and planned course of production and stock of materials.

Concept
◦ The concept of inventory, stock or work-in-process has been extended from manufacturing
systems to service businesses[1 and projects,[ by generalizing the definition to be "all work
within the process of production- all work that is or has occurred prior to the completion of
production." In the context of a manufacturing production system, inventory refers to all work
that has occurred – raw materials, partially finished products, finished products prior to sale
and departure from the manufacturing system. In the context of services, inventory refers to all
work done prior to sale, including partially process information.
SCOPE
◦ concerns the balance between replenishment lead time, carrying costs of
inventory, asset management, inventory forecasting, inventory valuation,
inventory visibility, future inventory price forecasting, physical inventory,
available physical space, quality management, replenishment, returns and
defective goods, and demand forecasting. Balancing these competing
requirements leads to optimal inventory levels, which is an ongoing process as
the business needs shift and react to the wider environment.
SCOPE
◦ Inventory management involves a retailer seeking to acquire and maintain a proper
merchandise assortment while ordering, shipping, handling, and related costs are kept in
check. It also involves systems and processes that identify inventory requirements, set targets,
provide replenishment techniques, report actual and projected inventory status and handle all
functions related to the tracking and management of material. This would include the
monitoring of material moved into and out of stockroom locations and the reconciling of the
inventory balances.
SCOPE
◦ It also may include ABC analysis, lot tracking, cycle counting support,
etc. Management of the inventories, with the primary objective of
determining/controlling stock levels within the physical distribution
system, functions to balance the need for product availability against
the need for minimizing stock holding and handling costs.

Reasons for keeping stock
◦ Time – The time lags present in the supply chain, from supplier to user at
every stage, requires that you maintain certain amounts of inventory to use in
this lead time. However, in practice, inventory is to be maintained for
consumption during 'variations in lead time'. Lead time itself can be addressed
by ordering that many days in advance.
◦ Seasonal Demand: demands varies periodically, but producers capacity is
fixed. This can lead to stock accumulation, consider for example how goods
consumed only in holidays can lead to accumulation of large stocks on the
anticipation of future consumption.
◦ Uncertainty – Inventories are maintained as buffers to meet uncertainties in
demand, supply and movements of goods.
Reasons for keeping
◦ Economies of scale– Ideal condition of "one unit at a time at a place where a
user needs it, when he needs it" principle tends to incur lots of costs in terms of
logistics. So bulk buying, movement and storing brings in economies of scale,
thus inventory.
◦ Appreciation in Value – In some situations, some stock gains the required
value when it is kept for some time to allow it reach the desired standard for
consumption, or for production. For example; beer in the brewing industry

Special terms used in dealing with inventory management
1. Stock Keeping unit (SKU)
◦ SKUs are clear, internal identification numbers assigned to each of the

products and their variants. SKUs can be any combination of letters and
numbers chosen, just as long as the system is consistent and used for all the
products in the inventory.[6] An SKU code may also be referred to as product
code, barcode, part number or MPN (Manufacturer's Part Number). [7]
Special terms used in dealing with
inventory management
2. Stockout
means running out of the inventory of an SKU.[8]
3. New old stock
(sometimes abbreviated NOS) is a term used in business to refer to merchandise

being offered for sale that was manufactured long ago but that has never been
used. Such merchandise may not be produced anymore, and the new old stock
may represent the only market source of a particular item at the present time.
Inventory examples
◦ Inventory examples
◦ While accountants often discuss inventory in terms of goods for sale,

organizations – manufacturers, service-providers and not-for-profits – also
have inventories (fixtures, furniture, supplies, etc.) that they do not intend to
sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in
warehouses. Retailers' inventory may exist in a warehouse or in a shop or store
accessible to customers. Inventories not intended for sale to customers or to
clients may be held in any premises an organization uses. Stock ties up cash
and, if uncontrolled, it will be impossible to know the actual level of stocks
and therefore difficult to keep the costs associated with holding too much or
organizations usually divide their "goods for
sale" inventory into:
◦ While the reasons for holding stock were covered earlier, most manufacturing organizations usually
divide their "goods for sale" inventory into:
◦ Raw materials – materials and components scheduled for use in making a product.
◦ Work in process, WIP – materials and components that have begun their transformation to finished goods.
These are used in process of manufacture and as such these are neither raw material nor finished goods.[9]
◦ Finished goods – goods ready for sale to customers.
◦ Goods for resale – returned goods that are salable.
◦ Stocks in transit.
◦ Consignment stocks.
◦ Maintenance supply.
Manufacturing
◦ A canned food manufacturer's materials inventory includes the ingredients to form the foods to be
canned, empty cans and their lids (or coils of steel or aluminum for constructing those components),
labels, and anything else (solder, glue, etc.) that will form part of a finished can. The firm's work in
process includes those materials from the time of release to the work floor until they become complete
and ready for sale to wholesale or retail customers. This may be vats of prepared food, filled cans not yet
labeled or sub-assemblies of food components. It may also include finished cans that are not yet
packaged into cartons or pallets. Its finished good inventory consists of all the filled and labeled cans of
food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to
grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and
outlet centers.
Capital projects
◦ The partially completed work (or work in process) is a measure of inventory
built during the work execution of a capital project,[10][11][12] such as
encountered in civilian infrastructure construction or oil and gas. Inventory
may not only reflect physical items (such as materials, parts, partially-finished
sub-assemblies) but also knowledge work-in-process (such as partially
completed engineering designs of components and assemblies to be
fabricated).

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INVENTORY

of stocked goods. It is required at different locations within a

facility or within many locations of a supply network to precede the

regular and planned course of production and stock of materials.

etc. Management of the inventories, with the primary objective of

determining/controlling stock levels within the physical distribution

system, functions to balance the need for product availability against

the need for minimizing stock holding and handling costs.

logistics. So bulk buying, movement and storing brings in economies of scale,

◦ Appreciation in Value – In some situations, some stock gains the required

consumption, or for production. For example; beer in the brewing industry

1. Stock Keeping unit (SKU)

◦ SKUs are clear, internal identification numbers assigned to each of the

means running out of the inventory of an SKU.[8]

3. New old stock

(sometimes abbreviated NOS) is a term used in business to refer to merchandise

◦ While accountants often discuss inventory in terms of goods for sale,

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