Importance of inventory management

Inventory Management

1. Procurement & Inventory Management Section 10 Objective 5 by G. Flanders-Hinds

2. OBJECTIVES Explain the importance of inventory management: Prevention of pilferage Control of inventory Signaling of market trends Availability of capital Optimization of storage space Just-in-time (JIT)

3. WHAT IS STOCK OR INVENTORY? ‘Stock’ or ‘inventory’ refers to the goods and materials kept by an organization in a warehouse or storeroom. Stock is important as it is a current asset and so adds to the value of a business. Types of stock are : Raw materials and components Work in progress – unfinished goods Finished goods Consumable stock – stock purchased for use in the business Stock-in-trade – stock purchased for resale

4. WHAT IS STOCK CONTROL? Stock control involves the storing and handling of goods. The primary goal of stock control is to minimize the cost of holding stock while ensuring that there is adequate material for production to continue and to be able to meet customer demand.

5. WHY CONTROL STOCK? It is important that businesses need to maintain adequate stock levels: there should not be too much stock or too little. Drawbacks of keeping little (or no) stock are The firm might run out of stock and not have enough raw materials and components to maintain production; The firm might lose customers because of missed orders. However, keeping small amounts of stock might suit a firm if these items are perishable or if replenishing stock is quick and easy.

6. Disadvantages of keeping too much stock Goods might deteriorate e.g. perishable goods such as fruits and vegetables’ Higher storage fees and insurance costs Higher security costs to prevent theft from warehouse/storeroom Stock may become obsolete or go out of fashion Capital that could be spent otherwise may be tied up in cash Stock will take up space in the warehouse

7. Maintaining stock levels (maximum, minimum and reorder levels Keeping a lot of stock may suit a business whose sales are difficult to predict. To prevent the problems of overstocking or understocking, maximum and re-order levels needs to be set: (a) Minimum stock level – this is the lowest amount of stock that should be held. Going below the minimum stock level will mean that the firm runs the risk of running out of stock needed for production or of losing customers because of its inability to meet demand; (b) Maximum stock level - this is the largest amount of stock to be kept in the organization: keeping more than this amount means that the warehouse may become overcrowded

8. Minimum and maximum stock levels are decided on based on factors such as: The type of product – if it is perishable or if it is very large e.g. a truck; The amount of storage space available The amount of funds available to purchase stock Delivery charges that will be applied by suppliers

9. (c) Re-order levels can also be maintained. It is the level of stock at which a further replenishment order should be placed. When selecting an re-order level, the lead time must also be considered. The lead time is that period of time between when goods are ordered and when they are delivered. With modern computer systems keeping track of stock use, this may be an automatic process

10. The importance of stock control To monitor in the marketplace – stock control allows and organizations to identify those items that are selling quickly and those that are not. It will allow the organization to assess which goods it should order more or less of, based on the demand in the market; To keep track of available storage space – have an efficient stock control system allows a business to identify when goods are sold and to see how much storage space is available to accommodate additional stock.

11. To monitor the availability of capital – if proper stock control measures are in place it will allow the business to maintain a suitable level of stock and to prevent much needed cash from being tied up in stock; To ascertain items that are overstocked or understocked – properly monitoring the stock; To identify pilferage – efficient and accurate stock control measures allow a business to identify theft of stock quickly ( Pilferage – the theft of a small quantity of stock )

12. REFERENCES Carysforth , C., Neid , M., Maxime , C. & Metz, Y. (2012). Office Administration for CSEC. A Caribbean Examination Council Study Guide. Nelson Thornes . Finisterre, S., Payne, L., & Reid, J. (2004). Longman Office Administration for CXC. Pearson Education Limited . Kontuš , E. (2014). Management of Inventory in a Company. Retrieved from file :///C:/ Users/C14labuser/Downloads/kontus_eleonora.pdf . Trendfield -Newsome , A. & Walker, C. (2011). Office Administration for CSEC Examinations. Macmillan Publisher Limited. Trendfield -Newsome, A. & Walker, C. (2011). Office Administration for CSEC Examinations. Macmillan Publisher Limited.