Introduction to Inventory Management

Introduction to Inventory Management

• Inventory management involves ordering, handling, storing, and using a company's non-capitalized assets, also known as inventory.
• Aims of inventory management are to define terms, describe the role of stocks, discuss reasons for holding stock, review the role of stocks in the supply chain, explain benefits of coordinated stocks, describe business trends affecting stocks, views of stock and describing changing patterns of stocks at a national level
• Effective inventory ensures the right amount of stock is in the right place at the right time.

Inventory Definition

• Inventory includes raw materials used in production and goods ready for sale.
• Inventory turnover is a primary source of revenue generation.
• There are three main types of inventory: raw materials, work-in-progress, and finished goods.
• Inventory is categorized as a current asset on a company's balance sheet.

Retail Inventory Management

• Retail is a term for businesses selling physical products to consumers.
• The retail sector can be split into offline (brick-and-mortar), online (ecommerce websites/marketplaces), multichannel (multiple sales platforms), and omnichannel (unified customer experience across channels).

Aspects of Inventory Management

• Inventory management involves determining the type of inventory, forecasting demand, purchasing efficiently, storage, analysis, effective techniques, tracking inventory, proper accounting, and use of appropriate systems and tools.

Importance of Inventory Management

• Customer experience is enhanced by fulfilling orders promptly.
• Improved cash flow by avoiding overstocking.
• Reduced shrinkage by preventing spoilage or theft.
• Optimized fulfillment by efficient storage.

Key Inventory Management Terms

Barcode Scanner

• Barcode scanners digitally identify items for inventory and fulfillment.
• Tasks performed include booking-in, picking, and counting.

Bundles

• Bundles combine individual products to be sold as one.
• The products will be listed under a single stock keeping unit (SKU).

Cost of Goods Sold (COGS)

• COGS are the direct costs of purchasing or producing goods, material, labor and tools.
• COGS do not include indirect costs like distribution or advertising, sales force etc.

Direct vs. Indirect Costs

• Direct costs are incurred for producing a particular product.
• Indirect costs are related to the product but not directly traceable.

Direct and Indirect Costs Examples

• Direct cost examples include physical assets, maintenance, materials, direct labor, scrapped materials, and direct supervision.
• Indirect cost examples include utilities, IT, purchasing, management, taxes, legal, warranty, quality assurance, accounting, and marketing.

Beginning and Ending Inventory

• Beginning Inventory (BI) is the value of unsold on-hand inventory at the start of an accounting period.
• Ending Inventory (EI) is the value of unsold on-hand inventory at the end of an accounting period.

Inventory Valuation

• Inventory valuation is the process of assigning a monetary value to unsold inventory for financial records.

FIFO and LIFO

• First-In-First-Out (FIFO) assumes the first stock purchased is the first to be sold.
• Last-In-First-Out (LIFO) assumes the most recently added products are sold first.

Other Inventory Terms

• Average Inventory: Average on-hand inventory calculated by adding Ending Inventory (EI) to Beginning Inventory (BI) and dividing by two.
• Back Order (BO): An order for an out-of-stock product.
• Sales Order (SO): Document detailing a customer purchase and payment status.
• Purchase Order (PO): Commercial document detailing quantities, items, and prices for new inventory from a supplier.
• Stock Keeping Unit (SKU): Unique alphanumeric code to identify and organize product variants in a company's inventory.
• Third-Party Logistics (3PL): External party handling warehousing, inventory, fulfillment, or customer service for a retail company.
• Order Fulfillment: The process or getting a customer's sales order from a warehouse or distribution center to the customers possession.
• Order Management: The systematic processing of managing and fulfilling sales orders which comes into a business.
• Inventory Variant: The variations of a single product that a company may in its inventory. E.g. T shirts in different colours and sizes.
• Inventory Visibility: The ability for a person to be able to see the exact inventories.
• Pipeline Inventory: Inventory that is en route somewhere in the supply chain.
• Lead Time: The time it takes for a supplier to deliver new products to the desired location once a purchase order/re-order is issued.
• Dead Stock: Inventory that remains unsold for a long period of time.
• Inventory Shrinkage: Accounting term to indicate the inventory has been stolen, damaged, or has become lost/missing.

Supply Chain

• Supply Chain: The complete flow or product or commodity takes from origin to consumer, including wholesalers, warehouses and finished goods..
• Multi-channel: Is where a retail model sells, using an online via a combination of websites and marketplaces.

Omnichannel and Overselling

• Omnichannel: Integrate a company's online and offline sales channels into one for a unified consumer experience.
• Overselling: Taking/Providing online orders for the produce that turns out to be in stock due to poor inventory management/processes - this can be prevented using high quality experience for online customers

Key Inventory Management Formulas

Inventory Turnover

• The number of times a company has replaced inventories of a certain time
• The Formula is Cost of goods sold / Average inventory

Sell Through Rate

• The amount of Inventories/Stock a retailer receives/has with what is sold over a given time
• The formula is: (No. of Sales / Stock on-hand) * 100

Days of Inventory Outstanding

• This measures the number of days it takes for inventories to be sold.
• The Formula: (Ave inventory cost/cost of goods sold) *365

Safety Stock

• The backup Stock in order to meet requirements like unexpected supply problems or demand changes.
• The formula is: (Max Daily Sales volume * max lead time) - (Ave daily sales volume * Ave lead time)

Reorder Point

• This helps determine when to order new inventories.
• The formula is: (lead time in Days * Av Daily Sales Volume) + (Safety Stock)

Economic Order Quantity

• This helps calculate exactly how much inventory to order
• Formula is: Square root of (2 * (Demand in Units * Ordering Costs)/(Carrying Costs per unit)

Stocks Definition

• Stocks are stores of materials kept until needed, composed of all goods and materials.
• This is a store of items that are kept for future use that are easily identified.
• Stocks include all the goods, materials and raw materials.

Nature of Stocks

• Stocks consist of raw materials, components, finished products, people, information, paperwork, messages, knowledge, consumables, energy, and money.
• Stocks are formed when an organization acquires materials that it does not use immediately.

Item and Unit

• An item is a distinct product held in inventory.
• A unit is the standard size or quantity of an item.

Customer and Supplier

• A customer is anyone whose demand is met by removing units from stock.
• A supplier is anyone who replenishes or adds to stock.

Stock Cycles

• Stock cycles involve replenishing stock, storing it, customers creating demand, and removing units to meet demand, which gets repeated.
• Stock replenishment and reduction repeat to meet demand through Suppliers who deliver the material in the organisation
• Deliveries are large and infrequent while customer demands are smaller and more frequent.

Recurring Stock Cycle Elements

• An organization buys units from a supplier along with arranged deliveries that is put into the storage
• Customer creates demand for the items
• Units are taken stock in order to meet the demands.

Stock Control

• As materials move through the stock cycle, there are many different arrangements for purchasing, storage and delivery.
• Holding stock is surprisingly expensive, costing about 20% of its value a year.

Inventory/Stock Management

• Inventory management decides policies, activities, and procedures to ensure the correct stock levels.
• It acts as buffer so that operation continues smoothly when there is a problem, even thought there is a variance b/w supplies and demands.
• This also allows if demands are larger/more or less than expected.

Functions of holding stock

• Allows for variance/Uncertainty b/w and demand
• Let's operation continues when there are problems (shortage and variations)
• Avoid'd delays in passing product to customers

Types of stocks

• Raw materials arrived from suppliers
• Articles in progress
• finished goods waiting to be shipped to customers

Kinds of inventory

• Cycle stock is normal stock used during operations.
• Safety stock is a reserve for emergencies.
• Seasonal stock maintains stable operations through demand variations.
• Pipeline stock is being moved from place to place.
• Other stock is held for various other reasons.

Cycle Inventory

• Raw materials go though operations and processes to finished goods

Importance of Stocks

• Operations are basically impossible without certain stocks available.
• It is possible for stock to do an efficient productive operation. Stock also has an effect on lead times.

Effects of stock

• Effect leaded times - effect operational cost - affects border operation and more

Shape Of Supplies Chain

• A product moves through series of organization, so that it arrives at final customers.
• A series of activities and operations - forms the product supply chains.

A supply Chain Consists Of

• Consists materials that moves and travel from initial clients.
• Supply chain - overall management for the storage of material.

Supply Chain Management Step

• Logistic strategies as well as the overall management for analyzing supply chain.
• Plan, organize, get approval, and maintain system

Logistics

• This is an important part of the operations and should be optimized for performance.
• Logistics must be optimized for organizations within a supply chain to continue with their customer's service and satisfaction.

Trends affecting the Stock

• Improving Communication to the customers.
• Improvement in services also concentration.

Drop Shipping

• Materials which are shipped directly to supplier by the customer instead of arriving at the warehouse.

Postponement

• Delayed customization along with packing.

Environmental concerns

• There is a huge concern because of air pollution, water pollution etc

Summary of Chapter

• There is always going to be a stock or stores of material in all organization.
• These stores of material is stored by suppliers and reduce meets and demand from costumers.
• There needs the inventory management is to ensure stock control.