Inventory Management: Meaning, Benefits, Process, Techniques

 

[Inventory Management]

 

 

Inventory Management: Meaning, Benefits, Process, Techniques

Meaning

Inventory management is a process to keep the track of goods and services used by an organization to produce and sell goods and products,

The major goal of inventory management is to maintain an adequate amount of stocks at anytime to fulfill the customer demands by reducing the risk and holding cost.

Efficient Inventory management ensures that the right goods available at right time to meet the customer�s demand.

Benefits of Inventory Management

1} Increased Customer Satisfaction

If you deliver the products on time to the customers and with the managed quality that the customer demands there are more likely to chance of increased customer retention and satisfaction.

As no customer wants incorrect orders and late deliveries

2} Increased Profit Margins

Inventory management works with the supply chain management to reduce the holding cost and stock outs to increase the margin

It also works with purchasing department to reduce the cost and efforts required to prepare the goods for sale.

INVENTORY MANAGEMENT PROCESS:
1] Packaging

2] Production

3] Stock Control

4] Order Management

 

5] Reporting

 

1] Packaging

It is the process of buying of raw materials, equipment, services required to produce and sell products

In this step the purchasing team or the purchase manager prepares the purchase order and a legal binding document which outlines the purchasing business needs. Which is sent to the supplier.

2} Production

In this step the raw materials purchased are to be converted into finished goods for sale with the help of all other resources.

3} Stock Control

In this step all the goods purchased are to be arranged in such a way such that no goods will be wasted and everything is tracked in record.

4} Order Management

In this step all the process of order entry, order tracking, order fulfillment is followed.

5} Reporting

At last after the fulfillment of order and stabilizing inventory levels by comparing the stocks and demand the final report has been made and submitted.

 

Inventory Management Techniques

�1} FIFO METHOD

It is known as First In First Out
This is the method of inventory valuation in this the business uses the items purchased first are the ones to be used or sold first. This method is majorly used for the industries where the goods are of perishable nature and used to be obsolete very fast.

�Advantages:

1} Better Reflects Current Costs

This method shows the accurate cost by matching the revenues with the expenditures.

2} Simplicity

Fife is relative simple to understand hence it can be applied by the small enterprises.

3} Industries dealing with perishable nature

It is the best technique used by the industries which used to deal with goods with the perishable nature as the goods which come in first in the stock are the ones to be sold first which reduce the risk of perish ability.

 

 

4} Tax Advantage

FIFO method help in save the taxes as at the time of inflation the cost of goods sold will be less so the tax will be saved.

Disadvantages

1} Distorted Profit

During the times of inflation the sale of lower cost inventory will show the higher profit which will mislead the investors.

2} Recording inventory

Despite FIFO is simple but continuous price changes make it difficult to record the items

2] LIFO METHOD
it stands for last in first out

This method of inventory management follows the approach of selling the items which are purchased recently or the items which are entered at last are the ones to be sold first.

Advantages

1} Lower tax liability

FIFO always used to sell the items which are bought lastly which lead to lower profits hence the taxable income will also be less.

Matching cost with revenue

FIFO matches the current revenue with the recent cost and provides a clear understanding of cost of goods sold.

3} reduce risk of obsolescence

When the items purchased lastly are the ones to be sold first then the risk of holding the older will be reduced and obsoletion will be removed.

Disadvantages

1] Distortation of financial statement

During the times of inflation the LIFO method will show the lower reported profit which will affect the financial statements of a firm.

2] Complex record keeping

It requires complex record keeping as it necessities the complex record keeping.

3] Not confirm to IFRS
In some countries the use of LIFO method is not mentioned or permitted according to international Financial Reporting System making it less universally accepted.