MEANING:
A manufacturing company requires many types of material to produce any goods or service. If a company does not get the required material as needed than the production system gets disturbed and fails to produce and sale required quantity of products on time. The over stock of inventory is unsuitable due to the large amount of investment on it as well as other cost associated with it. On the other hand, the lower stock inventory might create the problem of shortage resulting inn the disturbance on production. Therefore, inventory management includes the requirement of different types of inventory, period of stock and cost associate on it.
A manufacturing company requires many types of material to produce any goods or service. If a company does not get the required material as needed than the production system gets disturbed and fails to produce and sale required quantity of products on time. The over stock of inventory is unsuitable due to the large amount of investment on it as well as other cost associated with it. On the other hand, the lower stock inventory might create the problem of shortage resulting inn the disturbance on production. Therefore, inventory management includes the requirement of different types of inventory, period of stock and cost associate on it.
Inventory is the stock that firm maintains to meet its future requirement for production and selling. The basis reason for holding inventory is to keep up the production activities unhampered. Inventories are a part of current assets, which are used within one year. In a normal courses of business operation manufacturing organizations maintains the inventory of raw materials, work-in-progress, finished goods, spare parts, suppliers etc. in case of manufacturing concern, inventories link the production and sales. Tading organizations are unsold goods i.e. finished goods.
Hence, inventories may be defined as the combination of raw materials, work-in-progress, finished goods and other suppliers required for the smooth operation and sales of an sales of an organization. Managing the stock at lowest cost without compromising on the production and sales activities is called inventory management.
Types of inventory management
1. Raw materials; raw materials is Avery importance and inevitable factor of production. In includes physical commodities used to manufacture the final product.
2. Work-in-progress: work in progress inventory are semi-manufactured products, the products that needs more work before they are contented of finished products for sales, in other words, goods partially worked on but not fully completed are called work in progress.
3. Finished goods: inventory of finished products are the stock of goods which are ready for sales. Stock of finished goods is required for smooth marketing operations of the products.
Inventory of inventory depends on certain risks and cost. Therefore, the inventory manager should try to maintain optimal size of inventory without disturbing the production and sales needs.
Objective of inventory management
The objectives of inventory management are mentioned below:
1. To supply the required materials continuously: there should be a continuous available of materials in the factory or finished goods for trade. The main objective of inventory management in to maintain required inventory so that production and sales process run smoothly.
2. To minimize the risk of under and over stocking of material: if a company keeps inventory without proper analysis, there will be a chance of overstocking, which will increase the cost of carrying the inventory or under stocking of inventory that create problem in smooth operation of a business. So one of the main objectives of the inventory management is to minimize the risk caused due to under and over stocking of inventory.
3. To maintain systematic record of inventory: management needs different information regarding inventory for planning and decision-making. A systematic recodes of inventory helps provides such information to the management. It also assists to evaluate the current inventory management policy.
4. To reduce losses, damages and misappropriation of materials: inventory management aims to reduce or remove the losses and misappropriate of materials. This is done by maintaining the proper stocks of materials with utmost care.
5. To minimize the cost associated with inventory: the proper maintenance of the information regarding inventory helps to make decisions like whether to take discounts or not, the size of order to be placed, when to order etc. the total cost associated with inventory may be minimized by analyzing the lot size to be acquired, the offer of discount on variable lot size and the timing of order. Such analysis helps to reduce the unnecessary inventory in inventories.
6. To make stability in price: an effective inventory management system minimizes the effects of regular price fluctuation. This is turn helps to gain the stability is selling price.
Reasons or motives of holding inventory
The main reason or motives of holding inventory is to supply the required of inventory to different department as needed so that production/ sales process does not get hampered. The motives or reason of holding inventory are:
1. Transaction motive: The manufacturing concerns need inventories of raw material and work in progress so as to maintain regular production activities. Similarly, the trading organization need the inventories of finish goods for supplying the goods and services to the customers regularly, in this way, holding of inventories helps to have regular transactions.
2. Precautionary motive: due to different reasons, like shortage of inventory with the suppliers, week relation with the supplier, disturbance in transaction, delay in inventory supply etc. might take place. It is also importance objective of holding the inventory to take precaution from take the above.
3. Speculative motive: generally the price of inventories rise, so the companies may keep additional amount of inventory to get benefit by selling the surplus inventory at higher price than purchase price. It crates risk when the price of inventory falls.
Techniques of inventory management
To achieve the objective of the inventory management, different techniques are used. Some of them are mentioned below:
a. Economic order quality
b. Stock level:
• Re-order level
• Maximum stock level
• Minimum stock level
• Danger stock level
• Average stock level
• Safety stock
c. Just in time purchase
d. Perpetual inventory system
e. Back analysis
1. Raw materials; raw materials is Avery importance and inevitable factor of production. In includes physical commodities used to manufacture the final product.
2. Work-in-progress: work in progress inventory are semi-manufactured products, the products that needs more work before they are contented of finished products for sales, in other words, goods partially worked on but not fully completed are called work in progress.
3. Finished goods: inventory of finished products are the stock of goods which are ready for sales. Stock of finished goods is required for smooth marketing operations of the products.
Inventory of inventory depends on certain risks and cost. Therefore, the inventory manager should try to maintain optimal size of inventory without disturbing the production and sales needs.
Objective of inventory management
The objectives of inventory management are mentioned below:
1. To supply the required materials continuously: there should be a continuous available of materials in the factory or finished goods for trade. The main objective of inventory management in to maintain required inventory so that production and sales process run smoothly.
2. To minimize the risk of under and over stocking of material: if a company keeps inventory without proper analysis, there will be a chance of overstocking, which will increase the cost of carrying the inventory or under stocking of inventory that create problem in smooth operation of a business. So one of the main objectives of the inventory management is to minimize the risk caused due to under and over stocking of inventory.
3. To maintain systematic record of inventory: management needs different information regarding inventory for planning and decision-making. A systematic recodes of inventory helps provides such information to the management. It also assists to evaluate the current inventory management policy.
4. To reduce losses, damages and misappropriation of materials: inventory management aims to reduce or remove the losses and misappropriate of materials. This is done by maintaining the proper stocks of materials with utmost care.
5. To minimize the cost associated with inventory: the proper maintenance of the information regarding inventory helps to make decisions like whether to take discounts or not, the size of order to be placed, when to order etc. the total cost associated with inventory may be minimized by analyzing the lot size to be acquired, the offer of discount on variable lot size and the timing of order. Such analysis helps to reduce the unnecessary inventory in inventories.
6. To make stability in price: an effective inventory management system minimizes the effects of regular price fluctuation. This is turn helps to gain the stability is selling price.
Reasons or motives of holding inventory
The main reason or motives of holding inventory is to supply the required of inventory to different department as needed so that production/ sales process does not get hampered. The motives or reason of holding inventory are:
1. Transaction motive: The manufacturing concerns need inventories of raw material and work in progress so as to maintain regular production activities. Similarly, the trading organization need the inventories of finish goods for supplying the goods and services to the customers regularly, in this way, holding of inventories helps to have regular transactions.
2. Precautionary motive: due to different reasons, like shortage of inventory with the suppliers, week relation with the supplier, disturbance in transaction, delay in inventory supply etc. might take place. It is also importance objective of holding the inventory to take precaution from take the above.
3. Speculative motive: generally the price of inventories rise, so the companies may keep additional amount of inventory to get benefit by selling the surplus inventory at higher price than purchase price. It crates risk when the price of inventory falls.
Techniques of inventory management
To achieve the objective of the inventory management, different techniques are used. Some of them are mentioned below:
a. Economic order quality
b. Stock level:
• Re-order level
• Maximum stock level
• Minimum stock level
• Danger stock level
• Average stock level
• Safety stock
c. Just in time purchase
d. Perpetual inventory system
e. Back analysis
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