What is Inventory Management?
Inventory is defined as the amount of goods that a business has in available stock. In taking inventory, a business takes into consideration those goods that have an economic value for the business. The stock of goods can vary in quantity and quality but are still part of the inventory. Goods that are recorded as inventory include human resources, machinery, raw materials and finished products (Waters, 2003). In relation to this, inventory management is defined as the process of conducting a balanced cost-benefit analysis of the inventory. In inventory management, a company takes stock of all the available goods and the inventory created is used while making decisions on how to spend and what to spend on.
Why is Inventory Management necessary?
The main purpose of exercising inventory management is to come up with a record that ensures that customer demand for products is always met. In any business, the main focus is on satisfying customer needs efficiently and on time. Actually, the success of a business is usually determined by the feedback given by customers on the delivery of goods and services. Inventory management starts the process by ensuring that a company has the required amount of raw materials needed for the production of products. Additionally, inventory management ensures that customers receive their goods on time (A. Wild & T. Wild, 2002). This depends on the urgency with which a customer requires the goods or services. Through inventory management, a business promotes a smooth running of the supply chain from the delivery of raw materials by suppliers to the delivery of finished products to customers. In the modern world, there are inventory management systems that automate the process of inventory management. Such systems have become more common with the advancement in technology. It is important for a business to implement systems that are in line with their line of production. This ensures that the data that the system gives is accurate and presents the true picture of the business.
Inventory management is an important aspect of a business’ success. Successful inventory management largely influences a business’ ability to compete with other companies that offer similar products and services. First, inventory management enables a company to predict its actions regarding the amount and types of products that need to be replenished. Consequently, this ensures that no inaccuracies occur in the identification process and therefore the opportunity cost attached to over and/or under stocking is considerable mitigated. Secondly, the inventory program procures the goods required in bulk and this trims down the costs of supplies and aids the company to operate within an optimum level due to the realized economies of scale. Purchases that involve high amounts of items tend to be sold on discounted terms and this means further cost reduction (A. Wild, & T. Wild, 2002). Third, the amount of tied-up principal is reduced and the resources can be averted to other investments. This in turn causes a proportional or more than proportional increase in the level of financial returns.
Consequences of not applying Inventory Management?
Disregarding inventory management in business institutions leads to an increased amount of costs, especially those that are associated with product shortages. In the short-run period, this is evidenced by low profits due to low sales while in the long-run it is marked by the reduction of the market size. Rationally, consumers’ accord product value to the utility derived from each product. Quality should be enforced to both the manufactured item and the service offered. Cases of shortages tend to reflect poor management and therefore, the customers opt to substitute the product with another. Inefficiencies that arise from the various operations within the production process have an adverse consequence on the company’s positioning in relation to its business rivals since it undermines its competitive edge (Waters, 2003). This would translate to business failure in today’s competitive environment as enhanced by the element of international trade that has led to economic liberalization. Conclusively, the costs attached to inventory management are outweighed by the benefits and it would therefore be prudent for one to adopt the practice within the business environment.
Waters, D. (2003). Inventory control and management. San Francisco, CA: J. Wiley.
Wild, A., & Wild, T. (2002). Best practice in inventory management. London, UK: Elsevier.