TRAINING IN PURCHASING &

SUPPLY CHAIN MGT

Module 3: INVENTORY MANAGEMENT:

INSTITUTE OF BRIGHT VISION OF EXCELLENCE IN

ASSOCIATION WITH THE UNIVERSITY OF NORTH CAROLINA

By: Kombe M. Angeles

Skills & Professional
Development Coordinator - 2023
 INTRODUCTION
• Inventory management is the supervision of non capitalized assets -or
inventory -- and stock items.
• As a component of supply chain management, inventory management
supervises the flow of goods from manufacturers to warehouses and from
these facilities to point of sale.
• A key function of inventory management is to keep a detailed record of each
new or returned product as it enters or leaves a warehouse or point of sale.
• Organizations from small to large businesses can make use of inventory
management to track their flow of goods.
• There are numerous inventory management techniques, and using the right one can
lead to providing the correct goods at the correct amount, place and time.
• Inventory control is a separate area of inventory management that is concerned with
minimizing the total cost of inventory, while maximizing the ability to provide
customers with products in a timely manner.
• In some countries, the two terms are used synonymously.
 Why is inventory management important?
• Effective inventory management enables businesses to balance the amount of
inventory they have coming in and going out.
• The better a business controls its inventory, the more money it can save in business
operations.
• A business that has too much stock has overstock.
• Overstocked businesses have money tied up in inventory, limiting cash flow and
potentially creating a budget deficit.
• This overstocked inventory, which is also called dead stock, will often sit in storage,
unable to be sold, and eat into a business's profit margin.
• But if a business doesn't have enough inventory, it can negatively affect
customer service.
• Lack of inventory means that a business may lose sales.
• Telling customers they don't have something, and continually backordering
items, can cause customers to take their business elsewhere.
• An inventory management system can help businesses strike the balance
between being under- and overstocked for optimal efficiency and profitability.
 The inventory management process
• Inventory management is a complex process, particularly for larger organizations, but
the basics are essentially the same, regardless of the organization's size or type.
• In inventory management, goods are delivered in the receiving area of a warehouse --
typically, in the form of raw materials or components -and are put into stock areas or
onto shelves.
• Compared to larger organizations with more physical space, in smaller companies,
the goods may go directly to the stock area instead of a receiving location.
• If the business is a wholesale distributor, the goods may be finished products, rather
than raw materials or components.
• Unfinished goods are then pulled from the stock areas and moved to
production facilities where they are made into finished goods.
• The finished goods may be returned to stock areas where they are held prior
to shipment, or they may be shipped directly to customers.
• Inventory management uses a variety of data to keep track of the goods as
they move through the process, including lot numbers, serial numbers, cost of
goods, quantity of goods and the dates when they move through the process.
 Inventory management systems
• Inventory management software systems generally began as simple spreadsheets that
track the quantities of goods in a warehouse but have become more complex since.
• Inventory management software can now go several layers deep and integrate with
accounting and enterprise resource planning (ERP) systems.
• The systems keep track of goods in inventory, sometimes across several warehouse
locations.
• Inventory management software can also be used to calculate costs -often in multiple
currencies -- so accounting systems always have an accurate assessment of the value of
the goods.
• Some inventory management software systems are designed for large
enterprises and can be heavily customized for the particular requirements of an
organization.
• Large systems were traditionally run on premises but are now also deployed in
public cloud, private cloud and hybrid cloud environments.
• Small and midsize companies typically don't need such complex and costly
systems, and they often rely on standalone inventory management products,
generally through software as a service (SaaS) applications.
 Inventory management techniques/Types
• Inventory management uses several methodologies to keep the right amount
of goods on hand to fulfill customer demand and operate profitably.
• This task is particularly complex when organizations need to deal with
thousands of stock-keeping units (SKUs) that can span multiple warehouses.
• The methodologies include:
• Stock review, Just-in-time (JIT), ABC analysis, Economic order quantity (EOQ),
Minimum order quantity (MOQ) , First in, first out (FIFO).
• Stock review, which is the simplest inventory management methodology and is,
generally, more appealing to smaller businesses. Stock review involves a regular analysis
of stock on hand versus projected future needs.
• It primarily uses manual effort, although there can be automated stock review to
define minimum stock levels that then enables regular inventory inspections and
reordering of supplies to meet the minimum levels.
• Stock review can provide a measure of control over the inventory management process, but
it can be labor-intensive and prone to errors.
Just-in-time (JIT) methodology, in which products arrive as they are ordered by customers
and is based on analyzing customer behavior.
• This approach involves researching buying patterns, seasonal demand and location-based
factors that present an accurate picture of which goods are needed at certain times and places.
• The advantage of JIT is customer demand can be met without needing to keep large
quantities of products on hand and in close to real time.
• However, the risks include misreading the market demand or having distribution problems
with suppliers, which can lead to out-of-stock issues.
• ABC analysis methodology, which classifies inventory into three categories that represent the
inventory values and cost significance of the goods.
• Category A represents high-value and low-quantity goods, category B represents moderate-
value and moderate-quantity goods, and category C represents low-value and high-quantity
goods.
• Each category can be managed separately by an inventory management system.
• It's important to know which items are the best sellers to keep enough buffer stock on hand.
• For example, more expensive category A items may take longer to sell, but they may not need
to be kept in large quantities.
• One of the advantages of ABC analysis is that it provides better control over high-value
goods, but a disadvantage is that it can require a considerable amount of resources to
continually analyze the inventory levels of all the categories.
•Economic order quantity (EOQ) methodology, in which a formula determines the optimal
time to reorder inventory in a warehouse management system.
• The goal here is to identify the largest number of products to order at any given time.
• This, in turn, frees up money that would otherwise be tied up in excess inventory and
minimizes costs.
Minimum order quantity (MOQ) methodology, in which the smallest amount of product a
supplier is willing to sell is determined.
• If a business can't purchase the minimum, the supplier won't sell it to them.
• This method benefits suppliers, enabling them to quickly get rid of inventory while weeding
out bargain shoppers.
•First in, first out (FIFO) methodology, in which the oldest inventory is sold
first to help keep inventory fresh.
• This is an especially important method for businesses dealing with perishable
products that will spoil if they aren't sold within a specific time period.
• It also prevents items from becoming obsolete before a business has the
chance to sell them.
• This typically means keeping older merchandise at the front of shelves and
moving new items to the back.
 Materials Requirement Planning (MRP)
• This inventory management method is sales-forecast dependent, meaning that
manufacturers must have accurate sales records to enable accurate planning of
inventory needs and to communicate those needs with materials suppliers in a timely
manner.
• For example, a ski manufacturer using an MRP inventory system might ensure that
materials such as plastic, fiberglass, wood, and aluminum are in stock based on
forecasted orders.
• Inability to accurately forecast sales and plan inventory acquisitions results in a
manufacturer's inability to fulfill orders.
 Days Sales of Inventory (DSI)
• This financial ratio indicates the average time in days that a company takes to turn its
inventory, including goods that are a work in progress, into sales.
• DSI is also known as the average age of inventory, days inventory outstanding
(DIO), days in inventory (DII), days sales in inventory or days inventory and is
interpreted in multiple ways.
• Indicating the liquidity of the inventory, the figure represents how many days a
company’s current stock of inventory will last.
• Generally, a lower DSI is preferred as it indicates a shorter duration to clear off the
inventory, though the average DSI varies from one industry to another.
• The four types of inventory management are just-in-time management (JIT),
materials requirement planning (MRP), economic order quantity (EOQ) , and
days sales of inventory (DSI).
• Each inventory management style works better for different businesses, and
there are pros and cons to each type.
 Inventory management vs. inventory control

• Both inventory management and inventory control are essential to running a

successful direct sales and channel operation.
• Inventory management is the overall strategy to ensure adequate inventory,
and inventory control encompasses the processes and tools used to track
existing inventory.
• Businesses may choose to use an inventory control system on its own but will
benefit from using both together. Here are the essential differences:
• Inventory management
• Inventory management is a strategy that ensures businesses always have the right
amount of inventory at the right time and in the right place.
Inventory management tools enable businesses to:
• calculate safety stock;
• calculate reorder points; • accomplish demand planning and forecasting; • identify
obsolete items; • optimize warehouse layout; and • identify fill rate percentage.
 Inventory control
• Inventory control addresses inventory already in a business's possession.
• It works at the transactional layer of an ERP system and enables businesses
to:
1. receive inventory 2. process inter-branch transfers 3. process receipts 4. pack
and ship stock 5. process customer invoices 6. process supplier purchase orders.
 Conclusion
• Together with transport costs, inventory costs constitute probably the most s ignificant portion of total
logistics costs.
• Many supply chain decisions are based on the cost of holding inventory.
• The effective management of inventory throughout the supply chain is there fore of paramount importance.
These reasons can be summarized as follows:
• To allow for operating efficiency through economies of scale.
• To balance supply and demand, particularly when seasonality of products oc curs.
• To buffer against uncertainties in demand and supply.
• To allow for geographic specialization.
• To prevent the cost of a stock out.