Inventory Management - Lecture notes 1 PDF

Preview

Summary

It was during the Industrial Revolution that one of the earliest schools of management thought, the classical management theory, was born. Many of the employees were non-English speaking immigrants, and managers were unsure how to train them or deal with increased labour dissatisfaction, so they beg...

Description

Inventory Management Managing your business's inventory is all about keeping track of how it's being purchased, manufactured, stored, and used. From purchase to sale, it controls the entire flow of goods, ensuring that you always have the right number of units of a particular thing in the right location at the right time. What does the term "inventory" mean?

Your company's inventory consists of all the goods that you keep on hand for the purpose of selling. It could be raw materials that you buy and transform into something new, or it could be a bulk product that you break down and sell separately. It could even be software, for example, which is completely intangible. Types of stock available Depending on the products you sell, you may have to deal with any number of inentory types. Listed here are some of the most common types you'll encounter:. Customers buy your finished goods/for-sale products. In order to produce your finished goods, you need raw materials. Unfinished goods — inventory that is still in the process of being manufactured — are referred to as "work-in-progress." Maintenance, repair, and operation are referred to as MRO in the industry lingo. To aid in the manufacturing process, you'll need this inventory. The extra inventory you keep on hand in case of a supply shortage or a sudden increase in demand.

Every business that deals with inventory has to have a system in place to keep track of that inventory. As a starting point, let's see how that works in practise first. The process of inventory control is explained. An inventory management system is designed to keep track of products and components from suppliers to stock on hand to production and sales to ensure that stock is utilised as efficiently as possible. By looking at the difference between dependent and independent demand or forecasting sales in order to plan for the future, it can go as deep as you need. But at the end of the day, your stock is the only thing that really matters. Sam's chairs are an example. In order to sell her handcrafted dining chairs, Sam decides to start her own business. She needs six different sizes of wood and a cushion for every chair she makes. She buys 10 planks of each size of wood she needs, as well as 10 cushions, from her supplier. Her business now has all of these items in stock. Sam's inventory will fluctuate as she converts raw materials into chairs and then sells them. The number of chairs she can make, the speed at which she can make them, the location of her materials, the number of chairs she sells, and a slew of other things will be important for her to keep track of. This is all about keeping track of inventory. To make things a little less intimidating, here are the five main stages your goods will go through in the inventory management process. A step-by-step procedure for inventory control: The following are the five most important stages.

Tracking and controlling stock as it moves from your suppliers to your warehouse to your customers is an important part of inventory management. The following are the five major stages: Buying raw materials, or products that don't need to be assembled, is one example of purchasing. The process of creating a finished product from the raw materials used in its creation. The manufacturing process isn't for everyone; wholesalers, for example, might not get involved at all. Stockpiling raw materials and finished goods before they're ready to be sold is an important part of running a successful business. Get your inventory into the hands of customers and collect payment It is necessary for businesses to keep track of sales and profit margins. Here's how Sam's company makes use of each stage of the process, to continue with our earlier example:

Inventory control vs. inventory management: Inventory control and inventory management are closely related, but they are not the same. What exactly is inventory control, and how does it work? Inventory management refers to the process of keeping track of the items you currently have on hand. This necessitates a thorough understanding of your inventory, including how much is on hand, where it is located, and what condition

it's in. It's also important to ensure that inventory is stored efficiently, which reduces inventory costs and frees up your employees' time to focus on other tasks. Inquire into inventory management. Management and control are two different things. Inventory management encompasses a lot more than just inventory control; it also includes the entire supply chain, as well as production, fulfilment, sales, and reporting. In order to get a handle on your company's inventory, you'll need a system in place. If you don't, you'll be unable to keep track of vendors, production, or sales. You can then improve the way your products are stored and sold in an infinite number of ways. It's entirely up to you whether or not you want to optimise purchasing, control, production, or sales. Changing the way you count stock is one example of an improvement you might want to plan based on your previous operational experience, for example. Changes in product and order profiles, customer gains and losses, or shifts in demand may necessitate adjusting processes. What is the significance of inventory control? When it comes to running your business, serving your customers, and increasing your sales, inventory management is critical. Inventory management is critical for any company that relies on sales to function, be it a small craft brewery or a large wholesale distributor. This is for the following three reasons: Get the job done without a hitch Inventory management is critical to the success of your business. To learn more, click here:

• Mistakes in inventory are common. Customers' demands must be met by Sam's supply of raw materials and production. As a result, she may end up having to find a place to store the excess chairs, which could eat into her profit margin. Then again, if she runs low on any of her raw materials, production will be halted until she gets more. To keep track of inventory, many small businesses rely on counting stock by hand. Disruptive and time-consuming as they are, inventory counts interfere with the creation and sale of products. Consequently, it is critical to implement a system that does not rely on stocktakes to provide accurate data. To learn more, click here: • ensuring that the supply of a product matches the demand for it. • Control of inventory and product quality stockouts and the impact they have on a company • Three indications that it's time to reevaluate your inventory management strategy. Keep your customers happy When it comes to inventory management, this is a given: • The speed with which you can deliver your goods to your customers • How quickly you can deliver on your commitments. Your ability to provide customers with a high level of visibility

Having a track record of on-time delivery and letting customers know what's available will encourage customers to return for more. This is especially true for

transactions between companies. When a deadline is missed, it can be inconvenient for the customer. The loss of sales and profits for a business can be catastrophic.

To learn more, click here: Customer satisfaction can be measured in three ways: • What is the significance of the National Quality Rating System (NPS)? • Increasing the level of contentment of clients The following are five ways in which inventory management improves customer satisfaction: Increasing the size of your business If a company grows in complexity, so does its inventory management. The management of inventory and materials will become more difficult as Sam expands her business by adding new product lines, hiring employees, opening new production facilities, and expanding her customer base. So, if you're going to grow, it's critical that you take control of your physical inventory from the start. With rapid expansion come many time-consuming tasks, such as hiring new employees, expanding into larger facilities, and negotiating with new vendors. The importance of establishing an efficient stock system early cannot be overstated. The longer you put it off, the less time you have to complete it. Find out: • There are a total of five obstacles to a company's growth.

Growth stages of small and medium-sized enterprises (SMEs) • How to sustainably grow a business A look at the role inventory management plays in promoting growth • Overcoming the challenges of development The benefits of inventory management don't stop there. Additionally, there are a number of ways it can help your company's bottom line: Increase sales revenue by making it easy to add new products and channels to the system, analyse performance, and empower salespeople with the most current product information. Increase profit margins by reducing inventory holding costs and eliminating inefficiencies that lead to inventory losses, overstocking, and stockouts. • Slash inventory administration costs by reducing the amount of time and manpower spent on the task. Learn more about inventory management strategy by visiting this website.. How to improve the management of inventories 1. Pay attention to the things that are important to you. The task of sorting through a warehouse full of goods can be overwhelming. To make it easier to keep track of everything, focus on the most important things first. You shouldn't expect the same level of demand for every item in your warehouse. The best way to keep your customers happy is to keep the most popular items in stock. Involve suppliers in the process.

You can't run a stock-based business without good supplier management. When you build strong relationships with your key suppliers, you can secure reliable supply, get better prices and learn about new trends that could affect your business.. Develop a system for inventory tracking and management. It's critical to consider how your company handles things like order quantities, replenishment cycles, safety stock, forecasts, and seasonality. Keep track of what works and what doesn't in each operation, and adjust it accordingly. It may be preferable to make a significant improvement in one area rather than a few small ones all over the place.

Make use of up-to-date information When information is accurate and current, it can be a powerful tool. Your business can benefit greatly from real-time data and analytics, which can include everything from layered inventory tracking to forecasting data, automatic ordering, and customised safety stock. Consider using perpetual inventory management software for the most accurate data, as it is the best way to ensure that the data you require is always available. 5. Make use of mobile devices Management of inventories has been completely transformed by mobile technology. Receiving and tracking goods is much faster with barcode scanning, which also reduces the chance of human error. As a result of the use of mobile apps, salespeople can access inventory data while on the go. No longer will you be

bound to a warehouse computer. You can monitor critical business processes from the comfort of your own home, on vacation, or anywhere else. Create a system for inventory control On an ad hoc basis, you can only get so far with your inventory management. You'll need an inventory management system if you want to keep track of your stock. Because every business is different, it's critical to find a system that works for you. Sam might be able to keep track of her inventory using spreadsheets in the early stages of her business. In order to handle the enormous volume of orders processed every day by an Amazon-like global stock-based business, a customised, multifaceted solution is required. Techniques for managing inventory include the following: These common inventory management methods can help any company, no matter how big or small, gain better control over their inventory. Here are some things to keep in mind: Just-in-time (JIT) stock. To avoid the costs and risks associated with keeping a large amount of inventory on hand, JIT relies on having as little inventory as possible. Analyzing the ABCs of the inventory. These goods are categorised according to their profitability, so you can see which ones are worth keeping and which ones aren't. • Dropshipping. Dropshipping allows businesses to outsource all aspects of stock management, which has a number of advantages but a few major drawbacks. Bulk shipments. • This method is based on the assumption that bulk purchases are more cost-effective than purchasing individual items. It's a great strategy if a

company is confident in the demand for its products, but it can be problematic if that demand shifts unexpectedly. Backordering. The term "backorder" refers to when a customer orders a product that is not yet in stock. Find out more about the impact of backordering on inventory management. • Consignment. It is possible to transfer goods from a consignor to a consignee without the consignee paying for the goods up front using this method. The goods remain the property of the consignor, and the consignee only pays for the items when they are sold. This is a great idea, but it also has a number of serious drawbacks. • Cross-docking. You don't need to keep any inventory with this system at all. The products are delivered to a warehouse where they are sorted and prepared for shipment right away, and they are ready to ship. Once they've been reloaded, they're usually sent on their way as soon as possible. • Counting in cycles. Small amounts of inventory are counted on a specific day rather than an entire stocktake. Using this method on a regular basis ensures that the inventory levels in your inventory management software are always accurate. The ABC analysis and dropshipping can be found here if you want to learn more about them. The best way to improve your inventory management abilities You can learn more about inventory management by watching the Unleashed Academy video training series. Inventory management glossary

Before going any further with inventory management systems, it's a good idea to brush up on a few basic terms and formulas. The selling price of a product There are two types of costs associated with producing a product: the direct costs and the total cost of sales (COGS). Directly used materials and labour are included in this calculation. Days of unsold inventory (DIO) To determine the average number of days a company keeps inventory before selling it, the Days Inventory Outstanding (or Days Sales of Inventory) metric is employed. Low minimum purchase quantity (EOQ)

At any given moment, the economic order quantity is the best order quantity to place. Total holding and ordering expenses are minimised when the EOQ is optimal. It's also known as the "optimal lot size" in some circles. Items that have been successfully completed Inventory of finished goods refers to the number of ready-to-sale manufactured goods in stock. Keeping track of inventory Valuation and recording of asset changes are the focus of inventory accounting. Raw materials, work-in-progress, and finished goods all go into inventory.

Accurate inventory accounting ensures that asset values and costs are properly adjusted for changes in inventory at all three stages of the supply chain. Costs associated with keeping inventory The costs associated with purchasing, storing, and managing inventory are known as inventory costs. Ordering costs, carrying costs, and shortage costs are the three main types. Computer programme for keeping track of stock Tracking inventory, orders, sales, and deliveries through a computerised system A bill of materials and other production-related documents can be created with it as well. Time that has passed since Lead time in inventory management refers to the time elapsed between placing an order to replenish inventory and receiving payment for that order. The point of sale. The time and location at which a retail transaction is completed are referred to as the "point of sale" or "point of purchase." In most cases, you'll be presented with an invoice and a few different ways to pay it. Purchase order When a buyer sends a purchase order to a vendor, the vendor responds by sending the requested goods or services. It is expected that the buyer will specify what products they want to purchase and how many of each item they want to purchase. Reorder point

When inventory reaches this level, a replenishment operation is triggered. Stock must be replenished as soon as it drops below a certain level in order for the company to continue operating. Safety stock This is a stockpile of critical inventory held as a safety net in case of sudden changes in supply or demand. Sales channels a method for making goods and services available to the public for purchase. If you're selling to customers directly, your sales channel is a direct one; otherwise, it's an indirect one. Stock levels The quantity of goods or raw materials stored on the premises of a business is referred to as stock levels. Supply chain Organization, people, activities, and resources all work together to make up a supply chain that delivers a product or service to a customer. Inventory management formulas based on four basic concepts The following calculations may be intimidating to first-time business owners, but don't let that stop you. To keep stock levels in check, these formulas are essential. Let's take a closer look: 1. The Economic Order Quantity (EOQ) formula 2. The Days Inventory Outstanding (DIO) formula

3. The safety stock formula 4. The reorder point formula Calculating the Quantity of Economic Goods to be Purchased (EOQ) EOQ = √(2DK/H) If you buy too little or too much inventory stock, your business will suffer. Your optimal order quantity is determined by the EOQ formula. Where: • D is the set-up fee for each order, which usually includes shipping and handling charges. In economics terms, this is known as the "demand rate" (your quantity sold per year) • H represents the annualised holding expense per unit. To figure out how long an item has been out of stock (DIO) Day-in-period = (Average inventory / COGS)

The Calendar of Events More accurate than just looking at the inventory turnover ratio, this formula shows how well a business's inventories are managed and how efficient the entire operation is. Low DIO is generally preferred, but the industry and market dynamics need to be taken into consideration. Where: Average inventory = (Beginning inventory + Ending inventory / 2) / 1 A company's COGS is the cost of selling its products.

Days in Period is the number of days in the time frame you want to measure, whether it's weekly, quarterly or annually. • Calculating a contingency reserve To calculate the amount of safety stock to keep on hand, divide the maximum daily usage by the maximum lead time in days. As a business owner, you need to know how much buffer stock to keep on hand at all times. It may seem difficult at first, but all you need to know is the history of your purchases and sales. determining the re-order point (Average daily usage x Lead time in days) + Safety stock = reorder point. Reordering stock is determined by calculating the reorder point. When it comes to knowing when to place another order, small business owners frequently rely on instinct and past experience, but as the company grows, this becomes increasingly unsustainable. What are the costs of inventory? You can make better decisions if you know how much your inventory costs. Inventory costs can be broken down into three broad categories: ordering costs, carrying costs, and shortage costs. Purchasing inventory has a price. Order creation and processing costs are included in this cost. In order to determine your inventory's EOQ, you'd use this. Ordering costs include:

A purchase requisition's preparation costs

• The cost of inspecting goods that have been received • The cost of processing an invoice from a supplier for an order • The price of preparing and sending a payment to the vendor. Costs associated with stocking and m...