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What Is Inventory Management?

Background and Introduction

Management problems involve decision making problems. Decisions are important tasks that all companies have to make. The premise that companies have to acquire, allocate, and control factors of production brings out the necessity for inventory management. Companies involve themselves in inventory management in order to hold inventories at lowest possible costs given their own objectives. This ensures that the company runs well as expected and thus reaching to a compromise between the different costs involved becomes a must. According to Mpwanya (2006), “Inventory control is the activity which organizes the availability of items to the customers as it coordinates the purchasing, manufacturing and distribution functions to meet the marketing needs”(11). Thus, the control factor brings in the management aspect.

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Inventories have been defined as the taking of stock for raw materials, supplier components, and work in progress and even finished goods that appear at various points of production and logistics channel (Mpwanya, 2006). There exists the pros and cons of inventory as it is worthy noting that holding too much of inventory usually puts the company in a challenging situation on warehousing space and cost management affecting the company profits. However, holding too little of it results in delayed deliveries and compromised customer service and this is neither a good situation for any company with an aim of succeeding.

Adeyemi and Salami (2010) defines inventory management as the art of keeping the most economical amount of a particular kind of a good or any product in order to facilitate an increase in the total value of all the assets the company owns. It informs the managers of how much of a good to re-order when to re-order and how frequent it should be done.

Inventory management thus helps in making sound business decisions depending on the motives of holding the inventories. These motives can be transactional, precaution or speculative in nature. For example, a company can decide to hold stock to meet production or sales goals as well as to cover the possibility that underestimations might take place in future, it can also hold stock if there is a possibility of gaining more in the future thus holding more of the stock.

Several scholars have summarized the advantages of inventory management as follows: helping companies achieve economies of scale; companies can realize economies of scales in their activities whether in manufacturing, purchasing or transportation by simply holding their inventories. For example, if the company is able to buy at large scales, there is a possibility for it being given large discounts in the return, the company’s transport facilities will be used to transport large volumes of goods and thus achieve economies of scale by better utilization of its equipments.

In the manufacturing sector, economies of scale can be achieved by ordering more material and thus production takes longer and this allows for reduced fixed cost of production per unit. Inventory management also helps companies in achieving balance of trade: this can be explained using an example where some companies accumulate inventory to take advantage of seasonal demand. For instance, a company which makes ice creams may see some demand all year but most of its sales will increase during the hot seasons especially during the summer. Thus, inventory management will help the company in producing to stock. This helps the company in establishing a stable work force and keeping the operating costs down.

Inventory management also helps in specialization. Firms with subsidiaries are allowed to specialize, for example, instead of manufacturing variety of products each plant can manufacture a product and then distribute it to the customers or to storage places and in this case economies of scale are achieved through long run production. The process of inventory management is also known to protect the company from uncertainties as it offsets demand and supply uncertainties.

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For example, if the demand increases and the stocks run out, the production line may be shut until more materials are gathered and delivered. Likewise a shortage of workforce would mean that production process cannot be completed. The last advantage of inventory management is the fact that it acts as a buffer interface (Stock& Lambert, 2000). It does this through creation of both place and time utilities. These interfaces include among others: supplier and purchasing and marketing and distribution. We can thus say that inventory management: “Represent the largest single investment in assets for most manufacturers, wholesales, and retailers” (Stock& Lambert, 2000: 188).

Ideas to Improve the Inventory Management and How As A Manager I Can Make Inventory Management Better

In order to improve the inventory management several ways exist and they include:-

Commitment of company management: the fact that lower inventories have different impacts on the company system; it should be the role of the company to ensure that the activities taking part in the company are all geared towards meeting the customer needs and without excess stocks being left unused.

The other way through which inventory management can be improved is through analysis of all the inventory items involved. It is important for the company management to understand that goods in the inventory are important according to their contribution towards achieving the company objectives. The items which generate more profits should be classified in a different class from the others and they should be maintained at a higher percentage compared to those which have lower return rates.

They can also be classified according to their bulkiness in order to be aware of the transport logistics likely to be involved. Another way of improving inventory management is by assuring that there is improved performance of all the logistic activities. Activities such as the warehousing, transport, and order processing can derail the benefits of inventory management and thus the need to ensuring that they are all working properly.

As the company manager, I can also improve the inventory management by using better and improved demand forecasting methods. Better demand forecasting reduces variability in terms of the expected against the actual sales. Improving inventory management can also be done through the use of inventory management software. In the recent past, there have been creation of software that seeks to solve all sorts of problems and inventory management has not been left behind either.

By managers using this software, they are able to predict easily the fast moving inventories as well as the more profitable items in the company. Finally, the use of postponement methods is another way of improving inventory management. This process involves modifying or customizing products after the main manufacturing process has been completed then delay the configuration and distribution process to the time when the distribution cycle will be favorable.

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We can conclude that inventory management is an important effective management tool for a company as it helps in the control of materials or goods, which have to be held for later use with its principal goal being to keep the balance of the conflict economics of keeping or not keeping too much of an item or stock. It does this through the classification and characterization of all the assets or policies within a company.

Reference List

Adeyemi, S L., & Salami, A. O. (2010). Inventory Management: A Tool of Optimizing Resources in a Manufacturing Industry. A Case Study of Coca-Cola Bottling Company, Ilorin Plant. Web.

Mpwanya, M. F. (2006). Inventory Management as a Determinant for Improvement of Customer Service: Dissertation. Web.

Stock, J. R., & Lambert, M. D. (2000). Strategic Logistics Management, 4th Ed. New York: McGraw-Hill Irwin Publishers.

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