Inventory management

Inventory Management
In any business or organization, all functions are interlinked and connected to each other and are
often overlapping. Some key aspects like supply chain management, logistics and inventory form
the backbone of the business delivery function. Therefore these functions are extremely
important to marketing managers as well as finance controllers.
Inventory management is a very important function that determines the health of the
supply chain as well as the impacts the financial health of the balance sheet. Every
organization constantly strives to maintain optimum inventory to be able to meet its requirements
and avoid over or under inventory that can impact the financial figures.
Inventory is always dynamic. Inventory management requires constant and careful evaluation of
external and internal factors and control through planning and review. Most of the organizations
have a separate department or job function called inventory planners who continuously monitor,
control and review inventory and interface with production, procurement and finance
departments.
Defining Inventory
Inventory is an idle stock of physical goods that contain economic value, and are held in various
forms by an organization in its custody awaiting packing, processing, transformation, use or sale
in a future point of time.
Any organization which is into production, trading, sale and service of a product will necessarily
hold stock of various physical resources to aid in future consumption and sale. While inventory
is a necessary evil of any such business, it may be noted that the organizations hold inventories
for various reasons, which include speculative purposes, functional purposes, physical
necessities etc.
From the above definition the following points stand out with reference to inventory:
 All organizations engaged in production or sale of products hold inventory in one form or
other.
 Inventory can be in complete state or incomplete state.
 Inventory is held to facilitate future consumption, sale or further processing/value addition.
 All inventoried resources have economic value and can be considered as assets of the
organization.
Different Types of Inventory
Inventory of materials occurs at various stages and departments of an organization. A
manufacturing organization holds inventory of raw materials and consumables required for
production. It also holds inventory of semi-finished goods at various stages in the plant with
various departments. Finished goods inventory is held at plant, FG Stores, distribution centers
etc. Further both raw materials and finished goods those that are in transit at various locations
also form a part of inventory depending upon who owns the inventory at the particular juncture.

Finished goods inventory is held by the organization at various stocking points or with dealers
and stockiest until it reaches the market and end customers.
Besides Raw materials and finished goods, organizations also hold inventories of spare parts to
service the products. Defective products, defective parts and scrap also forms a part of inventory
as long as these items are inventoried in the books of the company and have economic value.
Types of Inventory by Function
INPUT PROCESS OUTPUT
Raw Materials Work In Process Finished Goods
Consumables required
for processing. Eg :
Fuel, Stationary, Bolts
& Nuts etc. required in
manufacturing
Semi Finished
Production in various
stages, lying with
various departments
like Production, WIP
Stores, QC, Final
Assembly, Paint Shop,
Packing, Outbound
Store etc.
Finished Goods at
Distribution Centers
through out Supply
Chain
Maintenance
Items/Consumables
Production Waste and
Scrap
Finished Goods in transit
Packing Materials Rejections and
Defectives
Finished Goods with
Stockiest and Dealers
Local purchased Items
required for production
Spare Parts Stocks &
Bought Out items
Defectives, Rejects and
Sales Returns
Repaired Stock and Parts
Sales Promotion &
Sample Stocks

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Similar Articles Under - Inventory Management
 Inventory Management Concepts
 Need for Inventory Management
 Finished Goods Inventory
 When to avoid Holding Inventories
 Types of Inventories
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The article is Written By “Prachi Juneja” and Reviewed
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 Inventory Management - Introduction
 Components of Inventory Costs
 Inventory Classification
 Finished Goods Inventory Classification
 Inventory Control
 Inventory Inefficiency Factors
 Factors affecting Inventory Operations
 Challenges in Inventory Management
 Inventory Health
 Company’s approach to Inventory Health
 Inventory Turnover & Inventory Health
 Need for Inventory Operations
 Inventory Planning
 Inventory Management Practices
 Inventory Management Systems
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4. Inventory Management
5. Inventory Management Concepts
Inventory Management Concepts
Inventory management and supply chain management are the backbone of any business
operations. With the development of technology and availability of process driven software
applications, inventory management has undergone revolutionary changes. In the last decade or

so we have seen adaptation of enhanced customer service concept on the part of the
manufacturers agreeing to manage and hold inventories at their customers end and thereby effect
Just In Time deliveries. Though this concept is the same in essence different industries have
named the models differently. Manufacturing companies like computer manufacturing or mobile
phone manufacturers call the model by name VMI - Vendor Managed Industry while
Automobile industry uses the term JIT - Just In Time where as apparel industry calls such a
model by name - ECR - Efficient consumer response. The basic underlying model of inventory
management remains the same.
Let us take the example of DELL, which has manufacturing facilities all over the world. They
follow a concept of Build to Order where in the manufacturing or assembly of laptop is done
only when the customer places a firm order on the web and confirms payment. Dell buys parts
and accessories from various vendors. DELL has taken the initiative to work with third party
service providers to set up warehouses adjacent to their plants and manage the inventories on
behalf of DELL’s suppliers. The 3PL - third party service provider receives the consignments
and holds inventory of parts on behalf of Dell’s suppliers. The 3PL warehouse houses
inventories of all of DELL’s suppliers, which might number to more than two hundred suppliers.
When DELL receives a confirmed order for a Laptop, the system generates a Bill of material,
which is downloaded at the 3PL, processed and materials are arranged in the cage as per
assembly process and delivered to the manufacturing floor directly. At this point of transfer, the
recognition of sale happens from the Vendor to Dell. Until then the supplier himself at his
expense holds the inventory.
Let us look at the benefits of this model for both Dell as well as Its Suppliers:
1. With VMI model, Dell has reduced its in bound supply chain and thereby gets to reduce its
logistics and inventory management costs considerably.
2. DELL gets to postpone owning inventory until at the time of actual consumption. Thereby
with no inventories DELL has no need for working capital to be invested into holding
inventories.
3. DELL does not have to set up inventory operations and employ teams for operations as well
as management of inventory functions.
Supplier Benefits
1. Supplier gets to establish better relationship and collaboration with DELL with long-term
business prospect.
2. By agreeing to hold inventories and effect JIT supplies at the door to DELL, supplier will
be in a better position to bargain and get more business from DELL.
3. With VMI model, supplier gets an opportunity to engage in better value proposition with
his customer DELL.
4. Supplier gets confirmed forecast for the entire year with commitments from DELL for the
quantity off take.
5. VMI managed is managed by 3PL and supplier does not have to engage himself in having
to set up and manage inventory operations at DELL’s premise.

6. 3PL Managed VMI holds inventories of all suppliers thereby charges each supplier on per
pallet basis or per sq.ft basis. Supplier thereby gets to pay on transaction basis without
having to marry fixed costs of inventory operations.
Today most of the Multi National companies have successfully managed to get their suppliers
and 3PL service providers to setup VMI through out their plants all over the world and this
model has become the order of the day.
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5. Need for Inventory Management - Why do Companies hold Inventories ?
Need for Inventory Management - Why
do Companies hold Inventories ?
Inventory is a necessary evil that every organization would have to maintain for various
purposes. Optimum inventory management is the goal of every inventory planner. Over
inventory or under inventory both cause financial impact and health of the business as well as
effect business opportunities.
Inventory holding is resorted to by organizations as hedge against various external and internal
factors, as precaution, as opportunity, as a need and for speculative purposes.
Reasons why organizations maintain Raw Material Inventory
Most of the organizations have raw material inventory warehouses attached to the production
facilities where raw materials, consumables and packing materials are stored and issue for
production on JIT basis. The reasons for holding inventories can vary from case to case basis.
1. Meet variation in Production Demand
Production plan changes in response to the sales, estimates, orders and stocking patterns.
Accordingly the demand for raw material supply for production varies with the product plan
in terms of specific SKU as well as batch quantities.
Holding inventories at a nearby warehouse helps issue the required quantity and item to
production just in time.
2. Cater to Cyclical and Seasonal Demand
Market demand and supplies are seasonal depending upon various factors like seasons;
festivals etc and past sales data help companies to anticipate a huge surge of demand in the
market well in advance. Accordingly they stock up raw materials and hold inventories to be
able to increase production and rush supplies to the market to meet the increased demand.
3. Economies of Scale in Procurement
Buying raw materials in larger lot and holding inventory is found to be cheaper for the
company than buying frequent small lots. In such cases one buys in bulk and holds
inventories at the plant warehouse.
4. Take advantage of Price Increase and Quantity Discounts
If there is a price increase expected few months down the line due to changes in demand
and supply in the national or international market, impact of taxes and budgets etc, the

company’s tend to buy raw materials in advance and hold stocks as a hedge against
increased costs.
Companies resort to buying in bulk and holding raw material inventories to take advantage
of the quantity discounts offered by the supplier. In such cases the savings on account of the
discount enjoyed would be substantially higher that of inventory carrying cost.
5. Reduce Transit Cost and Transit Times
In case of raw materials being imported from a foreign country or from a far away vendor
within the country, one can save a lot in terms of transportation cost buy buying in bulk and
transporting as a container load or a full truck load. Part shipments can be costlier.
In terms of transit time too, transit time for full container shipment or a full truck load is
direct and faster unlike part shipment load where the freight forwarder waits for other loads
to fill the container which can take several weeks.
There could be a lot of factors resulting in shipping delays and transportation too, which can
hamper the supply chain forcing companies to hold safety stock of raw material inventories.
6. Long Lead and High demand items need to be held in Inventory
Often raw material supplies from vendors have long lead running into several months.
Coupled with this if the particular item is in high demand and short supply one can expect
disruption of supplies. In such cases it is safer to hold inventories and have control.
Holding inventories help the companies remain independent and free from vendor
dependencies.
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5. Finished Goods Inventory
Finished Goods Inventory
All Manufacturing and Marketing Companies hold Finished Goods inventories in various
locations and all through FG Supply Chain. While finished Goods move through the supply
chain from the point of manufacturing until it reaches the end customer, depending upon the
sales and delivery model, the inventories may be owned and held by the company or by
intermediaries associated with the sales channels such as traders, trading partners, stockiest,
distributors and dealers, C & F Agents etc.
Why and when do Organizations hold Finished Goods Inventories ?
1. Markets and Supply Chain Design
Organizations carry out detailed analysis of the markets both at national as well as
international / global levels and work out the Supply Chain strategy with the help of SCM
strategists as to the ideal location for setting up production facilities, the network of and
number of warehouses required to reach products to the markets within and outside the
country as well as the mode or transportation, inventory holding plan, transit times and
order management lead times etc, keeping in mind the most important parameter being, to
achieve Customer Satisfaction and Demand Fulfillment.
2. Production Strategy necessitates Inventory holding

The blue print of the entire Production strategy is dependant upon the marketing strategy.
Accordingly organizations produce based on marketing orders. The production is planned
based on Build to stock or Build to Order strategies.
While Build to Order strategy is manufactured against specific orders and does not warrant
holding of stocks other than in transit stocking, Build to Stock production gets inventoried
at various central and forward locations to be able to cater to the market demands.
3. Market penetration
Marketing departments of companies frequently run branding and sales promotion
campaigns to increase brand awareness and demand generation. Aggressive market
penetration strategy depends upon ready availability of inventory of all products at nearest
warehousing location so that product can be made available at short notice - in terms of
number of hours lead time, at all sales locations through out the state and city.
Any non-availability of stock at the point of sale counter will lead to dip in market demand
and sales. Hence holding inventories becomes a necessity.
4. Market Size, location and supply design
Supply chain design takes into account the location of market, market size, demand pattern
and the transit lead time required to reach stocks to the market and determine optimum
inventory holding locations and network to be able to hold inventories at national, regional
and local levels and achieve two major objectives. The first objective would be to ensure
correct product stock is available to service the market. Secondly stocks are held in places
where it is required and avoid unwanted stock build up.
5. Transportation and Physical Barriers
Market location and the physical terrain of the market coupled with the local trucking and
transportation network often demand inventory holding at nearest locations. Hilly regions
for example may require longer lead-time to service. All kinds of vehicles may not be
available and one may have to hire dedicated containerized vehicles of huge capacities. In
such cases the will have to have an inventory holding plan for such markets.
Far away market locations means longer lead times and transportation delays. Inventory
holding policy will take into account these factors to work out the plan.
6. Local tax and other Govt. Rules
In many countries where GST is not implemented, regional state tax rules apply and vary
from state to state. Accordingly while one state may offer a tax rebate for a particular set of
product category, another state may charge higher local taxes and lower inter state taxes. In
such cases the demand for product from the neighboring state may increase than from the
local state. Accordingly inventory holding would have to be planned to cater to the market
fluctuation.

While in case of exports from the country of origin into another market situated in another
country, one needs to take into account the rules regarding import and customs duties to
decide optimum inventories to be held en route or at destination.
7. Production lead times
FG inventory holding becomes necessary in cases where the lead-time for production is
long. Sudden market demand or opportunities in such cases require FG inventories to be
built up and supplies to be effected.
8. Speculative gain
Companies always keep a watch on the economy, annual state budget, financial
environment and international environment and are able to foresee and estimate situations,
which can have an impact on their business and sales.
In cases where they are able to estimate a increase in industry prices, taxes or other levies
which will result in an overall price increase, they tend to buy and hold huge stocks of raw
materials at current prices. They also hold up finished stock in warehouses in anticipation of
a impending sale price increase. All such moves cause companies to hold inventories at
various stages.
9. Avoid Certain Costs
Finally organizations hold FG inventories to satisfy customer demand, to reduce sales
management and ordering costs, stock out costs and reduce transportation costs and lead
times.
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5. Why and When to avoid Holding Inventories
Why and When to avoid Holding
Inventories
Every business organization that is engaged in manufacturing, trading or dealing with salable
products holds inventories in one form another. Inventory is held in the form of raw materials or
in the form of salable goods. Since every unit of inventoried item has an economic value and is
itemized in the books of account of the company, inventory can be considered to be an asset of
the company.
Inventory Management is a critical function performed by planners to balance the inventory
holding so as to ensure that optimum inventory levels are maintained. Any excess inventory will
result in incremental costs of maintaining inventory and affects the financials of the company as
it blocks working capital. Under inventory on the other hand can seriously hamper the market
share. Any customer order that is not fulfilled due to a stock out is not at all a good sign.
Therefore the responsibility of striking a fine balance in holding lean inventory calls for smart
planning and continuous monitoring of the inventory levels coupled with quick decision-making.
Due to the above factors all organizations generally tend to avoid holding inventories except at
certain times.
Inventory Buildup Can be a Sign of Hidden Problems

It has been noticed that inventory build up in process and manufacturing industries is often a sign
of hidden problems, which lie underneath and are not visible at the surface level. In other words
one can say that to cover up inefficiencies in the internal systems, people build up inventories as
safety stocks.
Stock build up can occur as a solution to cover up supplier inefficiencies. If the vendors are not
reliable and the flow of raw materials cannot be ensured, there results a trend to hold buffer
inventories in the form of raw materials or semi manufactured Work in Process inventories.
In other cases inventory build up can happen due to bad quality. The inventory cost increase and
resultant inventory storage cost can be attributed to cost of quality. If the production is not
consistent with quality, the goods produced will get rejected leading to an increase in rejected
inventory. Secondly, to make up for the loss due to quality rejection, one would have to increase
production and hold finished goods inventory.
In other cases production delays can lead to build up of inventories too. Production delays can be
attributed to varied reasons such as bad design of the product, production layout inefficiencies,
production stoppage due to breakdowns, Lengthy process times etc. Besides these causes, there
could be many other problems related to people and management resulting in slackness on the
shop floor, which can add to inventory holding at various stages.
Such inventory build-ups not only block the working capital and increase un necessary cost of
maintaining and storing the inventories, but also hide the problems which can cause serious
threat to the business. Management should be watchful to identify any such inventory buildups
and investigate into the root cause and solve such problems.
An inventory build up at the raw material side as well as the finished goods side gives cause for
worry to the finance controllers. Any non moving inventory is a cause for concern because it not
only blocks up the funds of the organization but the incremental cost of holding the inventory
keeps increasing over a period of time and effect the bottom line figures.
More importantly inventory over a period of time is susceptible to loss, theft, pilferage and
shrinkage. It can also become obsolete and deteriorate over a period of time if not used within
the shelf life.
Hence inventory levels are always on the radar of not only finance controllers, but of the top
management as well.
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5. Types of Inventories - Independent and Dependant Demand Inventories
Types of Inventories - Independent
and Dependant Demand Inventories
Inventory Management deals essentially with balancing the inventory levels. Inventory is
categorized into two types based on the demand pattern, which creates the need for inventory.
The two types of demand are Independent Demand and Dependant Demand for inventories.
 Independent Demand
An inventory of an item is said to be falling into the category of independent demand when
the demand for such an item is not dependant upon the demand for another item.

Finished goods Items, which are ordered by External Customers or manufactured for stock
and sale, are called independent demand items.
Independent demands for inventories are based on confirmed Customer orders, forecasts,
estimates and past historical data.
 Dependant Demand
If the demand for inventory of an item is dependant upon another item, such demands are
categorized as dependant demand.
Raw materials and component inventories are dependant upon the demand for Finished
Goods and hence can be called as Dependant demand inventories.
Take the example of a Car. The car as finished goods is an held produced and held in
inventory as independent demand item, while the raw materials and components used in the
manufacture of the Finished Goods - Car derives its demand from the demand for the Car
and hence is characterized as dependant demand inventory.
This differentiation is necessary because the inventory management systems and process
are different for both categories.
While Finished Goods inventories which is characterized by Independent demand, are
managed with sales order process and supply chain management processes and are based on
sales forecasts, the dependant demand for raw materials and components to manufacture the
finished goods is managed through MRP -Material Resources Planning or ERP - Enterprise
Resource Planning using models such as Just In Time, Kanban and other concepts. MRP as
well as ERP planning depends upon the sales forecast released for finished goods as the
starting point for further action.
Managing Raw Material Inventories is far more complicated than managing Finished Goods
Inventory. This involves analyzing and co-coordinating delivery capacity, lead times and
delivery schedules of all raw material suppliers, coupled with the logistical processes and transit
timelines involved in transportation and warehousing of raw materials before they are ready to be
supplied to the production shop floor. Raw material management also involves periodic review
of the inventory holding, inventory counting and audits, followed by detailed analysis of the
reports leading to financial and management decisions.
Inventory planners who are responsible for planning, managing and controlling Raw Material
inventories have to answer two fundamental questions, which can also be termed as two basic
inventory decisions.
a. Inventory planners need to decide how much of Quantity of each Item is to be ordered from
Raw Material Suppliers or from other Production Departments within the Organization.
b. When should the orders be placed ?

Answering the above two questions will call for a lot of back end work and analysis involving
inventory classifications and EOQ determination coupled with Cost analysis. These decisions are
always taken in co ordination with procurement, logistics and finance departments.
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5. Inventory Costs

Inventory Costs
Inventory procurement, storage and management is associated with huge costs associated with
each these functions.
Inventory costs are basically categorized into three headings:
1. Ordering Cost
2. Carrying Cost
3. Shortage or stock out Cost & Cost of Replenishment
a. Cost of Loss, pilferage, shrinkage and obsolescence etc.
b. Cost of Logistics
c. Sales Discounts, Volume discounts and other related costs.
1. Ordering Cost
Cost of procurement and inbound logistics costs form a part of Ordering Cost. Ordering
Cost is dependant and varies based on two factors - The cost of ordering excess and the
Cost of ordering too less.
Both these factors move in opposite directions to each other. Ordering excess quantity will
result in carrying cost of inventory. Where as ordering less will result in increase of
replenishment cost and ordering costs.
These two above costs together are called Total Stocking Cost. If you plot the order
quantity vs the TSC, you will see the graph declining gradually until a certain point after
which with every increase in quantity the TSC will proportionately show an increase.
This functional analysis and cost implications form the basis of determining the Inventory
Procurement decision by answering the two basic fundamental questions - How Much to
Order and When to Order.
How much to order is determined by arriving at the Economic Order Quantity or EOQ.
2. Carrying Cost
Inventory storage and maintenance involves various types of costs namely:
 Inventory Storage Cost
 Cost of Capital

Inventory carrying involves Inventory storage and management either using in house
facilities or external warehouses owned and managed by third party vendors. In both cases,
inventory management and process involves extensive use of Building, Material Handling
Equipments, IT Software applications and Hardware Equipments coupled managed by
Operations and Management Staff resources.
c. Inventory Storage Cost
Inventory storage costs typically include Cost of Building Rental and facility
maintenance and related costs. Cost of Material Handling Equipments, IT Hardware
and applications, including cost of purchase, depreciation or rental or lease as the
case may be. Further costs include operational costs, consumables, communication
costs and utilities, besides the cost of human resources employed in operations as
well as management.
d. Cost of Capital
Includes the costs of investments, interest on working capital, taxes on inventory
paid, insurance costs and other costs associate with legal liabilities.
The inventory storage costs as well as cost of capital is dependant upon and varies
with the decision of the management to manage inventory in house or through
outsourced vendors and third party service providers.
Current times, the trend is increasingly in favor of outsourcing the inventory management to
third party service provides. For one thing the organizations find that managing inventory
operations requires certain core competencies, which may not be inline with their business
competencies. They would rather outsource to a supplier who has the required competency than
build them in house.
Secondly in case of large-scale warehouse operations, the scale of investments may be too huge
in terms of cost of building and material handling equipments etc. Besides the project may span
over a longer period of several years, thus blocking capital of the company, which can be utilized
into more important areas such as R & D, Expansion etc. than by staying invested into the
project.
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5. Inventory Classification - ABC Classification, Advantages & Disadvantages
Inventory Classification - ABC
Classification, Advantages &
Disadvantages
Inventory is a necessary evil in any organization engaged in production, sale or trading of
products. Inventory is held in various forms including Raw Materials, Semi Finished Goods,
Finished Goods and Spares.
Every unit of inventory has an economic value and is considered an asset of the organization
irrespective of where the inventory is located or in which form it is available. Even scrap has
residual economic value attached to it.
Depending upon the nature of business, the inventory holding patterns may vary. While in some
cases the inventory may be very high in value, in some other cases inventory may be very high in

volumes and number of SKU. Inventory may be help physically at the manufacturing locations
or in a third party warehouse location.
Inventory Controllers are engaged in managing Inventory. Inventory management involves
several critical areas. Primary focus of inventory controllers is to maintain optimum inventory
levels and determine order/replenishment schedules and quantities. They try to balance inventory
all the time and maintain optimum levels to avoid excess inventory or lower inventory, which
can cause damage to the business.
ABC Classification
Inventory in any organization can run in thousands of part numbers or classifications and
millions of part numbers in quantity. Therefore inventory is required to be classified with some
logic to be able to manage the same.
In most of the organizations inventory is categorized according to ABC Classification Method,
which is based on pareto principle. Here the inventory is classified based on the value of the
units. The principle applied here is based on 80/20 principles. Accordingly the classification can
be as under:
A Category Items Comprise 20% of SKU & Contribute to 80% of $ spend.
B Category Items Comprise 30% of SKU & Contribute to 15% of $ spend.
C Category Items Comprise 50% of SKU & Contribute to 5% of $ spend.
The above is only an illustration and the actual numbers as well as percentages can vary.
Example: Table of Inventory Listing by Dollar Usage Percentage.
Item Annual Usage in No.
Units
Unit Cost-
$
Usage in
Dollars
Percentage of Total Dollar
Usage
1 5,000 1.50 7,500 2.9%
2 1,500 8.00 12,000 4.7%
3 10,000 10.50 105,000 41.2%
4 6,000 2.00 12,000 4.7%
5 7,500 0.50 3,750 1.5%
6 6,000 13.60 81,000 32.0%
7 5,000 0.75 3,750 1.5%

8 4,500 1.25 5,625 2.2%
9 7,000 2.50 17,500 6.9%
10 3,000 2.00 6,000 2.4%
Total $254,725 100.0%
Advantages of ABC Classification
 This kind of categorization of inventory helps one manage the entire volume and assign
relative priority to the right category. For Example A Class items are the high value items.
Hence one is able to monitor the inventory of this category closely to ensure the inventory
level is maintained at optimum levels for any excess inventory can have huge adverse
impact in terms of overall value.
 A Category Items: Helps one identify these stocks as high value items and ensure tight
control in terms of process control, physical security as well as audit frequency.
 It helps the managers and inventory planners to maintain accurate records and draw
management’s attention to the issue on hand to facilitate instant decision-making.
 B Category Items: These can be given second priority with lesser frequency of review and
less tightly controls with adequate documentation, audit controls in place.
 C Category Items: Can be managed with basic and simple records. Inventory quantities
can be larger with very few periodic reviews.
Example: Take the case of a Computer Manufacturing Plant; the various items of inventory can
be broadly classified as under:
SKU Description Classification of
Inventory
Remarks
Processor Chips A Class Kept under High Value Storage/Asset
Tracking / Access Control required
Memory Chips A Class Kept under High Value Storage/Asset
Hard Disk / Storage
Media
A Class Kept under High Value Storage/Asset
Software License A Class Kept under High Value Storage/Asset

Disk Drives A Class Normal Storage / Access Control Required
Cabinet / Case B Class Normal Procedures
Battery Pack B Class Normal Procedures
Monitor A Class Normal Storage / Access Control Required
Keyboard B Class Normal Procedures
Training Manuals C Class Minimal Procedures
Mouse B Class Normal Procedures
Stickers C Class Minimal Procedures
Screws & Nuts C Class Minimal Procedures
Power Cord C Class Minimal Procedures
Starter Assembly
Pack-Instructions
C Class Minimal Procedures
Disadvantages
 Inventory Classification does not reflect the frequency of movement of SKU and hence can
mislead controllers.
 B & C Categories can often get neglected and pile in huge stocks or susceptible to loss,
pilferage, slackness in record control etc.
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5. Finished Goods Inventory Classifications and Terminologies
Finished Goods Inventory
Classifications and Terminologies
While inventory classification of raw materials for Inventory Management purposes follows
ABC Classification, Finished Goods inventory is classified under additional categories based on
various attributes including sales volumes/patterns, functional attributes and operational
requirements.
Stock Category depending upon Sales Channels
Finished Goods at the very basic level is manufactured and stocked separately depending upon
the Business Units as well as the Sales Channels.

1. A normal standard category common to most of the products is the classification of -
Export SKU & Domestic SKU stocks. Along with FG Stocks exists a separate
classification of spare parts and accessories under FG Inventory.
2. Many product categories classify inventory based on Sales Channels as under:
SKUS for Institution Sales
SKUS for Channel Sale
SKUS for Direct Delivery
SKUS for Sales to Govt., Defense and NGO and other projects
a. The basic product may be the same, but depending upon the classification they
may contain additional bundling or kitting items etc.
b. Computer Industry is a classic example, which follows the above classification in
FG inventory.
c.
3. Automotive Components and Products are categorized into:
a. OE Supply SKU - SKUS, which are manufactured to supply to Original Equipment
Manufacturers.
b. After Market SKU - SKUS, which are manufactured to supply to Spares Market
through Dealer Network.
c. Exports - SKUS, which are manufactured for Export out of the Country.
4. FG Stock: Fast Moving, Slow Moving & Non Moving - FG Inventory is often categorized
into Fast Moving, Slow Moving and Non Moving stocks indicating their frequency and
volume of sales. This categorization is intended to serve the functional purpose of
determining the sales performance of categories of Goods.
5. Bought Out Items SKU Category: All the FG goods marketed and sold by an organization
need be manufactured by themselves. They could be sourcing items from other vendors or
buying items from overseas markets. Global companies normally have plants spread over
all continents and manufacture different categories of products. In such cases a particular
countries requirement of certain products may be sourced from overseas factories of the
company.
Inventory for such imported and bought out items is maintained under separate bucket to be
able to identify them easily. Their valuation and costing and profit margins may be different
from those of in house manufactured goods. Further imported Goods would have import
duty and tax liabilities, which may be different from that of in house manufactured
inventory.
Example: Computers and Desktops are manufactured by Global MNCs like Dell, HP &
Lenovo. They have established manufacturing facilities in various countries catering to the
local and international markets. Typically they produce few of the SKUS locally and the
other products are sourced from overseas facilities. They also buy monitors, keyboard and
accessories from OE Suppliers. These are considered bought out items in their inventory l
listing.
6. Other functional categories of inventory: In warehouses, to facilitate operational processes
as well as for ease of identification etc., inventory is categorized into many more
classifications including but not limited to:

a. Stock on Hold - Inventory that is frozen/blocked and cannot be released for sale or
consumption.
b. Scrap & Obsolete - Materials that are rejected, damaged and not usable or those
that have crossed the shelf life and expiry date are categorized under scrap category.
When a particular SKU is no longer salable due to lack of demand and has become
obsolete, it gets classified under obsolete stock and continues to be valued in the books of
accounts.
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5. Inventory Control - Inventory Audits and Cycle Counts
Inventory Control - Inventory Audits
and Cycle Counts
Any inventory of Raw materials, finished goods as well as Intermediate in process inventory has
an economic value and is considered an asset in the books of the company. Accordingly any
asset needs to be managed to ensure it is maintained properly and is stored in secure environment
to avoid pilferage, loss or thefts etc.
Inventory control assumes significance on account of many factors.
First of all inventory of raw materials as well as finished goods can run in thousands of SKU
varieties. Secondly inventory can be in one location or spread over many locations. Thirdly
inventory may be with the company or may be under the custody of a third party logistics
provider. These factors necessitate inventory maintenance mechanisms to be devised to ensure
inventory control.
Inventory control is also required as an operational process requirement. Inventory is has two
different dimensions to it. On one level it is physical and involves physical transactions and
movement of inventory. While on the other hand, inventory is recognizable by the book stock
and the system stocks maintained. This necessitates inventory control mechanism to be
implemented to ensure the book stocks and the physical stocks match at all times.
Thirdly the inventory always moves through supply chain and goes through various transactions
at various places. The number of transactions and handling that it goes through from the point of
origin to the point of destination is numerous. Therefore it becomes essential to control inventory
and have visibility through the pipeline including transit inventory.
Inventory control is exercised through inventory audits and cycle counts. An inventory audit
essentially comprises of auditing the books stocks and transactions and matching physical stocks
with the book stock.
Cycle counts: Cycle count refers to the process of counting inventory items available in physical
locations. Depending upon the nature of inventory, number of transactions and the value of
items, cycle count can be carried on periodically or perpetually.
1. Daily Cycle Count: Normally where the number of SKUs is very high coupled with high n
umber of transactions and through put, daily cycle count is initiated, where in a certain
percentage of locations or SKUs are counted on daily basis and physical stock is compared
with system stock. By the end of the month all of the stocks would have been covered once
in cycle count.

Inventory system throws up a count list based on an analysis of the movements of fast
moving SKUs along with other attributes like value etc. In some of the system, inventory
controllers can set up the attributes for each cycle count.
2. Quarterly & Half Yearly Cycle Counts: End of the sales quarter or end of half yearly
sales, finished goods and spare parts are normally covered under inventory audit and a
100% cycle count is carried out.
3. Wall to Wall Cycle Count: End of financial year and closing of books entails doing wall to
wall cycle count of all stocks lying in all locations and tallying with books of account. This
is a mandatory audit requirement and until stock figures are reconciled, certified by auditors
and published, New Year books of accounts cannot be started a fresh.
How the audit process works ?
Except for daily cycle counts, all other cycle counts entail counting hundred percent of all the
stocks by stopping all transactions during the counting period. System transactions are also
frozen until the count is completed.
Inventory system throws up count list with SKU number, description and location number. The
operator goes to the location, checks the SKU, counts the qty available and updates the list,
which is then fed into the system. The system reconciles the physical quantity with system
quantity and throws up discrepancy report, which is further worked upon to tally and adjust
inventory.
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5. Factors Leading to Inventory Inefficiencies
Factors Leading to Inventory
Inefficiencies
In any company inventory management is one area that the managements always focus on when
it comes to improving business efficiencies and cutting costs. An inventory reduction drive
always yields results, which are visible and releases cash back into business. Does this mean that
inventory management is inefficient? The answer can be a yes and a no.
Inventory management function is dependant upon physical operations involving multiple
locations and agencies and processes. The inter dependence upon transactions which are
sequential and parallel, renders inventory susceptible to inefficiencies occurring in operations,
transactions, and documentation over a period of time.
Another possible factor that can hamper the inventory efficiencies is the system setup that is used
to manage the inventory. Quite often one can find that the system setup and process defined in
the system is not user friendly and cumbersome. An efficient system should define and guide the
physical process as well as documentation process. The system process should in turn be
developed based on the business process requirement. In many cases the operations are made to
suit the system setup, which already exists in some basic form and not suited to the particular
business process on hand.
Poor system setup that does not match with the shop floor warehouse set up renders operations in
efficient. It is very common to come across complaints from users with regard to non-availability
of features to work around the processes; at times processes are lengthy and cumbersome leading
to operational delays. Non availability of different reports and loops and bugs in the system can
often push the operations teams to find shortcut methods to by pass the system processes and
carry on with the work, resulting in inventory inefficiencies as well as inefficient operations.

In cases where a company has outsourced the inventory management to a third party service
provider, the inventory management complications increase manifold. You have the company’s
ERP or inventory system on one hand and the third part service providers inventory management
system or warehouse system on the other hand. At any given point of time both have to be
reflecting the same inventory accuracy and also match with physical stock available on shop
floor, but this is not the case always. In cases where the systems are interfaced too inventory in
one system cannot mirror the other and reconciling transactions between the two systems can be
cumbersome and time consuming.
Health of the inventory accuracy as well as inventory management can also depend upon the
inventory strategy of the company and its outlook.
A few companies treat inventory to be a necessary evil and just about ensure processes are
compliant and inventory audits are regularly held. They do not deal with and treat inventory as
an important asset that needs to be managed and reviewed to keep it lean and accurate.
Those companies, which are aware of the implications and benefits that a lean inventory
management practice can have on their business, strive to build good management practices and
keep finding ways to optimize the processes. Any efficiency brought about with change in
processes adds to the company’s profits. Hence they give attention to and invest in driving
inventory management strategy and practices, which are benchmarked against the best in the
industry.
Decisions with regard to level of inventory to be carried, who owns and carries the inventory in
the supply chain are some of the key decisions that drive efficiencies in inventory management.
Besides this technology can also bring about process improvements speeding up the sales and
delivery processes and to a certain extent reduces manpower resources and associated costs too.
Inventory management is an ongoing and dynamic process. To keep out the inefficiencies in
systems, processes and physical operations, calls for active management participation and
continuous improvement in all processes and systems that are involved in inventory
management.
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5. Factors affecting Inventory Operations
Factors affecting Inventory Operations
Inventory management operations are increasingly being outsourced to third party service
providers, thereby ensuring that the investments and costs in managing the inventories are
reduced. This is a welcome trend provided the companies focus on overseeing and reviewing
both inventory management as well as inventory operations periodically to ensure proper
controls are maintained and processes followed.
Inventory management entails study of data on movement of inventory, its demand pattern,
supply cycles, sales cycles etc. Active management calls for continuous analysis and
management of inventory items to target at lean m inventory Management.
Inventory Management function is carried out by the inventory planners in the company in close
co ordination with procurement, supply chain logistics and finance, besides marketing
departments.
The efficiencies of inventory management are largely dependent upon the skills and knowledge
of the inventory planners, the focus and involvement of management and the management
policies coupled with the inventory management system.

However inventory operations management is not under the control of the inventory
management team but rests with the third party service providers. In this section of the article we
aim to uncover few of the critical areas and action points on the part of operations that can
impact the inventory of the company.
1. Unskilled Labor and Staff: Inventory operations management is a process-oriented
operation. Every task and action required to be carried out by the operatives will impact the
inventory as well as the delivery lead times and other parameters. Therefore knowledge of
what one is required to do and the effect of the action should be known to the operatives
who are on the shop floor. For Example: If an operative is given a put away task, he should
know how and where he should put away the pallet, how to scan the pallet ID and confirm
it back to the system. Besides he should also know the impact of not completing any of
these actions or doing some thing wrong. The impact his action will have on the system as
well as physical inventory should be clear to the operative.
Secondly different inventory items would have to be handled differently. Operatives who
are carrying out the task should know why and what is required to be done. They should
also know the consequences of not following the process. A pallet might have to be scanned
for the pallet id and put away on a floor location, while a carton might have to be opened
and scanned for individual boxes inside and put away into a bin. The operatives should be
trained on the entire process and understand why and what he is doing.
The WMS systems are quite operational and task intensive. Where the warehouses are
being managed on RF based systems, the operatives should be able to manage the RF
readers, understand how to access and complete transactions through the RF Guns.
Often it is noticed that when the warehouse operations are being managed by a third party
service provider and the principle customer is not present at the location, the quality of staff
and operatives is compromised and people are not given adequate training before being
allocated their responsibility. Such situations can lead to inventory discrepancies.
2. In adequate SOP, Training and emphasis on processes compliance: When a inventory
management project kicks off at a third party warehouse location, both the principle
customer as well as the third party service provider work on the project and setup basic
processes, document them in Standard Operating Procedures and conduct training as a part
of the project management methodology.
However over a period of time, the nature of business requirements changes, resulting in
change in the operating processes. These do not get documented in terms of amendments
and the SOPs become outdated. Thereafter one finds that the new comers who are
introduced on the shop floor are required to learn the processes by working along with
others where as no training or SOP document is provided to him for reference. With the
result they often have half-baked knowledge of the processes and carry on tasks not
knowing why they are doing and what they are required to do.
This situation is very dangerous for the health of the inventory and it shows slackness in the
attitude of the third party service provider. Continuation of such a situation will lead to bad

housekeeping, inventory mismatches, discrepancies and also affect the service delivery. If
left unchecked can lead to theft, pilferage and misuse of inventory.
In any third party owned inventory operations warehouse, the principle client should ensure
that periodic review and training is conducted for all staff. Inventory operations should be
periodically reviewed and inventory counts and audits carried out regularly.
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5. Operational Challenges in Inventory Management
Operational Challenges in Inventory
Management
The latest trend in all industries has been to outsource inventory management functions to Third
Party Service providers. Companies outsource both Raw Material Inventory as well as Finished
Goods to the Service Provider.
In case of finished goods inventory, depending upon the supply chain design, there may be
multiple stocking points at national, regional and state levels. In such an event each of the
warehouse a different service provider may manage operations, as one may not be able to find a
supplier having operations all over the country.
Therefore the inventory in such a situation will be managed in the Company’s system as well as
in the Service provider’s system. Inventory management and control becomes a critical function
especially in such situations where multi locations and multiple service providers are involved.
To ensure Inventory control is maintained across all locations, following critical points if
focused upon will help:
1. Establish and outline Operations Process for Service Providers: Draw up SOP -
Standard Operating procedure detailing warehouse operations process, warehouse inventory
system process as well as documentation process.
Especially in a 3rd Party Service Provider’s facility, it is important to have process
adherence as well as defined management, authorization and escalation structure for
operations failing which inventory operations will not be under control.
2. Establish inventory visibility at each of the location through MIS Reports: Draw up list
of reports and MIS data for all locations and ensure they are mailed to a central desk in the
inventory team for daily review. The inventory team leader should analyze daily reports of
all locations and highlight any non-conformity and resolve them as well as update the
management.
3. Initiate Daily Stock count procedure to be carried out at all of the locations and reported
back to the inventory desk.
Daily stock count should be able to reflect location accuracy, stock accuracy as well as
transaction summary for the day.
4. Monthly audits and inventory count should be implemented at all locations without fail and
insist on one hundred percent adherence.
5. Quarterly inventory - wall-to-wall count or half yearly and annual wall-to-wall count should
be implemented depending upon the volume of transactions as well as value of transactions
at each location.

6. Central Inventory team to be responsible for ensuring review of all reports and controlling
inventories at all locations.
7. Inventory reconciliation - involves reconciling physical inventory at site with the system
inventory at 3PL Site and then reconciling 3PL System stocks with company’s system
stock.
8. Visiting major sites and being present during physical stock audits on quarterly or half
yearly basis is very important.
9. Lastly keep reviewing processes and ensure training and re training is carried out regularly
and at all times at site so that a process oriented culture is imbibed and all operating staff
understand the importance of maintaining processes as well as inventory health.
Inventory is nothing but money to the company. If 3PL vendor is managing the inventory,
needless to say you should have your processes in place to be able to control and maintain
inventory health.
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5. Inventory Health - Important factors to be considered to avoid Inventory Mismatch
Inventory Health - Important factors to
be considered to avoid Inventory
Mismatch
Any inventory of raw materials or finished goods runs into thousands of SKU items. Especially
in case of Raw Material Inventory as well as Spare Parts Inventory these numbers could be much
higher when compared to Finished Goods. Even in Finished Goods some products like clothes,
grocery etc could run into thousands of SKUs across the entire range.
Every unit of Inventory has an economic value in the books of the company. Therefore as an
asset one needs to have a control over the inventory and ensure that the books stock matches
with the physical stock. By book stock essentially we mean system stock.
Inventory management on one hand consists of managing the inventory transactions and data in
the system and on the other it involves physical processes on the ground. Both these have to
work in tandem to ensure that all transactions are closed and completed both in the system as
well as on the shop floor.
In a warehouse a typical day operations begin with receiving materials from different vendors,
which are unloaded, counted and updated in the system. The system then issues a GRN and
directs the location to which the material should be stored. Accordingly the material is then
moved to the storage location and a confirmation back in the system closes the entire transaction.
At the same time, parallel processes for shipment delivery will be under process where the
system releases pick orders on the warehouse. Operations staff picks up the materials as per pick
list and confirm back to the system, which then releases a packing order and an invoice for
shipment. Amidst these multiple transactions there would be quite a few operational transactions
like bin to bin transfers, kitting etc which are again transacted in the system followed by physical
process and re confirmation to the system.

In such situation where multiple transactions both in system as well as physical operations are
going on and the tasks are interdependent, any process deviation in any one of the transactions is
bound to occur resulting in differences between system transactions and physical inventory.
Current trend in the industries is to outsource the warehousing operations to third party service
providers, in which case the transactions increase manifold because of the introduction of
additional system at the warehouse end, which belongs to the third party vendor. The principle
customer maintains his inventory in his ERP, which transacts with the third party vendors WMS
- Warehouse Management System and the Physical transactions on the shop floor, which have to
run concurrently with the system.
1. Systems Issues
Normally the ERP system and the WMS are interfaced using standard interfaces. Both
systems exchange standard interface files updating the transactions carried out in each of
the systems and are downloaded at both the ends in periodic batch frequencies of half hour
or one hour. Thus all receipts received physically at the warehouse in one hour get updated
in warehouse WMS which then sends out the GRN information to Client’s ERP for
updating. Client’s ERP similarly processes the orders based on the inventory available in its
system and issues sales orders which are sent across to WMS. WMS then generates pick
waves which when confirmed lead to releasing of packing list and invoice. These
transactions are again completed physically and WMS is updated. WMS further sends out
the information of dispatch to ERP for further updation. For these transactions to happen
smoothly both ERP as well as WMS should match perfectly in terms of inventory and
transaction information.
When in case of day-to-day operations, hundreds of transactions are being processes at both
the ends concurrently; the system updates may not happen on real time basis and can lead to
inventory discrepancies. Therefore it becomes necessary to have daily reconciliation of all
transactions between both systems as well as operations.
2. System discipline required
Such transaction based systems call for strict discipline on the part of system users to ensure
they complete all processes without deviation and regularly update the masters and
reconcile on daily basis. Any lack of discipline can effect not only the inventory but effect
transactions as well. For Example, if for any reason a particular SKU or consignment is
blocked at the warehouse and is not to be dispatched, the inventory block should not only
happen in WMS which controls floor operations but in ERP also. Otherwise in the ERP the
blocked inventory may be showing as open inventory and get allocated for a sales order.
3. Master Data Up-dation is a MUSTM
SKU code numbers in any inventory are subject to frequent changes. You can also have the
same description and same item being supplied by different vendors. Every time a new
SKU is created at the Customer’s ERP, one must ensure that the same new SKUs are
created in the WMS too. WMS master data with regard to SKU Code, description and other

SKU Master Data and Vendor Master information should mirror that of the ERP. If by
oversight or careless ness this co-ordination is found lacking the inventory gets mixed up or
does not get uploaded into the system.
4. System Inventory should match with Physical Inventory
The inventory that is setup and maintained in the ERP as well as WMS should correspond
to the inventory on the shop floor. For example the inventory shown in ERP and WMS with
details of each location as to where, how much is stored in which location should match
exactly with the physical reality. On the shop floor the physical location should have the
same SKU, Exact quantity as per System entry. Any mismatch on the floor location
resulting out of mistake from the operations staff of keeping inventory in wrong location
will create havoc in both system as well as operations.
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5. Company’s approach to Inventory Health
Company’s approach to Inventory
Health
Inventory means an item of value and asset in the books of the Company. This is the most
important category of item that needs to be focused upon by the management for in its
management lies the business efficiency as well as profits.
Inventory holding is a must for any business organization that is into manufacturing and selling
or trading of products. Technically inventory is holding stock of raw materials or finished goods
for a future point of consumption. This in fact blocks the working capital employed by the
company.
In any business, it is essential to have optimum inventory at all times. Over inventory stocking
results in erosion of profits and increase in inventory carrying costs that effects the operational
costs of the company, while shortage of inventory can lead to loss of business and sales
opportunity which will not only result in revenue loss but damage company’s reputation and
reliability in the market and with customer.
Inventory by nature is operations intensive. With the number of items running into thousands,
coupled with the number of transactions that are involved in managing inventory operations on
daily basis, it is quite possible that without water tight controls over processes, systems and
operations, inventory will go out of control resulting in pilferage, loss due to damage, mis-
management, theft or shrinking. Incase of inventories having extra sensitive characteristics
involving perish ability, shelf life or temperature control, tilt meters etc, it becomes necessary to
keep a tighter watch and control over such inventories and their management.
Inventory Control and effective management is essentially based mainly on two prime
factors, which are Company’s Inventory Management Strategy and Policy as well as
Management’s focus on Inventory Operation Management.

A company which identifies supply chain and inventory policy to be the enabler that will help
the company gain an edge over competition in the market and use it to leverage its position will
invest into engineering efficient supply chain models and inventory management practices to
meet its business goals. Companies like HP, IBM, DELL, Wall Mart, Xerox, Procter and Gamble
and Unilever etc have invested continually into reviewing and re engineering their inventory as
well as supply chain strategies to meet with emerging market situations. All these companies
have done away with traditional concepts of storage and inventory management and adapted the
more efficient VMI-Vendor Managed Inventory, JIT - Just In Time and Customer Response
systems whereby they have management to get their suppliers to hold inventories for them right
next to their manufacturing sites and supply on Just In Time Basis. Retailing business being
highly competitive most of the companies have invested heavily into soft wares and systems to
be able to manage the inventory visibility and stocks as well as call offs thereby bringing
efficiencies into inventory management operations. Systems driven catalogue management,
system based forecasting, Statistical analysis of Sales Data and extrapolation using complex
systems enabled forecasting methods and reports have brought in lean Inventory management
concepts in these companies and their strategies have paid off very well. In effect their strategic
focus and approach to inventory and logistics planning have been the key factors behind their
success in the markets.
While the companies focus on strategic decision making, planning and defining of Inventory
rules and methodologies relevant to their business operations, it is important to realize that the
effectiveness is dependant upon the ground operations. Especially in case of Inventories which
are stored at multi locations and handled by third party service providers, it is becomes that much
more difficult to manage the inventory operations. Therefore as principle owners of inventory,
the companies should build very strong management focus to define processes, set up
expectations, gather MIS data, analyze and control through checks and balances. This will
involve setting up of very strong inventory and logistics team with right management and
operational process capability and experience coupled with strong systems deployment.
Companies would have to set up independent audit teams too to audit the inventory books,
systems as well as processes both from operational as well as statutory compliance point of view.
It is not enough for companies to focus on monitoring the operations of the third party services,
but focus should also be on internal management of inventory planning and operations too.
Systems deployed should be capable of generating MIS reports and other data as per
requirement. Secondly inventory analysis and review should be a periodic process as laid down
by process document and manual, involving inventory planning, logistics, procurement as well
as finance teams. It is only when decisions and review of inventories are done in line with
changes in demand pattern or other operational conditions coupled with speedy decisions to
scrap or dispose of unused, unwanted and non moving inventory will help in maintaining
inventory balance and efficiency.
The company should have clearly defined metrics to measure and define inventory health
as well as inventory operations health and this needs to be viewed by the senior
management periodically with operating management and the rest of the team.

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5. Inventory Turnover as Indicator of Health of Inventory and Business
Inventory Turnover as Indicator of
Health of Inventory and Business

Inventory management as well as Supply chain operations are often overlapping and hold the key
to the success of sales operations. In all of the businesses be in automobile, manufacturing,
pharma or retail industry, status of inventory reflects the health of the business.
Inventory operations have two key elements namely Inventory System and Physical operations.
Today inventory systems have replaced the book keeping and financial accounting that was
being practiced earlier. Current inventory systems not only do the book keeping but are linked to
upstream as well as down stream activities including procurement, sales processing, financial
accounting.
In terms of measuring a sales performance in relation to Inventory, we often use the term
Inventory Turnover. Inventory turnover simply refers to the number of times the inventory is
sold or used in a period of one year. Inventory turnover is also termed as stock turn, or stock
turnover.
Inventory Turnover is calculated by taking the Total Cost of Goods Sold, divided by
Average Inventory. Adding together Beginning inventory and ending inventory and dividing
the figure by 2 in turn calculate average Inventory.
The inventory turnover as a measure of health of sales and business is used extensively in
Retail, textile as well as FMCG segments. A higher inventory turnover does indicate a healthy
trend of increased sales and indicates the need to maintain adequate inventory levels to avoid
stock outs. In adequate stocks can result in loss of business opportunities and is something that
the management needs to keep watching closely. On the other hand a lower inventory turnover
shows that either the sales of the said inventory is slowing down or that the unused inventory is
building up clogging the system somewhere. A slow inventory turn can help the inventory
manager focus on finding non-moving, obsolete and slow moving inventory items and thereby
steps can be taken to deal with them appropriately.
Inventory turnover also reflects the holding cost that is incurred in managing inventory.
Increased inventory turns reduce the holding costs. The costs especially fixed costs like rent and
cost of operations get distributed over higher inventory throughput and thereby the cost of
inventory transactions reduces.
Inventory turnover is also indicative of the health of inventory operations. When the
inventory turnover is higher, the inventory operations efficiency will also be high to meet with
the increased operational requirements thereby good house keeping and increased responsiveness
to market requirements.
Inventory turn in some cases or some systems is also calculated based on the numbers sold rather
than the average value of inventory. In such a system the Inventory turn is calculated by dividing
the Number of Units Sold divided by the Average number of Units inventory held in a given
period of time.
Over a number of years, each industry has developed methods to check inventory turnover and
industry standards have been standardized. So whenever a new business venture is set up, they
are able to have the industry standard as benchmark to be achieved and use it as a guide to
streamline operations.

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5. Why Young Managers should know about Inventory Operations
Why Young Managers should know
about Inventory Operations

When a management student passes out from college and is absorbed into any business
organization, if he is lucky he will get to spend a few months in getting orientation in all
departments before being assigned to a particular department or function at the end of the
induction program. Those who get to be assigned to working in Supply chain or inventory
operations of the company are likely to learn very important lessons that is likely to give them an
edge later on when they grow in ranks and take up higher and different responsibilities.
Inventory management and supply chain operations both on the Raw material as well as Finished
Goods side are very critical to the success of sales and marketing besides being major
contributors to the profitability of the company.
Sales and Marketing can be said to be efficient not when they build sales leads and convert them.
But the efficiency of being able to reach the right Finished Product to the Right Customer or
Market and the Right Time is what determines the Success of S & M. Inventory is the other
function that is critical to the Sales.
An efficient inventory management will mean carrying balanced inventory and functioning
at optimum efficiency as well as ensuring control over inventory carrying costs. Any
increase in efficiency of inventory holding or operations impacts bottom line directly. Supply
chain, having to do with movement of inventory to and from plant to the markets, holding
inventory en route at various points and managing overall inventory logistics is also very critical
both to inventory management as well as the Sales Function.
Once the trainee has understood the operations models and seen how the entire chain of
functions involving multiple internal departments, systems, documentation as well as external
vendors, third party service providers and the governmental organization all work in tandem to
make the business a success, he would have pretty much understood the secret to building
successful business.
Time and again we have seen that the General Managers as well as the Marketing Managers who
have been heading their departments in the companies have made headway and achieved
breakthroughs in terms of marketing their products using innovative supply chain distribution
strategies and thereby have been able to impact the bottom lines substantially. Direct marketing,
E marketing, Network marketing are all new sales concepts but if you have to incorporate these
into your marketing plan, then it becomes necessary first for you to be able to understand and
define the supply chain and inventory strategy to service these delivery channels.
An inventory strategy can be designed on paper but then to be able make it operational, one
needs to have a realistic exposure and experience to the field operations and have a hang of how
things work on the ground. Inventory management and operations involve multiple agencies and
service providers combined with multiple systems that need to be interfaced. Sales process has to
be married to Supply Chain and logistics process, which in turn needs to drive the inventory
operations process in the back end. All these different modules need to be working in tandem
and seamlessly to deliver products across markets in time.
Any aspiring manager who wants to head an organization as General Management or Marketing
Manger would have to first get first hand experience of these brass tacks that will help him later
to be able to devise practical and achievable strategies to take his business ahead.

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5. Inventory Planning - Basic Concepts
Inventory Planning - Basic Concepts
Every organization that is engaged in production, sale or trading of Products holds inventory in
one or the other form. While production and manufacturing organizations hold raw material

Inventory management

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