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Inventory Management: Key Concepts in 40 Characters
- 2. What is Inventory Management? Inventory management is the overseeing and controlling of the ordering, storage and use of components that a company will use in the production of the items it will sell as well as the overseeing and controlling of quantities of finished products for sale.
- 3. Stock (inventory) The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale.
- 4. Why businesses hold stocks Stocks of raw materials Work in progress Stocks of finished products
- 5. Stock Management Good stock management by a firm will lower costs, improve efficiency and ensure production can meet fluctuations in customer demand. Without effective stock management several serious problems can arise for firms: • Increases warehouse space needed • Higher insurance costs needed • Higher security costs needed to prevent theft • Stocks may be damaged, become obsolete or perish (go out of date) • Money spent buying the stocks could have been better spent elsewhere
- 6. Stock-holding costs Opportunity cost: is when working capital tied up in stocks could be put to another use. Storage costs: stocks have to be held in secure warehouse. Risk of wastage and obsolescence: if stocks are not used or sold as rapidly as expected.
- 7. Costs of not holding enough stocks Lost sales Idle production resources Special orders could be expensive Small order quantities
- 8. Optimum order size Economic Order Quantity (EOQ): the optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock-holding costs.
Editor's Notes
- Hi, i am going to talk about the chapter 22, the title of this chapter is 'Inventory Management'. On completion of this chapter, we will be able to:
- In other words, inventories are stocks of the product a firm is manufacturing for sale and components that make up the product. Thus, inventories form a link between the production and sale of the product.
- Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders and owners. Manufacturing businesses will hold stocks in three distinct forms: These are those goods which have been purchased and stored for future productions. These are the goods which have been committed to production but the finished goods have not yet been produced. In other words, work-in-progress inventories refer to ‘semi-manufactured products.’ These are the goods after production process is complete. Say, these are final products of the production process ready for sale.
- This will give the firm a competitive advantage as more efficient production can feed through to lower prices and also customers should always be satisfied as products will be available on demand.
- These include: The capital could be put in the bank to earn interest. They often require special conditions, such as refrigeration. Staff will be needed to guard and transport the stocks. Insurance of stocks is recommended in case they are stolen or damaged by, for example, fire or flood. then there is an increasing danger of godos deterioring or becoming outdated. This will lower the value of such stocks.
- These costs are often called ‘stock-out’ costs: If a firm is unable to supply customers ‘from stock’, then sales could be lost to firms that hold higher stock levels. If stocks of raw materials and components run out, then production will have to stop. If an urgent order is given to a supplier to deliver additional stock due to shortages, then extra costs might be incurred in adinistration of the order and in special delivery charges. Keeping low stock levels may mean only ordering godos and supplies in small quantities.
- In other words is the order quantity that minimizes the total holding costs and ordering costs.
- Buffer stocks: Minimum amount of product the business would want to hold in stock. Assuming the minimum stock level is more than zero, this is known as buffer stock. Maximum stock level: Max level of stock a business can or wants to hold. This may be limited by space or by the financial costs of holding even higher stocks levels. Example chart: 800 units. Lead time: Amount of time between placing the order and receiving the stock. Example chart: just under a week. Re-order stock level: This is the level of stocks that will trigger a new order to be sent to the supplier. Example chart: 400 units.