The Element of Inventory Management

Inventory these are classified as a type of current asset that a business must have for selling or producing purposes, which means:

• Raw materials: Items or components purchased to be used in production.
• Work in progress: Items that are in the production process or waiting to be processed in the next stage but have not yet completed all production steps.
• Maintenance materials: Parts or machine components kept in reserve for replacement when the original parts are damaged or have reached the end of their useful life.
• Finished goods: Production factors that have undergone all production processes and are ready to be sold to customers.
• Labor
• Investment capital
• Tools, machinery, equipment

 

1. The Role of Inventory in Supply Chain

Inventory plays a crucial role in balancing the supply chain by maintaining the lowest possible inventory levels without compromising service levels. Key inputs in the production process include raw materials, parts, and various materials collectively known as inventory, which constitute the largest component of production costs for many products. Additionally, adequate inventory ensures timely customer satisfaction, highlighting its importance to the core activities of a business. Effective inventory management directly impacts profitability, and nowadays, computerized systems are used to manage inventory data with greater accuracy and timeliness.

Purchasing inventory that meets the required specifications, in sufficient quantities, at reasonable prices, delivered on time, from reliable suppliers to the correct locations is the starting point of inventory management. The primary objectives of inventory management are:

1. To have enough inventory to meet customer demand promptly and consistently, thereby generating sales and maintaining market share.
2. To minimize investment in inventory to the lowest possible level, reducing production costs accordingly.

These objectives are inherently conflicting. Minimizing inventory investment often requires reducing inventory levels to just enough to feed the production process without interruptions. However, too low inventory levels can lead to insufficient or delayed customer service. Conversely, maintaining high inventory levels to ensure adequate and timely production or customer delivery increases inventory costs. Therefore, balancing these two objectives in inventory management is challenging.

Given that modern production management prioritizes quality, good customer service, as a component of high-quality output, ensures maximum customer satisfaction. This suggests that higher inventory levels might benefit the business in the long run by retaining customers and market share. However, high inventory costs, leading to higher production costs, make it difficult to compete on price. Thus, achieving low costs, high quality, and good service simultaneously is essential.

 

2. The benefits of inventory management can be outlined as follows:

2.1 Meeting customer demands predicted for each period, both in and out of season. Businesses need to maintain inventory in their warehouses.

2.2 Maintaining a constant and consistent production rate to ensure steady employment, machine operation, etc. This involves storing unsold products during low sales periods to sell during high sales periods when production might not keep up with demand.

2.3 Allowing businesses to obtain volume discounts from large purchases at once, preventing price changes and inflation effects when market prices increase.

2.4 Preventing stock outs by holding safety stock, in case of delayed lead times or sudden increase in orders.

2.5 Ensuring a smooth and continuous production process without interruptions due to stock outs, which could damage the production process, result in idle workers, and halt machines, thereby failing to meet customer orders on time.”

 

3. Demand The starting point for inventory management begins with customer demand. To manage according to customer needs which must be divided into 2 types of demand forecasting principles as follows

3.1 Dependent Demand is the demand for raw materials. Parts and products continuously used in the production process This is very necessary because it may cause severe damage if this type of raw material is lacking. For example, if a factory is missing even one type of chemical, it will cause the factory to stop immediately.

3.2 Independent Demand is the demand for raw materials, parts, and products that are not continuously used in the production process, most of which are sold directly to customers. If not, you may lose your opportunity and be fined.

 

4. Inventory and Quality Management Quality management involves two groups of people: customers and product owners. with both sides agreeing The customer will consider the product characteristics. Affordable price and delivery time on the other hand. The product owner must source input resources such as raw materials, labor, machinery, and money in order to produce the product as the customer desires. At a good cost, no loss and delivered to customers on time. without paying a fine Most problems in the supply chain are caused by external factors. Whether it is the economy, society, politics, competitors, customers, and sellers of production factors. Thus, inventory storage was created to support the quality system.

 

5. Inventory Cost: There are 4 types of inventory costs:

5.1 Ordering Cost is the cost that must be paid to obtain the required inventory. which will vary according to the number of orders But it does not vary with the amount of inventory. Because you order however many items at a time. Ordering costs remain constant. But if you order more frequently, the cost of ordering will be higher. Ordering costs include: Purchase order document cost Wages for purchasing staff, telephone costs, shipping costs, expenses for inspecting goods and documents. Fees for clearing goods from customs payment expenses, etc.

5.2 Carrying Cost is the cost of having inventory and maintaining it in a usable form. This will vary according to the amount of inventory held and the length of time the inventory is kept. Storage costs include capital costs sunk into inventory, which is interest expense. If the capital is from borrowing or is an opportunity cost if the capital is equity Warehouse cost Electricity costs for maintaining temperature The cost of goods that are damaged or expired and deteriorated from being stored for too long. Taxes and insurance Wages for guards and warehouse employees, etc.

5.3 Expenses due to product shortages (Shortage Cost or Stock out Cost) are expenses incurred from not having enough inventory for production or sales. Make customers cancel orders Lack of income that should be earned The business is in disrepute. The production process is interrupted, resulting in unemployment of machines and workers, etc. This cost is inversely proportional to the quantity of goods. If holding less inventory there is a greater chance of shortages. And there are expenses due to this shortage of goods, depending on the quantity of the shortage as well as the period of time that the shortage occurs. Expenses due to product shortages include: Order of special air lots for emergency use. Fines due to delays in delivering products to customers, lost sales opportunities Expenses incurred from loss of goodwill, etc.

5.4 Expenses for setting up new machines (Setup Cost) are expenses incurred from machines having to change one operation to another. which will cause temporary unemployment Inventory is left waiting for the production process to reset. The cost of setting up this new machine will be a fixed cost per time. This will depend on the size of the production lot. If produced in large batches, the machine must be reset once in a while. The cost of setting up a new machine will be low but the accumulated inventory will be high. If the production is in small batches and the machine is frequently reset, the cost of setting up a new machine will be high. But inventory levels will be lower. and can deliver work to customers faster

Among these various inventory costs, storage costs are higher if inventory levels are high. and will be lower if inventory levels are low. But for the cost of ordering Expenses due to product shortages And the opposite is true for new machinery costs: higher if inventory levels are low and lower if inventory levels are high. Therefore, inventory costs are lowest at the level where all expenses add up to the lowest.

 

Inventory Control System

One of the heavy tasks of inventory management is accounting and counting inventory because each business has many types of inventory. There may be variations in each type, such as photograph size, fabric color, which makes inventory counting requiring a large number of employees. To get the correct amount within the specified time period. In order to know what kind of inventory is beginning to be out of stock. Must buy more and the appropriate purchase amount There are 3 methods of inventory control system:

 

1. Continuous Inventory System (Continuous Inventory System Perpetual System) is an inventory system that has a method of accounting every time goods are received and distributed. Keep the balance sheet always showing the true balance of inventory. This is very necessary to control the inventory of important items that cannot be left out of hand. But this system is a method that has relatively high paperwork costs. And it requires a large number of employees to take care of all receipts and payments. At present, the application of computers to office and accounting work can help solve this problem. By using a code (Bar Code) or the international code for products (EAN13) affixed to the product and then using a machine to read the code (Laser Scan). This method, in addition to being accurate It’s accurate and accurate. It can also be used as a database for inventory management in the product supply chain.

 

2. Periodic Inventory System is an inventory system that has a method of accounting only for predetermined periods of time. For example, counting and accounting at the end of the week or at the end of the month. When the item is withdrawn, an order will be placed to replenish it to the level set. This system is suitable for products that have been ordered and The withdrawal will be made at a fixed time. For example, SE-ED bookstores will have a survey of book balances each day. and summarize the balance at the end of the month To see the amount of books outstanding in stores and warehouses Total amount of books that need to be prepared for delivery to the store as you wish to order.

End-of-period inventory systems generally have higher remaining inventory levels than continuous inventory systems. Because there will be some provision for unexpected absences in advance and this system will cause new order quantities to be adjusted. When needs change as well Choosing a continuous inventory system and an end-of-period inventory system have the advantages of each as follows.

 

Advantages of a continuous inventory system

1. There is less inventory in case of shortages. The product will be reserved for only the waiting period. Each system at the end of the period must reserve the product for the entire waiting period. and the time between each order.

2. Use a fixed order quantity, which makes it easy to get quantity discounts.

3. Each inventory can be checked independently. and can be strictly specific to expensive items

Advantages of period-end inventory system

1. It takes less time and costs less to control than a continuous system.

2. Suitable for ordering many types of products from the same seller. Because it will reduce costs related to documents Reduce purchase costs and more convenient for counting

3. Lower inventory storage costs

 

3. System of classifying inventory into ABC categories (ABC) This system is a method of classifying inventory into categories based on the quantity and value of each inventory item. To reduce the burden of taking care of counting and control the vast inventory which if every item is controlled equally strictly It will waste more time and expense than necessary. Because among all the inventory of each business, it usually meets the following criteria.

A is an inventory that has a small volume (5-15% of the total inventory) but a relatively high total value (70-80% of the total value).

B is inventory with a medium volume (30% of the total inventory) and a medium total value (15% of the total value).

C is inventory that has a high volume (50-60% of the total inventory) but a relatively low total value (5-10% of the total value).

 

4. Inventory count is a count of products to ensure that the products actually exist. And in the same account there are several methods as follows.

1. How to close the counting account That is, choose a certain day to close the account and prohibit additional disbursements. or move every inventory item By having to stop buying and selling normally Then count all the items. This method will accurately show the value of the inventory on the date of the count. But it causes a loss of income on the day the items are counted.

2. Method of circulating the count. Will close the movement of live inventory. To count, when any part has been counted, it can be sold or disbursed as usual. and close other departments to continue counting until all departments are complete This method will not result in loss of income from sales, but there is a high chance of inaccuracy.

5. Two Bin System (Two Bin System) is one of the fixed order quantity systems. The 2 Bin System means parcels are divided into 2 trays and stored in the warehouse. The large tray will contain parcels equal to the quantity ordered each time. The other tray is smaller and holds parcels. Sufficient for use during the lead time waiting for parcel delivery, with a certain level of safety stock reserved. to accommodate uncertainty When you want to use the said package, take it from the large tray. Until the parcels in the large tray run out of space, a parcel procurement sheet will be placed. A request for replacement of used supplies will be sent out. At that time, if there is a need for such supplies, they will be withdrawn from a small tray. which there is a sufficient number A new set of inventory parcels will be used to replace them. The procurement request will then be placed on a large tray. And we will need to fill both trays with supplies. Start filling from tray 2 until it’s full, and then the rest will come. Fill quickly at Tray 1

 

Source: businessplus