Knowledge Base

Introduction to Inventory

An inventory is defined as an itemized list of tangible goods or attributes an organization has at any given point of time. It is a current asset and includes tangible personal property that is held for sale by a business; is in the process of production for such sale; or is to be consumed in the production. It is defined as an idle resource of any kind that has potential economic value and considered as locked up capital. Inventory can therefore also be termed as items of store or materials kept in stock to meet future demands of production, repairs, and other such requirements of an enterprise.

Inventory is deemed as a current asset because it represents a business’ work-in-progress or property that is likely to be converted to revenue. As an asset, Inventory is difficult to manage and control as raw materials and finished goods arrive and leave the production premises incessantly. Moreover, inventory may be multi location, and even within one premise, it may be scattered throughout the warehouse(s) and production areas. To add to complications, some parts may be damages, and yet others may be obsolete.

It is therefore clear that while dealing with inventory, there are three issues that are of concern:

  • What the company actually has in hand – the physical quantity of goods in stock
  • The cost of these goods and
  • Proper billing of shipped goods

While too much inventory is indeed a bad thing, there are reasons why prudent people stay stocked up:

Market demand: most retailers are expected to carry goods that customers want for immediate consumption. All the items you see in a retail store – be it groceries or consumer durables – are stored because customers require it for immediate consumption. Dairy produce, wheat, rice, bread, meat, etc. are typical examples of items that customers need instantly. If for example, a customer walks in to your store and asks for a litre of skimmed milk, you cannot ask him to come tomorrow. The customer will simply walk away and buy it from somewhere else. On the other hand, an extremely high end car dealer will not store all the variants of a car or SUV that costs millions of rupees. If the car dealer feels the customer is really serious, he will arrange for a demo of that model from the company. In this case, the customer too understands that his / her requirement will not be fulfilled instantaneously, and is prepared to wait.

Safety stock:  This is extra inventory above current or short term needs that is kept on hand intentionally to cover the possibility that demand will be higher than usual. Take the recent case of sanitizers. Due to Covid 19, many medical stores and departmental stores stocked up on them over and above the regular demand for sanitizers.

Transportation stock: refers to inventory that is in transit. It is common for finished goods that are moved through several layers and channels of distribution.

Distribution inventory: are goods that are kept in warehouses close to clusters of customers. The intention is to reduce freight costs in delivering the goods to the final customers.

Anticipation stock: represents stock purposely accumulated based on some planned activity, such as a marketing promotion or an upcoming seasonal event.

Hedge / buffer stock: stock kept in expectation of rising prices or supply uncertainty in the marketplace.  

Role of Inventory
One of the main goals of supply chain management is to ensure that operations within and cross firms in a supply chain are performing smoothly. Yet another important role that inventory plays in the supply chain is to increase the quantity of demand that can be satisfied by having product ready and available when the customer wants it. Another significant role of inventory is to optimise cost by exploiting economies of scale that may exist during both production and distribution. Inventory is spread across the entire supply chain from raw materials to work in process to finished goods that supplier, manufactures, distributors, and retailers hold. Inventory is a most important source of cost in any supply chain and it has an enormous impact on responsiveness. If we think of the responsiveness range the location and quantity of inventory can move the supply chain, from one end of the spectrum to the other. For example, an apparel supply chain with high inventory levels at the retail store has a high level of responsiveness because a consumer can walk into a store and walk out with the shirt he is looking for. In contrast, an apparel supply chain with little inventory would be very unresponsive. A customer wanting a shirt would have to order it and wait several weeks or even months for it to be manufactured, depending on how little inventory existed in the supply chain.

Inventory Management
Due to globalisation, businesses need to get mean and lean. Inventory, with its own set of complexities, is one of the most challenging and critical areas of business where proper management is essential. Too much raw material on your hands; and you increase your manufacturing cost; too less material and manufacturing suffers. In its simplest form, inventory management is the process of dealing with the issue of how much to keep on hand, how much to order and how frequently to order it. The concept of inventory management days way back over 100 years. Mathematicians, academicians and economists have spent a lot of time in deriving inventory models that are useful in an inventory decision making process. Inventory management refers to the process of managing the stocks of finished products, semi-finished products and raw material by a firm. Properly implemented inventory management can bring down the costs and increase the income of a business.

Inventory management can be defined as the sum total of those related activities essential for the procurement, storage, sale, disposal or use of material. Utilities are created in goods when the right product is available at the right place, at the right time, at the right quantity and is available to the right customer. Inventory management deals will all these issues, placing importance on the quantities of goods needed.

Inventory managers have to keep stock when required and utilise available storage space resourcefully, so that the stocks do not exceed the available storage space. They are responsible in maintaining accountability of inventory assets. They have to meet the set budgets and decide upon what to order, when to order, how to order so that stock is available on time and at an optimum cost. Inventory managers have acknowledged that some of these objectives are contradictory; but their job is to achieve an economic balance between these conflicting variables. But to achieve this economic balance, a clear understanding of many interconnected variables is required i.e. functions, types of costs, problems etc.