Due to globalisation, businesses are facing fierce competition to grow and survive in our modern society. As such in this world e-commerce is becoming increasingly a must for all businesses to sustain their trading activities. Operations managers may ask themselves how to deal with customers’ demand?” or when to replenish stock to prevent shortage the unique answer is through a proper inventory management. Let’s deep dive to have a clearer understanding of what inventory management stands for. Based on the Open University manual, inventory is depicted as the stored accumulation of the transformed resources in an operation.
(Open University of Mauritius, January 2014) now we can deduce that inventory management is the trading activities associated with the control, supervision, manipulation and conversion of goods, raw materials and other components until their completion as finished products to meet customer’s demand. Below is an illustration of an inventory preparation process used by an Austrian environmental agency. (Umweltbundesamt 2014)Application of inventory managementMany industries such as retail, pharmaceutical, hospitality, cosmetic and much more use inventory management to track their stock level and to forecast a replenishment time.
The representation hereunder is a good example of inventory management in a retail industry from the production stage until the final phase where the customer leaves the supermarket with her shopping cart filled with groceries. (National Guard ,2011)Importance of Inventory Management With reference to the following quotation on Zappos which is a leading online shoe retailer in the United States of America:The process starts when the shoes are brought to the DC and each pair of shoe is given its own SKU number. This means that each model of shoes can have multiple SKUs due to different sizes, style and color. By having each pair of shoes its own SKU allows the company to have more in depth data, giving the company a database of each shoe’s life cycle. Once each shoe is given a label and scanned into the computer system, they are then sent to a pickable location. The crucial part of this process is speed, it is estimated that the time between receiving the goods to having it on the shelf is less than several hours. This is crucial since the company only keeps a limited supply of any style of shoes in its DC and only shoes that are in the warehouse can be shown on its website. The sophistication of this system allows the company to keep its inventory carrying cost low. (Awesome Inc, 2014)Handle local and foreign customers, we agree that for a company like Zappos dealing in the online retail market is complex, but through a proper inventory management, an organisation can boost its efficiency by reducing costs, waste and increasing its sales. Therefore, impacting positively the operations and profitability of any businesses. From an operation and logistic perspective, maintaining an appropriate inventory management is significant as it helps in avoiding supply shortages and delivery delays. Permitting the various processing phases to run at varied paces and with different timelines to smooth the running of operations. Moreover, it helps to response to customer demand immediately. It prevents from having working capital issues such as too much money tied up in unsold stocks. Inventory management is a concept that all operations and logistics managers put emphasis on to prevent unnecessary disruption in the production process due to insufficient availability of materials.Type of inventoryIdentifying the different forms of inventory helps to properly control and plan the stock required to produce a specific product. Here are the types of inventories: 1. Raw materials inventoryThey are raw resources used to assemble a finished product. For instance, plastic and water are the raw materials used to produce a bottle of water.2. Work-in-process inventoryComprises of any uncompleted goods not yet released for consumption. The storage of arms and legs to be used later in the assembling of chairs. 3. Semi-finished productsMostly represented as inputs in the production of other goods including final goods. For a car manufacturer, awaiting for the production department to include an engine in a car due to a dearth in the stock is a work-in-process one.4. Maintenance and operating materialsThe spare parts of machines for safety or cleaning purposes are considered under this sort of stock. 5. Finished products inventoryAll the completed goods that a company stores to sell to customers when they are requested. A guitar is a finished product for a musical instrument shop.Inventory costsRegardless of size, all companies somehow have costs to manage to eliminate the risk of business failure. Let’s consider closely the different kind of inventory costs to evaluate to ensure of company success. Holding costs- All expenditures like renting, heating, lighting and insurance costs related to the holding of goods. Ordering costs- Expenses associated with placing an order and the delivery of stocks. The paperwork and clerical duties connected with organising the purchase order, important information and delivery of inventory. Shortage Costs- It refers to the costs caused from an extra demand level when supply is not enough. If not monitored it may lead to a loss of customers or money.The risks associated with holding too much stock Liquidity problem- Money is tied up in stocks which may cause cash flow issues. The need to borrow money may arise implying payment of interests and finance charges. Obsolescence- With technology changes a particular product can easily become outdated as daily, monthly and yearly new and more sophisticated ones are launched on the market. Block storage space- Holding excessive inventory level blocks unnecessary space in the warehouse which could have been used for renting.The risks associated with holding too little stock Won’t be able to benefit of discounts from bulk buying Managing inventory may be time- consuming Consumer loyalty will decrease affected brand reputation of the businessKeeping up a proper inventory management is of utmost importance to respond to customers demand on time and to cope with market instability. Inventory management form the spine of the business operations and logistics functioning. A good understanding of the importance and the types of stocks, the costs and the risks linked to inventory control is the key to business prosperity.