Concept of Inventory Management

Concept of inventory management is very simple. To control the loss of inventory is inventory management. This loss may be happened due to negligence. Proper care will be helpful for managing inventory. Both more and less buying of inventory is risky. If we buy less inventory, it will delay the production and production cost will increase. If we buy more quantity than our need, it will increase the cost of holding it. So proper management inventory concept will teach us everything to reduce these cost by estimating the proper quantity of inventory. We can take the simple example of your house. For example, you want to make house for your living, for this, you want to buy the inventory in the form of cement and sand. So, for reducing the cost of cement and sand, you need manage this inventory. First of all, bring the expert and estimate the correct quantity of cement and sand. Only after this, you should give the order of purchase. Suppose, the cost of one bag of cement is Rs. 300. If your estimation is wrong, you can buy 100 cement bag extra. What will you do? Its cost is Rs. 30000. You need some space for these bags safety. You have to save these cement bags from water. So, inventory management concept is not only estimate correct quantity but we have to take all actions for safety of the material. Inflation is also part this. We have to think whether prices of our inventory will increase or decrease. If prices will increase and it will very high than our holding and safety cost, it will be best if we will buy extra.

Following thoughts should include in inventory management.

1. Inventory is the part of current asset. We can not take its long term benefits. So, its purchasing should be on the basis of sales or production. As per management study guide, Dell buys the raw material when it gets the order.

2. To know the inventory turnover ratio is very necessary for getting the idea of inventory conversion period.

3. Use the economic order quantity and inventory level techniques.

4. Warehouse management is also part of inventory management. There are lots of accounting system which you can tell you the closing stock and different inter-warehouses and outside transfer from one warehouse. It will be helpful for physical checking.

Related : Inventory Management Degree