Inventory management

Inventory management is the management of inventory and stock. As an element of supply chain management, inventory management includes aspects such as controlling and overseeing ordering inventory, storage of inventory, and controlling the amount of product for sale. Inventory management is all about having the right inventory at the right quantity, in the right place, at the right time, and at the right cost.

How Much Inventories the company should maintain

Following cost are incurred for maintaining an appropriate level of inventories.

  • Cost of inventories
  • Financial Cost
  • Ware housing Cost
  • Miscellaneous Cost

All these cost demand or require that the company should maintain an appropriate level of inventory. This appropriate level should be based on cost benefit analysis. In this analysis the financial manager have to calculate the benefit of maintaining appropriate level of inventory against the cost.

How to control the Inventory

A generic method of inventory control is called ABC method. Under the ABC method the inventory items are classified in A B and C categories. Category A includes those items which are frequently reviewed. Under the category B and C these are the items which are not frequently reviewed. This ABC method is of little use in the presence of Information technology.

The company should decide the appropriate level of inventories before time which is to be order.

This order of inventories depends upon.

  • Forecasted usage of the inventory.
  • Carrying cost of inventories which includes the cost of the ware house etc.
  • Ordering cost, every order has its own cost.

The basic model of inventory management is called EOQ model. This model enables the organization to minimize their cost a maintain an optimal level of the inventory.

financial accounting

December 05, 2019