Inventory management
Inventory management refers to the planning and control of the size of individual
items of materials that is carried on by a business. Take any business firm-trading or
manufacturing. Many and diverse materials are dealt with/used by the firm. Quite a
lot of money is locked up in these materials carried as stock. Several factors account
for this. The nature of the business, the size of the business, the seasonality of
production/consumption of the production, the seasonality of raw material
availability, the terms of purchase/sale, the length of the production cycle, the
dependability of transport facilities, the inventory policy of the business, the costs of
emergency action courses, the lead time and the lead time consumption needs and the
probabilities associated therewith etc, influence the size of inventory. To elaborate a
little, trading and most manufacturing businesses, large businesses, seasonal
businesses (like those in the manufacture of umbrellas, rain-coats, etc), businesses
using raw materials which are available only during certain seasons (like flour mills,
edible oil mills, etc), businesses which buy on cash and sell or credit terms, businesses
with longer production cycle (where the time gap between beginning of production
process and its completion is more), businesses with uncertain transport infrastructure,
businesses pursuing cautious inventory policy (which carry more stock relative to
their level of operation), businesses where emergency purchases cost heavily, and
businesses with large/ fluctuating lead time and lead time requirements carry a lot
more inventory than other businesses.
Well, coming back to determination of the optimum size of inventory, due regard
given to all the above said factors, different questions arise. There are i) How much to
order every time? ii) When to order or what is the re-order level? What should be the
safety stock? What stock-out probabilities and levels are acceptable? Inventory
management has to find optimal/satisfying answers to these and the size of inventory
is thus determined.
The quantum of inventory carried depends on the motives of the organization. There
are principally three motives, namely, transaction motive, precautionary motive, and
speculative motive. Inventory carried in order to facilitate smooth running of day-today operations (production and sales) comes under the first category. Inventory held
to avoid stock-outs due to unforeseen contingencies (like spurt in demand, increase in
rate of usage, delay in arrival of ordered inventory, etc) comes in the second category.
When excessive inventory is held taking advantage of favorable price trends in the
market, such excessive inventory is called inventory held for speculative motives.
Inventory requirements for meeting the transactional and precautionary needs can be
planned with fair degree of accuracy given the rate of usage, lead time, the level of
insurance against stock-out that is considered prudent and other relevant information.
With the help of these information the maximum, minimum and reorder level of stock
and the optimum quantity of stock to be ordered each time can be ascertained, the
stock level and optimum order quantity plans help achieving the objective of
inventory management.
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