Inventory

Inventory refers to the goods an organization keeps on hand, usually for selling to customers or using them to manufacture other goods. Businesses and other entities have many possible reasons for maintaining an inventory. One possibility is that the items in the inventory may be expected to increase in value; thus, acquiring them before they are needed and storing them until the time for their use has arrived can be a method of realizing monetary savings. Another motivation for maintaining inventory is to avoid delays in the shipping of materials. This can be especially important for manufacturers with large-scale operations involving factories that are in production around the clock. It can be very costly to power down such large facilities, and every hour they spend idle is an hour of lost productivity and sales, so keeping an adequate supply of raw materials on hand is a common practice in the manufacturing sector.

Background

The theory and practice of coordinating inventory in ways that meet an organization’s needs, as well as its goals for efficiency, productivity, and effectiveness, are collectively referred to as inventory management. The type of inventory management system (or inventory model) used by an organization varies along with the size of that organization and the type of materials it sells or manufactures. One variable that must be taken into consideration by inventory managers is whether the goods used by the organization are subject to seasonal demand. This means that the goods are in greater demand during certain times of the year. For example, a clothing supplier located in Alaska might wonder how many insulated coats to keep in inventory at various times throughout the year. One approach would be to keep the same number in inventory during each month of the year, but the result of this approach would likely be that there would be too many unused coats stored during the spring and summer months (when demand would be low), and not enough available in the fall and winter months (when demand would be higher). The best approach would be to recognize that winter coats are a seasonal product.

Many inventory managers seek to benefit from economies of scale when determining optimal levels of materials to keep on hand. Economies of scale are savings that can be realized by purchasing materials in larger quantities than are immediately required to maintain operations. Some suppliers offer discounts when larger quantities are ordered, and making one large purchase of materials consolidates shipping costs into one fee, avoiding multiple shipping costs. However, though this may be a cost-saving measure, a large inventory may entail substantial storage fees. Another consideration that may make an economy of scale somewhat less economical is the possibility of spoilage. Some inventory materials have a brief shelf life, after which they become substandard or unusable. This issue is especially important for restaurant inventory managers, who must balance their customers’ demand for fresh food against the reality that fresh food spoils quickly if unused.

Overview

Some organizations think of inventory in terms of inventory proportionality. This may occur in situations where an organization uses several different types of materials to manufacture a product. One example of such an organization is a toy company that specializes in making model airplanes out of rubber bands, string, and popsicle sticks. The toy company would try to manage its inventory in such a way as to ensure that it never runs out of any of the three components, because even if only one component ran out, production would have to stop. A complicating factor might be that each airplane requires one piece of string, two popsicle sticks, and three rubber bands. This would mean that for every one piece of string kept in inventory, the toy company would need two popsicle sticks and three rubber bands. Therefore, the inventory of each component would need to be proportional to the way the components are combined. In large organizations where inventory components are used for multiple purposes, this can lead to some very complicated calculations. This is one reason why most companies use sophisticated computer programs to track and manage their inventories. Situations which do not call for proportional inventory management are those in which an organization maintains an inventory of items which are "complete," that is, they do not require assembly or interaction with other materials for them to be used or sold. For instance, the toy company might keep an inventory of soccer balls in addition to the materials for its toy airplanes. The soccer ball inventory management system would not need to be proportional because each of its inventory units is complete and does not need to be combined with any other items for it to be used.

An interesting use of inventory that is distinct from traditional applications is known as inventory credit. When an organization makes use of inventory credit, it essentially uses the inventory it has on hand for other reasons (items ready to be sold or used in manufacturing) as collateral to obtain financing for organizational operations or special projects. Thus, an ice cream company that regularly keeps several hundred thousand dollars worth of ingredients in its warehouse, awaiting use in the production of ice cream, could also use those ingredients to convince its bank to extend the ice cream company’s line of credit by the value of the inventory. In this way, the inventory acts as security for the loan because the bank can rest assured that even if the ice cream company is not able to pay back the loan, the bank will still have the option of forcing the company to sell the ingredients and give the proceeds of the sale to the bank as payment on the loan.

Many inventory management methods, including just-in-time management, ABC inventory control, materials requirement planning, first-in, first-out inventory control, and minimum-maximum inventory control, can help managers make inventory decisions. Perpetual inventory systems, radio frequency identification (RFID), and barcode inventory systems help managers organize large quantities or items in a database that can be accessed remotely and track shortage or surplus issues. These modern inventory tools can help large and growing businesses properly manage inventory to avoid inventory losses or product shortages.

Bibliography

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