Inventory management involves balancing the costs of holding inventory with the benefits. It refers to controlling and tracking materials, work in process, and finished goods. The goals are to maintain optimal inventory levels to meet demand while minimizing costs. Effective inventory management requires specifying order quantities, reorder points, and controlling inventory across all stages and locations.

1. By
Sherief Ashraf
Ahmed Reda

2. "Inventory" to many small business owners is one of
the more visible and tangible aspects of doing
business. Raw materials, goods in process and
finished goods all represent various forms of
inventory. Each type represents money tied up
until the inventory leaves the company as
purchased products.
Likewise, merchandise stocks in a retail store
contribute to profits only when their sale puts
money into the cash register.

3. In a literal sense, inventory refers to stocks of
anything necessary to do business. These stocks
represent a large portion of the business
investment and must be well managed in order to
maximize profits. In fact, many small businesses
cannot absorb the types of losses arising from poor
inventory management. Unless inventories are
controlled, they are unreliable, inefficient and
costly.

4. Inventory management is primarily about specifying the
size and placement of stocked goods. Inventory
management is required at different locations within a
facility or within multiple locations of a supply
network to protect the regular and planned course of
production against the random disturbance of running
out of materials or goods.
Inventory management involves a retailer seeking to
acquire and maintain a proper merchandise
assortment while ordering, shipping, handling, and
related costs are kept in check.

5. The scope of inventory management also concerns the
fine lines between replenishment lead time, carrying
costs of inventory, asset management, inventory
forecasting, inventory valuation, inventory
visibility, future inventory price forecasting, physical
inventory, available physical space for
inventory, quality
management, replenishment, returns and defective
goods and demand forecasting. Balancing these
competing requirements leads to optimal inventory
levels, which is an on-going process as the business
needs shift and react to the wider environment.

6.  Buffer/safety stock
 Cycle stock (Used in batch processes, it is the available
inventory, excluding buffer stock)
 De-coupling (Buffer stock that is held by both the
supplier and the user)
 Anticipation stock (Building up extra stock for periods
of increased demand - e.g. ice cream for summer)
 Pipeline stock (Goods still in transit or in the process
of distribution - have left the factory but not arrived at
the customer yet)

7. The reasons for keeping stock:
There are three basic reasons for keeping an inventory:
• Time - The time lags present in the supply chain, from supplier
to user at every stage, requires that you maintain certain
amounts of inventory to use in this "lead time."
• Uncertainty - Inventories are maintained as buffers to meet
uncertainties in demand, supply and movements of goods.
• Economies of scale - Ideal condition of "one unit at a time at a
place where a user needs it, when he needs it" principle tends to
incur lots of costs in terms of logistics. So bulk
buying, movement and storing brings in economies of scale, thus
inventory.
All these stock reasons can apply to any owner or product stage.

8. Buffer stock is held in individual workstations
against the possibility that the upstream
workstation may be a little delayed in long
setup or change over time. This stock is then
used while that changeover is happening. This
stock can be eliminated by tools like
SMED(Single –Minute Exchange of Die).
These classifications apply along the whole
Supply chain, not just within a facility or plant.

9. Where these stocks contain the same or similar items, it
is often the work practice to hold all these stocks
mixed together before or after the sub-process to
which they relate. This 'reduces' costs. Because they
are mixed up together there is no visual reminder to
operators of the adjacent sub-processes or line
management of the stock, which is due to a particular
cause and should be a particular individual's
responsibility with inevitable consequences. Some
plants have centralized stock holding across sub-
processes, which makes the situation even more acute.

10.  Stock Keeping Unit (SKU) is a unique combination of all
the components that are assembled into the purchasable
item. Therefore, any change in the packaging or product is
a new SKU. This level of detailed specification assists in
managing inventory.
 Stock out means running out of the inventory of an SKU.
 New old stock (sometimes abbreviated NOS) is a term
used in business to refer to merchandise being offered for
sale that was manufactured long ago but that has never
been used. Such merchandise may not be produced
anymore, and the new old stock may represent the only
market source of a particular item at the present time.

11.  Raw materials - materials and components
scheduled for use in making a product.
 Work in process, WIP - materials and
components that have begun their transformation
to finished goods.
 Finished goods - goods ready for sale to
customers.
 Goods for resale - returned goods that are
salable.

12.  Purpose:-
Inventory proportionality is the goal of demand-driven
inventory management. The primary optimal outcome
is to have the same number of days' (or hours', etc.)
worth of inventory on hand across all products so that
the time of run out of all products would be
simultaneous. In such a case, there is no "excess
inventory," that is, inventory that would be left over of
another product when the first product runs out.
Excess inventory is sub-optimal because the money
spent to obtain it could have been utilized better
elsewhere, i.e. to the product that just ran out.

13. The secondary goal of inventory proportionality is inventory
minimization. By integrating accurate demand forecasting with
inventory management, replenishment inventories can be
scheduled to arrive just in time to replenish the product destined
to run out first, while at the same time balancing out the
inventory supply of all products to make their inventories more
proportional, and thereby closer to achieving the primary goal.
Accurate demand forecasting also allows the desired inventory
proportions to be dynamic by determining expected sales out
into the future; this allows for inventory to be in proportion to
expected short-term sales or consumption rather than to past
averages, a much more accurate and optimal outcome.
Integrating demand forecasting into inventory management in this
way also allows for the prediction of the "can fit" point when
inventory storage is limited on a per-product basis.

14.  Applications:-
The technique of inventory proportionality is most
appropriate for inventories that remain unseen by the
consumer. As opposed to "keep full" systems where a
retail consumer would like to see full shelves of the
product they are buying so as not to think they are
buying something old, unwanted or stale; and
differentiated from the "trigger point" systems where
product is reordered when it hits a certain level;
inventory proportionality is used effectively by just-in-
time manufacturing processes and retail applications
where the product is hidden from view.

15. One early example of inventory proportionality used
in a retail application in the United States is for
motor fuel. Motor fuel (e.g. gasoline) is generally
stored in underground storage tanks. The
motorists do not know whether they are buying
gasoline off the top or bottom of the tank, nor
need they care. Additionally, these storage tanks
have a maximum capacity and cannot be
overfilled. Finally, the product is expensive.

16. Inventory proportionality is used to balance the
inventories of the different grades of motor fuel, each
stored in dedicated tanks, in proportion to the sales of
each grade. Excess inventory is not seen or valued by
the consumer, so it is simply cash sunk (literally) into
the ground. Inventory proportionality minimizes the
amount of excess inventory carried in underground
storage tanks. This application for motor fuel was first
developed and implemented by Petrolsoft Corporation
in 1990 for Chevron Products Company. Most major oil
companies use such systems today.

17.  Roots:-
The use of inventory proportionality in the
United States is thought to have been
inspired by Japanese just-in-time parts
inventory management made famous by
Toyota Motors in the 1980s.

18. It seems that around 1880. there was a change in manufacturing practice from
companies with relatively homogeneous lines of products to vertically
integrated companies with unprecedented diversity in processes and products.
Those companies (especially in metalworking) attempted to achieve success
through economies of scope - the gains of jointly producing two or more
products in one facility. The managers now needed information on the effect of
product-mix decisions on overall profits and therefore needed accurate
product-cost information. A variety of attempts to achieve this were
unsuccessful due to the huge overhead of the information processing of the
time. However, the burgeoning need for financial reporting after 1900 created
unavoidable pressure for financial accounting of stock and the management
need to cost manage products became overshadowed. In particular, it was the
need for audited accounts that sealed the fate of managerial cost accounting.
The dominance of financial reporting accounting over management
accounting remains to this day with few exceptions, and the financial reporting
definitions of 'cost' have distorted effective management 'cost' accounting since
that time. This is particularly true of inventory.

19. Hence, high-level financial inventory has these two basic
formulas, which relate to the accounting period:
 Cost of Beginning Inventory at the start of the period +
inventory purchases within the period + cost of
production within the period = cost of goods
available
 Cost of goods available − cost of ending inventory at
the end of the period = cost of goods sold

20. Successful inventory management involves balancing the costs of
inventory with the benefits of inventory. Many small business owners
fail to appreciate fully the true costs of carrying inventory, which
include not only direct costs of storage, insurance and taxes, but also
the cost of money tied up in inventory. This fine line between keeping
too much inventory and not enough is not the manager's only concern.
Others include:
 Maintaining a wide assortment of stock -- but not spreading the
rapidly moving ones too thin;
 Increasing inventory turnover -- but not sacrificing the service level;
 Keeping stock low -- but not sacrificing service or performance.
 Obtaining lower prices by making volume purchases -- but not ending
up with slow-moving inventory; and
 Having an adequate inventory on hand -- but not getting caught with
obsolete items.

21. The degree of success in addressing these concerns is
easier to gauge for some than for others. For
example, computing the inventory turnover ratio is a
simple measure of managerial performance. This value
gives a rough guideline by which managers can set
goals and evaluate performance, but it must be
realized that the turnover rate varies with the function
of inventory, the type of business and how the ratio is
calculated (whether on sales or cost of goods sold).
Average inventory turnover ratios for individual
industries can be obtained from trade associations.

22. To maintain an in-stock position of wanted items and to dispose of
unwanted items, it is necessary to establish adequate controls over
inventory on order and inventory in stock. There are several proven
methods for inventory control. They are listed below, from simplest to
most complex.
 ! Visual control enables the manager to examine the inventory visually
to determine if additional inventory is required. In very small businesses
where this method is used, records may not be needed at all or only for
slow moving or expensive items.
 ! Tickler control enables the manager to physically count a small
portion of the inventory each day so that each segment of the inventory
is counted every so many days on a regular basis.
 ! Click sheet control enables the manager to record the item as it is used
on a sheet of paper. Such information is then used for reorder purposes.
 ! Stub control (used by retailers) enables the manager to retain a
portion of the price ticket when the item is sold. The manager can then
use the stub to record the item that was sold.

23. As a business grows, it may find a need for a more sophisticated
and technical form of inventory control. Today, the use of
computer systems to control inventory is far more feasible for
small business than ever before, both through the widespread
existence of computer service organizations and the decreasing
cost of small-sized computers. Often the justification for such a
computer-based system is enhanced by the fact that company
accounting and billing procedures can also be handled on the
computer.
 ! Point-of-sale terminals relay information on each item used or
sold. The manager receives information printouts at regular
intervals for review and action.
 ! Off-line point-of-sale terminals relay information directly to the
supplier's computer who uses the information to ship additional
items automatically to the buyer/inventory manager.

24. The final method for inventory control is
done by an outside agency. A manufacturer's
representative visits the large retailer on a
scheduled basis, takes the stock count and
writes the reorder. Unwanted merchandise
is removed from stock and returned to the
manufacturer through a
predetermined, authorized procedure.

25. A principal goal for many of the methods
described above is to determine the
minimum possible annual cost of ordering
and stocking each item. Two major control
values are used:
 1-Order Quantity: The size and the
frequency of orders.
 2-Reorder Point: The minimum stock level
where additional quantities are ordered.

26. In recent years, two approaches have had a
major impact on inventory management:
Material Requirements Planning (MRP) and
Just-In-Time (JIT). Their application is
primarily within manufacturing but
suppliers might find new requirements
placed on them and sometimes buyers of
manufactured items will experience a
difference in delivery.

27. Material requirements planning is basically an information system
in which sales are converted directly into loads on the facility by
sub-unit and time period. Materials are scheduled more
closely, thereby reducing inventories, and delivery times become
shorter and more predictable. Its primary use is with products
composed of many components. MRP systems are practical for
smaller firms. The computer system is only one part of the total
project which is usually long-term, taking one to three years to
develop.
Just-in-time inventory management is an approach which works to
eliminate inventories rather than optimize them. The inventory of
raw materials and work-in-process falls to that needed in a single
day. This is accomplished by reducing set-up times and lead times
so that small lots may be ordered. Suppliers may have to make
several deliveries a day or move close to the user plants to support
this plan.

28. At time of delivery
 Verify count -- Make sure you are receiving as
many cartons as are listed on the delivery receipt.
 Carefully examine each carton for visible damage -
- If damage is visible, note it on the delivery receipt
and have the driver sign your copy.
 After delivery, immediately open all cartons and
inspect for merchandise damage.

29. When damage is discovered
 Retain damaged items -- All damaged
materials must be held at the point received.
 Call carrier to report damage and request
inspection.
 Confirm call in writing--This is not
mandatory but it is one way to protect
yourself.

30. Carrier inspection of damaged items
 Have all damaged items in the receiving area -- Make
certain the damaged items have not moved from the
receiving area prior to inspection by carrier.
 After carrier/inspector prepares damage report, carefully
read before signing.
After inspection
 Keep damaged materials -- Damaged materials should not
be used or disposed of without permission by the carrier.
 Do not return damaged items without written
authorization from shipper/supplier.