Inventory Management Overview

Inventory management, in the context of an industry, typically refers to the act of managing the material resources of an organization that can help it earn revenue in the future.

Inventory management involves having the right inventory at the right quantity, in the right place, at the right time, and at the right cost.

For example, a retail store that sells multiple goods (packed food items, groceries, clothes, electronics goods etc.) does not usually store all the goods in the store. In other words, a part of the entire stock of goods is kept at a warehouse. The sum of the goods in the store and at the warehouse at any particular point in time is known as the inventory.

The fundamental reason for holding inventory: it is either physically impossible or economically unsound to have goods arrive in a system precisely when demand for them occurs.

Without inventories, customers would have to wait (or they will take their business somewhere else).

• The price of some raw materials may exhibit seasonal fluctuation, so the organization might want to take advantage of low-price opportunities.
• There might be quantity discounts when buying large volumes.
• The organization wants inventory of goods to display to customers.
• Meet variations in customer demand.
• Meet unexpected demand.
• Smooth seasonal or cyclical demand.
• Smooth production.

1) Raw Materials (RM): unprocessed, basic material that is used to produce goods.

2) Component Parts (CP): sub-components that can be assembled into finished goods.

3) Work-in-Process (WIP): unfinished material, being processed to become finished goods.

4) Finished Goods (FG): ready for sale material.

Pipeline Stock
• Material in transit between stocking locations.

Speculative Stock
• Hedge against price variations.
• Buy more when the price is low, so you can buy less when price is high.