Inventory management

01/July/2025 01:02 Share:

Inventory Management

Definition

Inventory Management refers to the process of ordering, storing, tracking, and controlling a company’s inventory—whether raw materials, work-in-progress, or finished goods. Its aim is to ensure that the right quantity of inventory is available at the right time and at minimum cost.

Objectives of Inventory Management

To maintain sufficient inventory for smooth production and sales.
To minimize carrying and ordering costs.
To reduce stockouts, shortages, and overstocking.
To ensure proper storage and reduce losses due to spoilage, theft, or damage.
To maintain an optimal investment in inventory to improve liquidity.

Significance of Inventory Management

Helps in uninterrupted production and customer satisfaction.
Reduces excess investment and improves cash flow.
Optimizes warehouse space and costs.
Supports demand forecasting and sales planning.
Ensures better pricing and vendor negotiation by bulk ordering.

Factors Determining Inventory Levels

Factor	Description
Demand Forecast	Higher anticipated demand leads to higher inventory levels.
Lead Time	Longer supplier lead times require holding more stock.
Storage Cost	High warehousing costs may limit inventory levels.
Ordering Cost	High ordering costs justify bulk purchasing and more inventory.
Nature of Goods	Perishable or high-value goods need strict control and lower levels.
Working Capital	Limited working capital constrains how much inventory can be held.

Techniques of Inventory Management

Technique	Description
ABC Analysis	Classifies inventory into A (high value, low quantity), B (moderate), and C (low value, high quantity) for focused control.
EOQ (Economic Order Quantity)	Calculates the ideal order quantity to minimize total inventory costs.
FIFO/LIFO	Methods of inventory valuation — FIFO issues oldest stock first, LIFO issues newest.
JIT (Just-In-Time)	Inventory arrives only when needed, reducing holding costs but requiring accurate forecasting.
Reorder Level System	Stock is reordered once it drops to a predetermined level.
Perpetual Inventory System	Real-time tracking of inventory through ERP or barcode scanning.

[Insert Graph: Inventory Cost vs Order Quantity - EOQ Curve]

Example

A garment manufacturer forecasts monthly demand of 5,000 units. The cost of placing one order is ₹500 and carrying cost per unit per month is ₹2.

Using EOQ formula: EOQ = √(2 × Demand × Ordering Cost / Carrying Cost)
EOQ = √(2 × 5000 × 500 / 2) = √(25,00,000) ≈ 1581 units

So, the firm should order 1581 units each time to minimize total costs.

Conclusion

Inventory management is a strategic component of operational efficiency. By using techniques like ABC analysis, EOQ, and JIT, businesses can minimize waste, reduce costs, and respond better to market demand. Effective inventory control ensures the firm maintains the right amount of stock — not too much to increase holding costs and not too little to cause stockouts — thereby supporting profitability and customer satisfaction.