IMPACT OF INVENTORY MANAGEMENT AND CONTROL
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IMPACT OF INVENTORY MANAGEMENT AND CONTROL
Chapter one
INTRODUCTION
1.1 Background of the Study
Most organisations’ assets consist mostly of inventory in the form of raw materials, work in progress, and finished commodities. But why should we keep an eye on these products, or engage in inventory management?
Inventory items cost money to acquire, keep, and maintain, which implies storage facilities must be given to ensure that these materials or things do not spoil until they are converted into sellable goods; they do not generate money.
When stock is stored, it ties up capital that could have been employed in other areas, therefore it all represents a cost that must be managed appropriately to achieve efficiency.
We must, however, keep stock to meet production and sales requirements. This is because if we do not have enough stocks, we risk running out of them.
Similarly, if we are short on finished items, we risk disappointing our clients. Inventory shortages in both of these kinds are likely to result in customer and financial losses.
To avoid the concerns mentioned above, the organisation should achieve a balance between holding too much stock (overstocking) and carrying too little stock (understocking).
This is essentially the purpose of inventory management. Managing all types of assets is essentially an inventory problem; the same analytical methodologies apply to cash and fixed assets as they do to inventory.
First and foremost, a basic stock must be available to balance inflows and outflows of items. The amount of the stocks is determined by the flow pattern, which includes fast moving or regular things as well as slow moving or irregular items.
Second, because the unexpected can happen, it is vital to keep safety stock on hand, which represents extra stock, to avoid the cost of not having enough to satisfy current needs.
Third, extra funds may be necessary to satisfy future growth needs. These are known as anticipatory stocks, and they are associated with the knowledge that they are optimum purchase sizes as described by economic order quantity (EOQ).
Borrowing money, acquiring raw materials for production, or purchasing plants and equipment is less expensive or more cost-effective than purchasing only enough to meet current demands.
Manufacturers often have three types of inventories:
a) Raw materials.
b) Work in progress.
c) Finished items.
(a) The level of raw materials; inventory is influenced by projected production, seasonality of production, supply reliability, and the effectiveness of purchasing and production processes.
(b) The length of the production period, or the time from planning raw materials in manufacturing and completing finished products, has a significant impact on work in progress inventory.
Inventory turnover can be improved by boosting production. One way to accomplish this is to refine engineering techniques and apply them to the production process. Another option is to buy instead of making them. The level of finished goods inventory depends on how manufacturing and sales are coordinated.
Holding stock in any form costs money. The capital secured by the stock must be serviced through interest payments, and the land or warehouse required for the stock must be purchased or rented.
The handling of stock security and any quality deterioration that occurs incurs additional costs. Most organisations employ one of two types of stock control systems: the bin system, which has two quantities.
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