Inventory Management: What It Is, Types, Models and Examples

The inventory management It is a process through which various actions are carried out so that a company can improve everything related to the organization, planning and control of all its inventory. For a company to generate maximum dividends, it is essential that it make effective use of its resources, including those of its inventory.

The assets of a company are formed by those material elements that have been acquired by their owners, either for processing (raw material, packaging, boxes, etc.), or for its operation (bienechurías, land, vehicles, machinery , stationery, furniture, equipment and artifacts, among others).

These possessions must be registered, categorized, weighted and administered in detail to have accurate information regarding the assets of the organization. With this register it is possible to know what things are bought, how often refills are made, the amount of supplies in reserve, among other data.

What is an inventory?

An inventory is a reliable relation of all the elements obtained by the company, which are stored in order to be used in future times either in the area of ​​production, sale or services. The main purpose of an inventory is to contribute to obtaining profits.

Usefulness of inventories

- They allow the production and / or activity to remain constant and not suffer interruptions caused by lack of inputs.

- They make possible the planning of purchases to wholesalers, what allows obtaining the best prices by volume of purchase.

- Reduce the loss due to the expiration date of the existence in the warehouse and the stagnation of the same.

- Decrease search time, since everything is quickly locatable.

Types of inventory

Inventory of raw materials

It is constituted by the necessary base elements for the elaboration of the products made by the company. For example: the bundles of wheat flour, sugar and butter stored by a cookie factory.

These supplies are kept stored for use when required. When it is used, it will be necessary to make new application orders to replace what was used.

Inventory in manufacturing process

These are the elements that are being used for the preparation of the products, which are still being prepared without having become a definitive product.

Inventory of processed products

Are those stocks that are already fully processed and are awaiting the time of sale to leave the warehouse.

For example: a shoe factory manufactures a large number of models in different sizes to be able to dispatch as soon as an order is placed.

Subject inventory and endowments

They are those inputs that, although they are not indispensable for the elaboration of the final products of the company, operate as support material in the processes linked to production.

For example: office supplies, fuel storage, packaging and packing materials, hardware stores, among others.

Characteristics of inventory management

Requirements in each company

Each company or organization has different requirements and rhythms related to the type of product or service it performs. That's why there can not be a single way to take inventory.

This requires a thorough analysis that covers the route of consumables, from the ordering of the raw material to the delivery of the final product.

Planning tool

Inventory management is a useful tool to avoid improvisation when making purchases.

It contemplates not only the registration of goods acquired by the entity to guarantee its full operation, but also contemplates the location, codification and description of the articles, the processes, the times and the factors involved in each phase.

These phases range from the order of raw material to the dispatch of the manufactured products or services performed.

Systematization

The systematization of these procedures ensures that an efficient and dynamic flow of supplies is maintained, and that all processes are carried out in an optimal and timely manner. Likewise, it minimizes the surplus or deficits of existence in storage, which would cause upsets in production.

How is an inventory management done?

The first thing that must be done is a careful observation of everything there is. Then record in real time the entry and exit of each product with its own specifications.

By keeping the variables that intervene in the operational processes under control, costs are forecast and levels of uncertainty are reduced in the face of market oscillations.

Taking proper inventory management contributes to business profitability, since it allows identifying and correcting weaknesses in the use of resources.

Methods

There are several methods to perform an inventory management. In fact, there are even computer programs that provide simple and automated tools so that the person in charge can perform this task in an agile and fast way.

However, all inventory management is based on models that serve as the basis for its execution. The models are used to analyze the effect of different environmental factors and allow to foresee eventualities that may occur in the immediate and long term.

Currently there are many computer programs that use these models to make the formulas easier to apply, since users only have to enter the data and the system makes the calculations in an automated and fast way.

The two main models that are applied in inventory management are: the Wilson model and the ABC model.

Wilson's model

It is also called the Optimal Order model or EOQ model. It is based on mathematical formulas to define the most indicated quantities of orders that must be made in the company to make the investment of assets more efficient.

This model can be implemented in those companies that meet the following conditions:

- That your need for raw material be quantified in stable quantities.

- That your suppliers make shipments in a continuous manner and its price is constant.

- That the flow of preparation and dispatch of your finished products also remains unchanged.

- That there is no interruption in their existences.

Before applying the Wilson Model, it is necessary to determine certain variables:

- Q: represents the amount of supplies that will be requested per order.

- q: represents the number of products made by the factory that are sold per year.

- g: represents the cost per unit that implies storing the inputs per year.

- n: represents the number of orders that all customers make per year.

- k: represents the cost per unit of all orders per year.

- Ss: represents the number of units that are in the security reserves of the company.

- D: represents the number of product units produced by the company that customers demand.

To determine the optimal order quantity, the following formulas apply:

p (D / Q)

Then:

g (Q / 2)

And finally:

The ABC model

Also called the 80/20 method, it is based on the so-called Pareto principle and is used to classify the inputs according to their importance.

This model is applied to inventoried products that require different ways of control. In this model, each item receives a differentiated treatment according to its category.

Initially, the cost of each item stored and its frequency of consumption must be recorded. Then multiply the amount of inputs consumed by the cost of each unit and then order the resulting figures in increasing order.

The figures are categorized as:

TO

Are those items that have more value, either because they are the most used, the most requested by customers or the most important for the company. For this line, rigorously supervised periodic controls must be implemented, paying special attention to the accuracy of the data set.

This segment merits greater investment of resources because it is the most profitable. This category should be located in the area with the easiest access to staff or the public. If possible, the ideal is to use automated systems to order and dispatch products, ensuring their entry and exit quickly and efficiently.

B

Are those items that have average value. For this line the rigor is relaxed a bit without neglecting the check of existence. This category should be located in the middle access zone due to its moderate exit.

C

They are the items of less value. Many times it is more the expense they represent than the profit they bring to the company. Excessive accuracy is not required in the records; In fact, just keep the items in order. This category can be located in spaces of low traffic due to its slow exit.

The ABC methodology promotes the effectiveness in deposit, since it requires less time when locating the inputs because the most requested are grouped.

However, it must be borne in mind that a check should be done every so often in order to update the value of the products, because there may be modifications and some products may change their category. This system is especially useful when making decisions.

Examples

- A shoe company sells more in the spring and summer months and needs to increase stocks in those months.

- A pharmaceutical company faces a stage of many orders due to an epidemic.

- A meat company has accumulation of stock, which produces expenses, and has to solve how to reduce the storage of these products.

References

1. Bastidas B., Edwin. Emphasis on logistics and supply chain, Guide 11. Faculty of Engineering, 2010.
2. Encyclopedia of business for companies. Retrieved from: es.shopify.com
3. Business notes. Management of inventories and warehouses. (2016) Recovered at: esan.edu.pe
4. How to make an efficient inventory management. Recovered in: destinonegocio.com