Inventory - introduction

What is inventory?

Inventories are goods that are found in the warehouses of the company. These are the materials used in the production process or they meet customer demand, and consist of raw materials, materials pulled into the production in process, and finished products. These products usually belong to the company itself and it represents its most important asset.

The role and functions of the stock

Inventory management is a determining point in the strategic management of any organization.

The main function of inventory management is to determine the sufficient amount and type of input products, products in process and finished products, facilitating production and sales operations and minimizing costs by keeping them at an optimal level.

An efficient inventory management is essential to ensure that the business has enough products stored to meet consumer demand. If it is not handled correctly it can result in the business losing money on potential sales that cannot be satisfied or that you waste money taking care of too much inventory. An inventory management system can prevent these types of errors from occurring.

Effects:

Inventory is included in all the important segments of ones company and have important effects on all the main functions of the company - we mainly have inventories because that allows us to perform the functions of purchasing, production and sales at different levels.

Each function has to generate different inventory demands:

Sales: Costumer demand must be satisfied quickly and completely to avoid the buyer resorting to competition, so you not only must have sufficient inventory to meet market demand, but also, you should consider an additional amount for unexpected requests.

Production: Production and delivery do not usually occur instantaneously, so you must have stock of the product that can be used in a timely manner and that the actual sale does not wait until the completion of the production process.

Purchases: When a significant increase is expected in the prices of basic raw materials, a sufficient quantity must be stored at the lowest price prevailing at the moment. In the same way, if shortages of necessary raw materials are foreseen, it is essential to have a reserve to continue regularly with production operations.

In order for the inventory management process to be successful, it has to represent a combined answer to two very important questions:

What supplies and what quantities do you need to own?

The company workflow determines the quantity of supplies. For a re-seller, this depends on the supply and demand options of the market. For a manufacturing company, it also takes into account the quantity of components within the final product, all components that are part of the final product must be in stock and their quantity is directly related to the final product manufacturing plan. A manufacturing company has the need for those supplies that are the basis for the production of the final product, and the quantity is determined by the amount needed for the production of that final product.

What supplies and in what quantities does the company have at a given moment?

It would be best if an organization could only order what it needed at the time. To accomplish this, you must know the items that make you current inventory and their quantities levels. In the warehouse business every day there are so many changes in the situation, and therefore there are so many opportunities for making mistakes.

The stocks represent a significant investment and potential source of waste that needs to be carefully controlled. If you overstock, you will spend money on the storage, and lose it if inventory is damaged. On the other hand, in the event that there is not enough stock, you may have to stop production until the necessary material is purchased and thus waste time and work. In order to reduce costs and maintain the stock at an optimum level, you will need a system developed to help you decide when and how much stock you need to order.

In Erpag, both of these questions are answered by the back-ordering option and the fulfillment list, e.g. a list of all the items that you need to order and/or produce, taking into account the demand, the current stock levels and the BOMs of the items that need to be manufactured.

The importance of inventory

Inventory problems can and do contribute to business failures. When a company unintentionally runs out of inventory, the results are not pleasant. If it’s a retail store, it loses the profit for this item. If the firm is a manufacturer, the lack of inventory could cause production to stop. On the other hand, if a company maintains excessive inventories, the additional maintenance cost and potential damage can lead to great loses.

When managing inventory, whether is a manufacturing or reselling business, it is necessary to bear in mind two determining factors that affect their level. On the one hand, inventories are necessary to achieve the continuity of the production process, while on the other hand they cause holding costs. Therefore, it is necessary to define the level of supplies that will enable the continuous sales and/or production process to take place, causing the least possible costs. Such a level of inventory is called the optimal level.

Inventories represent a sustained movement of inputs (materials, finished products or merchandise). The level of inventory at each given moment is the result of the difference between the inflow and outflow and the quantity of goods found on the stock from the previous period – it has a great dynamic that is not easy to follow.

A good inventory management software reviews the state of supply and demand, the movement of items and delivery times. The inventory management is supposed to ensure customer satisfaction with minimal costs.

Good reporting and analytical views are essential for inventory management. That is why Erpag was developed as a very report-oriented ERP system, giving you a fulfillment list off all the items that need to be ordered so you can maintain your stock levels.