Inventory Management

Dangers Involved in Inventory Management

Inventory management primarily concerns specifying the size and placement of stocked goods. It is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned production course against the random disturbance of running out of materials or goods.

The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns, and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an ongoing process as the business needs shift and react to the wider environment.

Inventory control inventory cost elements (holding cost, order cost, total) Parameters: Order-cost (C) 10, demand (D) 1,000, holding cost (i) 20% (of price), price (p) 10 => EOQ = 100

Excessive inventory means the firm has idle funds, which earn the firm no profits. Excessive inventory also incurs extra handling and holding costs. However, low or inadequate inventory levels could mean the company lacks sufficient raw materials for production. The lack of available stock can lead to a loss of production when items are required on a breakdown basis. Inadequate inventory also means there are not enough goods to sell. The company risks losing customers to competitors.

Inventory management becomes more complicated when we factor in moderate inflation and seasonality. Inflation encourages firms to purchase more inventory, exposing them to excessive inventory. Without an accurate sales forecast, companies that operate in sectors affected by seasonality face shortages during high times and excess inventory during low times of the year.