Importance of Inventory Management Essay Example

tracking of market demand fluctuations is crucial for satisfying customers through timely supplies. This provides insight into customer purchasing patterns for both raw material suppliers and manufacturers.

(3) Inventory management helps eliminate unreliable suppliers by ensuring timely supply and safeguarding against stock shortages. It also helps find new suppliers who can provide regular on-time supply.

By using inventory management, it is possible to keep a list of suppliers that can provide timely supplies during production in order to manage any disruptions. Additionally, utilizing a "Stock keeping unit" (SKU) for identifying specific inventory items can aid in price protection. Increasing the quantity of purchases made for inventory can also help avoid the rising costs of inflation.

Some suppliers opt for periodic supplies instead of a one-time shipment for the entire year, which is known as a Stock Keeping Unit (SKU). Purchasing materials in bulk quantities can result in deep discounts and extend profit margins for businesses when selling finished goods. Larger orders can lower the cost of the ordering process. To take advantage of these benefits, some organizations issue blanket purchase orders that specify the periodic release of materials and dates for SKU.

Stock Inventory is divided into three categories, namely: (a) Raw materials, which are the essential elements required for producing finished goods; (b) Finished goods, which refer to products that are prepared for customer use and their production depends on market trends; and (c) Work-in-process, which pertains to products that are currently in the manufacturing process.

During summer, manufacturers are required to satisfy the amplified need for ice creams and soft drinks, as well as the surge in toy sales during holiday season. Work-in-process (WIP) refers to products

currently being produced that have not yet reached the stage of finished goods.

Inventory comprises different items, including half-assembled cars, motorcycles, and aero planes. Whether in a manufacturing or distribution center, proper categorization and documentation of inventory are necessary for completed products, work-in-progress items, and raw materials. Keeping accurate records of all SKUs is crucial to analyze inventory costs. FIFO (First-in-First-Out) is a common method used to value inventory prioritizing consumption or sale in the order of goods purchased first.

The LIFO (Last-in-First-Out) method prioritizes the sale of recently purchased goods due to their higher price compared to previous purchases. This technique also offers current cost and revenue analysis. On the other hand, the Average Cost Method computes average cost by dividing total goods cost with total available for sale quantity; this approach is best suited for computerized systems. Lastly, organizations that maintain finished product inventory using the Specific Cost Method record and reflect each item's cost in sales.

The Standard Cost Method is commonly utilized by manufacturing companies to assign a fixed value to an item for the entirety of a year. While not a precise solution, this method allows for costs and expenses to be predicted in the event of unexpected changes. At the end of a financial year, the balance sheet includes a sub-clause on the Asset side for current assets that can be easily converted into cash within one year. This category incorporates inventory, which can be further divided into raw materials or work-in-progress. This method is particularly useful for custom-made items.

Inventory, including both semi-finished goods and raw materials, can be considered as cash and classified as current assets. It is reflected not only

in the balance sheet but also in the income statement as cost of goods sold. This discussion covers inventory management methods and implementation as well as its relationship to logistics and supply chain management (SCM).