Inventory Management

Definition: 

The systematic management of inventory (stock) to ensure firm liquidity, reduced costs and risk of damage, and improve overall financial profitability. 

This includes inventory: 

• at the front-end (yet to be processed; raw materials / transformed inputs), 

• work-in-progress (currently being processed), and 

• at the back-end (finished goods).

There are advantages to holding stock; 

• operational process not interrupted due to lack of materials, 

• availability of finished products for customers (not running out in times of demand), no loss of revenue from being out of stock.

The disadvantages to holding stock include; 

• cash tied up in physical inventory (loss of liquidity / working capital / cash flow), 

• risk of damage / spoilage (perishable), 

• costs of insurance / warehousing / storage, 

• risk of obsolescence (going out of date / unsold).

LIFO (Last in, First out): Most recently purchased stock sold first; useful for product with no use-by date. Stock purchased recently can be cheaper, achieving higher margins.

FIFO (First in, First out): Oldest stock is to be sold first; imperative for perishable stock to reduce spoilage and waste (reducing costs).

JIT (Just-in-Time): Lean operations; utilising minimal stock at either end of process, ordering inputs at precise time needed, completing orders at precise time due; requires excellent forecasting, a flexible and reliable supply chain, responsive to changes in demand. Less cash ‘tied up’ in inventory; improving cash flow.

When to apply strategy:

• When a firm has poor liquidity and cash flow issues.

• When a firm has high levels of waste or unsold stock.

• When a firm loses sales to rivals from running out of stock. 

• When a firm carries large volumes of stock (retailers), requiring systems for ordering, storage and display of stock. 

• When a firm has expensive inputs (Boeing) that tie up large financial resources (purchase stock Just-in-Time)...