Inventory Management Functions, Methods, and Factors

Inventory management refers to the process of planning, controlling and managing the stock of goods or materials in an organization or company. The main objective of inventory management is to ensure the availability of goods or materials needed in the right quantity, at the right time, and in the right location, so that operational activities can run smoothly.

By managing inventory properly, companies can optimize the use of resources, minimize unnecessary storage costs, and increase customer satisfaction by fulfilling requests on time. Check out this TransTRACK article for more!

Inventory Management Function

You have mentioned several important inventory management functions. The following is a further explanation of each of these functions:

Anticipating inventory shortages

One of the main functions of inventory management is to anticipate and prevent inventory shortages. By accurately forecasting demand, companies can identify when inventory of goods or materials will run low. This allows companies to take proactive actions such as placing back orders or increasing production to keep supplies sufficient. Thus, inventory shortages that can hinder operational processes and customer satisfaction can be avoided.

Anticipate inventory orders that are not in accordance with needs

Sometimes, inventory orders received by companies do not match actual needs. This can happen due to communication errors, changes in customer requests, or changes in company policies. Inventory management is responsible for verifying orders received and ensuring compliance with actual requirements. By verifying and testing inventory, companies can avoid receiving goods they don’t need and reduce waste.

Anticipate the supplies needed are not on the market

In some cases, the goods or materials needed by the company may not be available on the market or experience a temporary shortage. In this function, inventory management is tasked with anticipating and planning steps in the event of an unavailability or shortage of supplies. For example, they may seek alternative sources or negotiate with suppliers to ensure smooth supply.

Ensure smooth production process

Adequate inventory is an important factor to maintain the smooth production process. Inventory management aims to ensure the availability of raw materials, spare parts and other components needed for production. By managing inventory efficiently, companies can avoid material shortages that could halt or hinder production. In this case, inventory management plays a role in ensuring that production runs smoothly, minimizes downtime, and meets set production targets.

By fulfilling these functions, inventory management helps companies maintain proper inventory levels, optimize resource usage, reduce unnecessary storage costs, and maintain the smooth running of the company’s overall operations.

Inventory Management Method

The following describes some of the commonly used inventory management methods:

EOQ (Economic Order Quantity) Method

The EOQ method is used to determine the optimal number of orders that must be made in each ordering period. This method considers ordering and carrying costs to find the point at which the total ordering and holding costs are lowest. By using the EOQ method, companies can optimize their order sizes and avoid unnecessary costs.

MRP (Material Requirement Planning) Method

The MRP method is used to plan the material requirements needed in the production process. This method involves using information about production plans, delivery times, and available inventory to generate an appropriate schedule of orders and procurement of materials. The MRP method helps companies avoid material shortages and ensures timely availability.

JIT (Just In Time) Method

The JIT method is an approach that aims to reduce or eliminate unnecessary inventory by managing the flow of materials so that goods or materials arrive at the production site on time. With the JIT method, inventory is kept as low as possible while ensuring supply reliability. This helps reduce storage costs and increase production efficiency.

ABC Analysis Method

The ABC analysis method is used to group inventory items based on their relative value. Supply items are grouped into three categories: A (high value and low frequency), B (medium value and medium frequency), and C (low value and high frequency). By using this method, companies can give the right priority in inventory management. Items with high scores (category A) will be given more stringent attention, while items with low scores (category C) can be managed more simply.

Periodic Review Method

The Periodic Review method involves reviewing and valuing inventory at certain time intervals. At each review point, inventory stock is checked and orders are placed to bring stock back to the desired level. This method allows companies to manage inventory in batches and reduce inventory control costs.

Each method has advantages and disadvantages of each, and the selection of the appropriate method depends on the characteristics of the company, the type of inventory being managed, and the objectives to be achieved.

Factors affecting inventory

Factors affecting inventory can include:

Finance

Financial factors greatly affect a company’s ability to purchase and maintain inventory. Availability of adequate funds and cash flow allows the company to purchase sufficient quantities of inventory and maintain adequate stock.

Supplier

The quality and performance of suppliers can affect the company’s inventory. Delays in delivery or poor quality from suppliers can lead to stock shortages or unwanted stock expansions. Good supplier relationships, including selecting reliable suppliers and negotiating good contracts, can help ensure smooth supply.

Lead Time

Lead time refers to the time required from the time of ordering until the goods or materials arrive at the company. Long lead times can affect the level of inventory required. The longer the lead time, the greater the inventory that needs to be maintained to meet demand during the period.

Types of products

The type of product also affects the level of inventory required. Products that have high or fluctuating demand may require larger inventories to meet customer demand. In addition, the physical characteristics of products such as size, weight, and fragility can also affect storage methods and inventory management.

Management

The effectiveness of inventory management and policies implemented can also affect inventory levels. The ability to perform accurate demand forecasting, optimize order sizes, properly monitor inventory, and manage inventory risk will have an impact on proper inventory levels and operational efficiency.

External Factors

External factors such as changing market trends, economic fluctuations, regulatory policies or natural disasters can have a significant impact on a company’s inventory. Changes in customer demand, changes in raw material prices, or supply line disruptions can affect inventory requirements and require adjustments in inventory management.

These factors must be considered and properly managed in inventory management so that companies can meet customer needs efficiently, reduce unnecessary storage costs, and optimize operational performance.

In managing inventory, it is important for companies to take advantage of technology solutions that can help optimize their inventory management processes. One solution that can be considered is the Logistic Service Integrator offered by TransTRACK.

By using TransTRACK’s Logistic Service Integrator, companies can take the necessary steps to optimize their inventory management. By leveraging real-time data, integration with suppliers, and optimizing delivery routes, companies can increase operational efficiency, reduce logistics costs, and ensure timely and adequate inventory. Take advantage of this solution and increase your company’s inventory management efficiency today!