Inventory

Related Terms: Automated Storage and Retrieval Systems; Enterprise Resource Planning; Inventory Control Systems; Material Requirements Planning

An inventory is the entirety of those things owned by a company and intended for resale or the raw materials and parts to be used in producing salable goods and products. Inventories are time-sensitive storage systems that can be divided into three categories. First are cycle stocks: the order quantity or lot size received from the plant or vendor. Second are in-transit stocks: inventory in shipment from the plant or vendor or between distribution centers. Third are safety stocks: the items in inventory that serve as a buffer against forecast error and lead time variability.

Historically, there have been two basic inventory systems: the continuous review system and the periodic review system. With continuous review systems, the level of a company's inventory is monitored at all times. Under these arrangements, businesses typically track inventory until it reaches a predetermined point of "low" holdings, whereupon the company makes an order (also of a generally predetermined level) to push its holdings back up to a desirable level. Since the same amount is ordered on each occasion, continuous review systems are sometimes also referred to as event-triggered systems, fixed order size systems (FOSS), or economic order quantity systems (EOQ). Periodic review systems, on the other hand, check inventory levels at fixed intervals rather than through continuous monitoring. These periodic reviews (weekly, biweekly, or monthly checks are common) are also known as time-triggered systems, fixed order interval systems (FOIS), or economic order interval systems (EOI).

INVENTORY AND THE GROWING COMPANY

Most successful small companies find that as their economic fortunes rise, so too do the complexities of their inventory system logistics. The resulting need for increased inventory management procedures is due primarily to two factors: 1) greater volume and variety of products, and 2) increased allocation of company resources (such as physical space and financial capital) to accommodate the growth in inventory. For a small company used to ordering parts and materials in an as-needed and informal basis, the transition to a formal and documented system of purchasing and inventory management can be a significant step. It requires the creation of new job functions to identify the costs (holding, shortage) associated with inventory and to implement and manage a formal inventory system. Formal inventory systems require extensive record keeping and on a periodic basis, they must be audited by someone. In addition, this transition to a formal inventory system requires substantial coordination between different functional areas of the company. Such a transition often leads into computerization of inventory management. This can be a challenging project, particularly for companies lacking employees with appropriate backgrounds in data management.

Just-In-Time Inventory Control

Just-in-time production is a straightforward idea that may be somewhat difficult to implement. The basic concept is that finished goods should be produced just in time for delivery, and raw materials should be delivered just in time for production. When this occurs, materials or goods never sit idle. This, in turn, means that a minimum amount of money is tied up in raw materials, semi finished goods, and finished goods. The result of a well-managed inventory system capable of supporting a just-in-time production system is sustained productivity and quality improvement with greater flexibility and delivery responsiveness. This production concept, which originated in Japan and became immensely popular in American industries in the early and mid-1990s, continues to be hailed by proponents as a viable alternative for businesses looking for a competitive edge.

SETTING AN INVENTORY STRATEGY

No single inventory strategy is effective for all businesses. When a company is faced with a need to establish or reevaluate its inventory control systems, a practice commonly known as "inventory segmenting" or "inventory partitioning" is a helpful tool. This practice is, in essence, a way of breaking down and reviewing total inventory so that a thorough assessment of each category may be made. The inventory may be broken down by product classifications, inventory stages (raw materials, intermediate inventories, finished products), sales and operations groupings, and excess inventories. Proponents of this method of study say that such categorical segmentations break the company's total inventory into much more manageable parts for analysis.

Key Considerations

Inventory management is a key factor in the successful operation of any business for which inventories are an integral part. For both large and small companies, determining whether their inventory systems are successful can be done by answering one question: Does the inventory strategy insure that the company has adequate stock for production and goods shipments while at the same time minimizing inventory costs? If the answer is yes, then the company in question is far more likely to be successful. If, however, the answer is no, then the business is operating under twin burdens that can be of considerable consequence to its ability to survive, let alone flourish.

No factor is more important in ensuring successful inventory management than regular analysis of policies, practices, and results. A useful checklist of actions for those wishing to establish and maintain an effective inventory system includes:

• Regularly reviewing product offerings, including the breadth of the product line and the impact that peripheral products have on inventory.
• Ensuring that inventory strategies are in place for each product and that they are reviewed on a regular basis.
• Reviewing transportation alternatives and their impact on inventory/warehouse capacities.
• Undertaking periodic reviews to ensure that inventory is held at the level that best meets customer needs; this applies to all levels of business, including raw materials, intermediate assembly, and finished products.
• Regularly canvassing key employees for ideas and information that may inform future inventory control plans.
• Determining what level of service (lead time, etc.) is necessary to meet the demands of customers.
• Establishing a system for effectively identifying and managing excess or obsolete inventory, and determining why these goods reached such status.
• Devising a workable system wherein "safety" inventory stocks can be reached and distributed on a timely basis when the company sees an unexpected rise in product demand.
• Calculating the impact of seasonal inventory fluctuations and incorporating them into inventory management strategies.
• Reviewing the company's forecasting mechanisms and the volatility of the marketplace, both of which can (and do) have a big impact on inventory decisions.
• Instituting a "continuous improvement" philosophy in inventory management.

• Making inventory management decisions that reflect a recognition that inventory is deeply interrelated with other areas of business operation.

To summarize, inventory management systems should be regularly reviewed from top to bottom as an essential part of the annual strategic and business planning processes.

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