100% best way to analyse “What is Inventory?”

Inventory management / “what is inventory?” is answered as a critical aspect of running a successful manufacturing company. Efficiently managing inventory can enhance operational efficiency, reduce costs, and improve customer satisfaction. In this article, we explore the concept of inventory in manufacturing companies, it’s types, accounting methods, models, and the importance of implementing robust inventory controls.

Business owners focus should be an efficient stock management to reduce costs and increase profitability. Deploying a proper inventory management software can reduce most of these issues.

What is Inventory? A Definition…

Inventory can be defined as the assortment of goods or materials a company holds for production, processing, and distribution, including items at various stages of the manufacturing cycle. Each of the stages of these inventory are valued at a certain unit price based on the value additions.

These costing method is called “ABC Analysis“.

What is Inventory and its importance in Manufacturing Companies?

In manufacturing companies, inventory refers to the stock of raw materials, work-in-progress (WIP), and finished goods that are necessary for the production and delivery of goods to customers. It serves as a buffer between the various stages of the manufacturing process, ensuring a smooth flow of operations.

What is Inventory and Different Types of Inventory?

Inventory is a term used to describe the assortment of goods, materials, or products that a manufacturing company holds at any given time. It represents the company’s investment in raw materials, work-in-progress (WIP), and finished goods that are essential for its operations.

In manufacturing companies, Stock management plays a vital role in ensuring a smooth production process and meeting customer demand. It serves as a buffer between different stages of the manufacturing cycle, allowing for continuous operations and preventing delays or disruptions.

The Stock management can be categorized into various types based on its purpose and stage of production. These include:

1. Raw Materials Inventory: These are the basic materials or components that are used in the production process. They are typically purchased from suppliers and serve as the foundation for manufacturing the final products. Ensure to follow perpetual inventory model to find missing stocks and consume it fast.
2. Work-in-Progress (WIP): WIP stocks consists of products that are currently undergoing the manufacturing process. These are partially completed goods that are yet to be finished and transformed into finished products. These happens on production floor as part of their business operations.
3. Finished Goods: Finished goods stocks includes the completed products that are ready for sale and delivery to customers. These products have gone through all the necessary manufacturing processes and are in their final form. Proper inventory management is important to control these steps.
4. Maintenance, Repair, and Operations (MRO) Stock: These type of stocks includes items that are necessary for supporting the production process and maintaining the manufacturing facility. It comprises tools, spare parts, consumables, and other supplies required for efficient operations.

Effective management of stock and an efficient supply chain management is crucial for manufacturing companies. It involves maintaining optimal stock levels to meet customer demand while avoiding excessive carrying costs. Companies need to strike a balance between having enough stocks to fulfill orders promptly and minimizing the risk of overstocking, which ties up capital and increases storage and holding costs.

Accurate inventory accounting is essential for financial reporting and determining the cost of goods sold (COGS). Various inventory valuation methods, such as FIFO (First-In-First-Out), LIFO (Last-In-First-Out), and Weighted Average Cost, are used to assign values to inventory for financial reporting purposes.

By implementing robust inventory management practices, manufacturers can streamline their operations, reduce costs, improve production efficiency, minimize stockouts, and enhance overall business performance. Utilizing advanced software solutions like our SaaS Cloud ERP Software can provide real-time visibility into inventory levels, automate stock tracking, streamline procurement processes, and optimize inventory control strategies.

What is Inventory Accounting or Inventory Management?

Inventory accounting involves tracking and valuing inventory to ensure accurate financial reporting. It includes methods such as

1. First-In-First-Out (FIFO)
2. Last-In-First-Out (LIFO)
3. Weighted Average Cost to determine the value of inventory on the balance sheet and the cost of goods sold on the income statement.
4. Standard costing

ACTouch cloud ERP uses the last 2 methods to give our customers a value addition and accuracy in their costing approach.

Inventory Models for Stock Management

Inventory models are mathematical techniques used by manufacturing companies to optimize their inventory levels and improve inventory management efficiency. These models help businesses strike a balance between meeting customer demand and minimizing inventory holding costs.

Here are some commonly used inventory models:

Economic Order Quantity (EOQ): EOQ is a model that calculates the optimal order quantity for inventory items. It considers factors such as the cost of ordering, holding inventory, and the rate of demand. The goal of EOQ is to determine the order quantity that minimizes total inventory costs, including ordering costs and carrying costs.

Just-In-Time (JIT): JIT is a lean inventory management approach aimed at reducing or eliminating inventory holding costs. Under JIT, inventory is received from suppliers or produced only when it is needed for immediate use in the production process or to fulfill customer orders. This model helps minimize inventory levels, storage costs, and the risk of obsolescence.

Material Requirements Planning (MRP): MRP is an inventory management system that utilizes computer-based software to plan and control the materials needed for production. It calculates the exact quantity and timing of raw materials and components required based on the production schedule and anticipated demand. MRP ensures that materials are available when needed, reducing the risk of stockouts and production delays.

ABC Analysis: ABC analysis categorizes inventory items based on their value and importance. It classifies items into three categories: A, B, and C. Category A items are high-value and high-priority items, while category C items are low-value and low-priority items. This classification helps companies allocate resources and prioritize their inventory management efforts accordingly.

Safety Stock Planning: Safety stock is an additional inventory buffer maintained to protect against unforeseen variations in demand, supply disruptions, or lead time uncertainties. By using statistical methods and historical data, companies can determine the appropriate level of safety stock to ensure they can meet customer demand even in unpredictable situations.

Inventory models and Inventory forecasting assist manufacturers in making informed decisions regarding when to order or produce items, how much to order or produce, and how to balance the costs associated with inventory. These models help optimize inventory turnover, reduce carrying costs, minimize stockouts, and improve overall operational efficiency.

What is Inventory and Importance of Inventory Controls

Efficient inventory controls and answering “what is inventory?” are vital for manufacturing companies due to the following reasons.

• Avoiding stockouts and ensuring timely production and delivery.
• Minimising excess inventory, reducing carrying costs, and optimising working capital.
• Enhancing production planning and scheduling to avoid bottlenecks.
• Improving customer satisfaction by meeting demand promptly and accurately.
• Follow a physical inventory process for actual inventory with a focus perpetual inventory can help.

What Are the Functions of Inventory?

Inventory Management serves several functions in manufacturing companies, including:

• Facilitating smooth production operations by ensuring the availability of materials.
• Meeting customer demand promptly, reducing lead time, and avoiding stockouts.
• Enabling economies of scale in procurement and production.
• Acting as a buffer to absorb uncertainties in demand, supply, and production lead time.

Inventory Turnover and it’s definition

Inventory is shown in Balance sheet under “current asset” section as its easy to consume and generate money.

Inventory turnover is a key performance metric that measures how quickly a company sells and replaces its inventory within a specific period. It is calculated by dividing the cost of goods sold by the average inventory value. A higher inventory turnover indicates efficient inventory management and better cash flow. So it leads to a question on “What is Inventory and how to manage it?”.

Inventory turnover ratio is a financial metric that measures how efficiently a company manages its stocks. It calculates the number of times stocks are sold or consumed within a specific period, typically a year.

In precise terms, Inventory Turnover is the ratio between the cost of goods sold (COGS) and the average inventory value. It indicates how quickly a company replenishes its inventory and converts it into sales.

A higher inventory turnover indicates that a company is selling its inventory quickly, which is generally considered favorable. It implies that the company is effectively managing its inventory levels, minimizing the risk of obsolete or excess inventory, and generating revenue efficiently.

On the other hand, a lower inventory turnover suggests that inventory is sitting idle or not selling as quickly as desired. This may indicate inefficiencies in inventory management, such as overstocking or poor demand forecasting.

Inventory turnover is industry-specific, and what is considered a good or bad turnover rate can vary. Generally, a higher turnover ratio is desirable, but it should be balanced with maintaining adequate inventory levels to meet customer demand.

Companies can use inventory turnover as a benchmark to evaluate their performance over time or compare it with industry averages. By monitoring inventory turnover regularly, businesses can identify trends, make informed decisions regarding inventory management, and optimize their supply chain operations.

It’s important to note that inventory turnover should be analyzed in conjunction with other financial and operational metrics to gain a comprehensive understanding of a company’s inventory management efficiency.

By utilizing advanced inventory management software like our SaaS Cloud ERP Software, businesses can track inventory turnover in real-time, generate insightful reports, and identify opportunities for improvement. This can lead to better inventory control, reduced holding costs, improved cash flow, and increased profitability.

Inventory Analysis and Best Practices?

Inventory analysis involves evaluating inventory data to gain insights and make informed decisions. Inventory analysis refers to the process of examining and evaluating inventory data to gain insights into inventory performance, trends, and opportunities for improvement. It involves analyzing various aspects of inventory, such as stock levels, turnover, carrying costs, obsolescence, and demand patterns.

Inventory analysis is crucial for effective inventory management and can provide valuable information for making informed decisions. Here are some key components and best practices of inventory analysis:

1. Stock Levels Analysis: Analyzing stock levels helps ensure that inventory is maintained at optimal levels. It involves monitoring inventory quantities, identifying excess or low stock situations, and adjusting reorder points and quantities accordingly.
2. Inventory Turnover Analysis: Calculating and analyzing inventory turnover ratios helps assess how quickly inventory is being sold or consumed. High turnover indicates efficient stock management, while low turnover may suggest issues such as overstocking or slow-moving items.
3. Carrying Costs Analysis: Carrying costs are the expenses associated with holding and storing inventory, including warehousing, insurance, depreciation, and obsolescence. Analyzing carrying costs helps identify areas for cost reduction and optimization, such as improving warehouse layouts or implementing just-in-time inventory practices.
4. ABC Analysis: ABC analysis categorizes inventory items based on their value and contribution to sales or profits. A-items are high-value items that require close monitoring, while C-items are low-value items with less significant impact. Analyzing the ABC classification helps focus resources on managing high-value items effectively.
5. Demand Analysis: Understanding demand patterns and trends is crucial for effective inventory management. Analyzing historical sales data, seasonal variations, and customer demand forecasts helps optimize inventory levels, plan for peak demand periods, and minimize stockouts or excess inventory.
6. Obsolescence Analysis: Identifying and managing obsolete inventory is essential to prevent financial losses. Analyzing inventory for slow-moving or obsolete items enables businesses to take proactive measures, such as discounting or liquidating stock, to minimize losses and free up storage space.
7. Technology and Software: Utilizing advanced inventory management software, such as our SaaS Cloud ERP Software, streamlines inventory analysis by providing real-time data, automated reporting, and analytics. These tools enable businesses to gain deeper insights into inventory performance, make data-driven decisions, and optimize inventory management strategies.

Best practices for Stock management and analysis include regularly monitoring and reviewing inventory data, setting clear performance metrics and targets, conducting regular physical inventory counts, collaborating with suppliers for better inventory visibility, and leveraging technology for accurate and timely data analysis.