Importance of Inventory Management

Featured image by Mary Eiloha Varquez

Handling of inventory is not an easy one. You must bear in mind that inventory management is essential towards your success. Why? Since your inventories, materials or products is your money, your central focus and must be managed properly. And, remember inventory management is not just for large business but for all business types – micro enterprise, small business, medium, large, including you!

Your inventory is your lifeblood that would satisfy your customer demands – might be internal and/or external consumer of your firm. The most important in inventory management is that you balance what, where and when to acquire, store and dispose your supplies.

What might happen if you were unable to acquire, store or dispose properly your supplies? Of course, if you have less supply, then you would have just provided less customer demands. But, if you have too much inventory, you might run into obsolete products or spoil them, and have just lost your money. Inventory costs money, and yes, losing your supplies mean losing your income as well. This is money that could be invested elsewhere, earning a return. So, always remember that you must always balance your inventory, stay updated on events, environmental circumstances, business news, and troubles, so you could anticipate and plan well on acquiring, storing and disposing your inventories.

Inventory ties up working capital and affects cash flow, sometimes even threatening the survival of your business. Your inventory also takes up space, and you need to hire people to take care of your supplies. But, always look-out for your people too; they might be the one harming your business. What do I mean? You would not want to be fooled by your people embezzling your inventories. Beware, money can always be an eye-catching threat, and when I say money this includes your inventory and other assets.

Poor inventory management will cause you low sales, dubious reputation and finally winding up your business. It is important that you anticipate fortuitous events – cause of unforeseen or unexpected circumstances. Prevent that your inventories would be abducted and damaged due to the act of nature or some say “act of God” or man-made accidents.

Then, you might be wondering, how much to order or when to order or produce? First, how many units to order at one time is based on total inventory costs; carrying cost, ordering cost, stock-out cost and purchase cost or actual price paid. Don’t just rely on customer demands, although, this one must be considered as well, but always bear in mind calculating your total inventory costs that would remind you how many products you could actually acquire. One piece of advice, find an order quantity that will minimize your total annual inventory cost.

Then, when to order or produce is based on your knowledge of how long orders take to arrive or the order cycle time – the period between placing one set of your orders until your next ordering time.

So, to prevent you for having obsolete and unsalable inventory, ensure to practice FIFO or first-in, first-out system. Just like the first-come, first serve system, FIFO operating system is also a queue processing technique. Simply, what have just arrived earlier must be disposed at first. Thus, the goal in inventory management is to minimize inventory costs and holding while maintaining a desired customer demands and service level.

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