Inventory can either be tangible or intangible. It can be stock in the sense of goods for sale or as an intangible item in a company’s files. All companies keep inventory which could be in the form of raw materials, supplies used in operations, work in progress, or even finished goods. Inventory is important because of factors such as the unpredictability of supplies and fluctuations in demand. Organizations that keep inventory enjoy good cash flows and enjoy strong control over the quality of materials received, lead times, and good transfer of information among departments.
Why careful management of inventory is critical to reducing logistic costs
Inventory has several costs (logistical) attached to it among them being: space (warehousing), theft, labor (about handling inventory), deterioration, obsolescence among others. Inventory management can be done by physical count which takes care of all inventory accuracy problems. This reduces chances of ordering which may lead to losses when the goods aren’t on-demand (Toomey, 67). Keeping only a small amount of inventory is deemed the most efficient; this is commonly done using the economic order quantity (E.O. Q) technique as a management technique method. This reduces the carrying costs of inventory.
This approach allows the manager to decide when and how often to order inventory. E.O.Q is used to manage inventory and is especially important in today’s times of economic crisis where firms are striving to downsize to reduce costs (World Bank and International Finance Corporation, 14). This is true because once inventory is bought, we already have a situation where there are tied-up funds. After all, the inventory could have otherwise been used to generate interest. Managing inventory acts as a prudent way to avail only stock that is used for trading purposes.
How efficient material handling helps reduce logistics costs
Materials can be handled by using one or either of the following methods: Last in First out method (LIFO) or First in First out method (FIFO). FIFO method ensures the most recent inventory is the first to be sold while LIFO ensures that inventory bought at the earliest time is the first to be sold. The FIFO method has been proved to be quite unrealistic especially during inflation periods because goods recently bought have been purchased at a higher price than goods already in stock. LIFO is however considered the most effective and also widely used, as it reduces ordering costs by ensuring that goods already in stock have been cleared out first before a new batch is purchased. This method also reduces obsolescence (Finkler, 57).
Partial and comprehensive systems analysis in supply chains management
Systems analysis is in a large framework undertaken to understand and control supplies processes. Partial systems analysis is the adoption of methods to control a section of the supplies management e.g. only purchasing. A comprehensive systems analysis is the adoption of a method or method of controlling the entire supplies management process right from purchasing to the point of sale. This is especially important as it can be able to detect at an early stage any inconsistencies in the supply chain e.g. damaged stock during purchasing (Muller, 35). It’s also very vital in the transfer of information in the supply chain as facts regarding all departments are analyzed.
However, it is deemed more expensive than the partial method which is cheaper. The partial method also takes a lesser time to be executed as compared to the comprehensive method. It’s however more prudent for organizations to manage inventory to improve efficiency than not incorporating any inventory management technique at all.
Finkler, Steven. Essentials of Cost Accounting for Health Care Organizations. U.S.A: Jones and Bartlett Learning, 1999.
Muller, Max. Essentials of Inventory Management. New York: Amacom, 2003.
Toomey, John. Inventory Management. New York: Oxford University Press, 2000.
World Bank and International Finance Corporation. Doing Business. London, UK: World Bank Publications, 2007.