Introduction
Businesses are recommended to have in place, methods and procedures that offer flexibility so as to meet their unusual demands of their resources. In this regard, they must carefully watch over their inventories. Experts have noted that most business fail because of either having too much inventory of not having enough stock (Krishnan & Ulrich, 2001; Lee, 1996). Inventory management is the practice of planning, controlling as well as directing business inventory with the aim of making profits.
Businesses are able to make profits from inventory management through increasing sales as well as lowering the cost of goods sold. Several factors need to be considered when determining how much inventory needs to be maintained. These factors include the current demand by the customers, anticipated trend in the market demands the market, anticipated economic trend at the local, national and international levels, the existing situation of the economy in all levels, and cost of raw materials and labor (Lee, 1996). According to Metters (1997), other factors such as technology, seasonal concerns, storage capacity as well as inflation have a significant impact on inventory management.
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Inventory Management Techniques
Cash management and inventories need to be managed in a similarly. It is estimated that businesses in America have reduced the percentage of inventories which are held on a monthly basis. This strategy enabled business in America to free about $82 billion extra cash in a period between 1990 and 1997 (Metters, 1997). Overstocking presents various disadvantages to businesses including illiquidity, price reductions, increases the risk of obsolescence. Inventories are less liquid and as such, companies stand the risk of having less cash flow which can be detrimental to Businesses (Lasher, 2013).
Various inventory management techniques are available for different kinds of businesses. For instance a Just-in-Time (JIT) inventory management is one technique that can be used to manage the cash flow of a business. This techniques holds that businesses need to buy from a vendor upon receiving a customer’s sales order (Kannan & Tan, 2005). For manufacturers, this technique requires that they use data so as to ensure that there is enough stock for all their retailers. Data to be collected may include information on buying behaviors, location, seasonal information as well as price point.
Another strategy that can be employed includes the ABC analysis. (Niemi, Huiskonen, & Kärkkäinen, 2009) assert that this strategy may help businesses to focus their time on resources that are bound to bring in more revenues and profits for the business. The ABC analysis allows for the hierarchy of the most valuable goods to the least valuable. This method has also acquired the name Inventory Categorization Method (Niemi et al., 2009). The items on the A-category contain the goods that have the largest revenues while the C-category contains the goods with the least amount of revenues. Smaller volumes of the A-category should be available in store due to the fact that they are costly and would require a lot of money. Moreover, the A-categories may require frequent stock reviews as well as re-ordering compared to the goods in the C-category. Despite the fact that the goods in the C-category have lower value, most businesses tend to have large volumes of items in this category. This ensures that there is adequate supply available. Regardless of the techniques applied, businesses should ensure regular audits of their inventories through reviews and cycle counting to promote accountability.
References
Kannan, V. R., & Tan, K. C. (2005). Just in time, total quality management, and supply chain management: understanding their linkages and impact on business performance. Omega, 33(2), 153-162.
Krishnan, V., & Ulrich, K. T. (2001). Product development decisions: A review of the literature. Management Science, 47(1), 1-21.
Lasher, W. R. (2013). Practical financial management: Nelson Education.
Lee, H. L. (1996). Effective inventory and service management through product and process redesign. Operations Research, 44(1), 151-159.
Metters, R. (1997). Quantifying the bullwhip effect in supply chains. Journal of operations management, 15(2), 89-100.
Niemi, P., Huiskonen, J., & Kärkkäinen, H. (2009). Understanding the knowledge accumulation process—Implications for the adoption of inventory management techniques. International Journal of Production Economics, 118(1), 160-167.
