Financial Problems In Inventory Management

Inventory is a quantity of goods owned and stored by a business that is intended either for resale or as raw materials and components used in producing goods that the business sells. For example, motherboards warehoused at a computer company to be used in the assembling of its computer systems are inventory. The products displayed for sale and stored in the backrooms of a department store are inventory as well. Inventory is the heart beat of any business and its management is a major interest of purchasing managers. Operations managers usually have an indecisive attitude towards inventories as it can be costly. Since for many companies inventory is the largest item in the current assets category, inventory problems can and do contribute to

The term inventory was traditionally associated with manufacturing where it was referred to products and their components moving through the factory by trucks and stored in warehouses. Physical or stock inventory is usually associated with manufacturing and retail. Inventories that are mismanaged can create significant financial problems for a business, whether the mismanagement results in an inventory glut or an inventory shortage. The objective of inventory management is to provide uninterrupted production, sales, and/or customer-service levels at the minimum cost. There are also costs related to insurance and the buildings required to hold the physical inventory that is interest on borrowed money to pay for it, storage costs including insurance, obsolescence costs if the products become out of date, cost of theft, management cost. These costs are balanced against not losing sales/production capacity because of stock outs and maximizing the use of expensive assets. Inventories are important, utile and still relevant in today’s business

Firstly, stock items should be differentiated so that they can control them but also invest in an information processing system which can cope with their particular set of inventory control circumstances. The most common way is the ABC system which is similar to Pareto analysis. When using the ABC approach and reviewing inventory, a company should rate items from A to C.

•A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items.

•B-items are the interclass items, with a medium consumption value. Those 15-25% of annual consumption value typically accounts for 30% of total inventory items.

•C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual consumption value typically accounts for 50% of total inventory items.

However, this method can be