INVENTORY MANAGEMENT

Inventory Management Process:

Inventory management refers to the process of ordering, storing, using, and selling a company's
inventory. This includes the management of raw materials, components, and finished products,
as well as warehousing and processing of such items.

What Is Inventory?

The term inventory refers to the raw materials used in production as well as the goods produced
that are available for sale. A company's inventory represents one of the most important assets  it
has because the turnover of inventory represents one of the primary sources of revenue
generation and subsequent earnings for the company's shareholders. There are three types of
inventory, including raw materials, work-in-progress, and finished goods. It is categorized as a
current asset on a company's balance sheet.

Concept of Inventory Management Pyramid Inventory management processes can be divided

into three levels of processes as shown in Figure 22.5 through an inventory management
pyramid. ERP and supply chain systems can support all these three levels.

 Inventory transactions and inventory control: Base of the pyramid talks about
inventory transactions and basic inventory control tools. These are absolutely
 fundamental to run the business and from regulatory point of view (yearly stock taking
and publishing inventory valuation under asset in the balance sheet is mandated by law).
Inventory transactions focus on activities like recording all inventory transactions like
goods issue, receipt, stock transfer, etc. These are the most basic processes to achieve
timely and accurate information on inventory status. Inventory controls are processes like
physical inventory, cycle counting, inventory valuation, etc. This ensures that the
company has basic level of control on its inventory, i.e. it knows where how much stock
is lying, the value of the stocks and where the stock is reaching near minimum level,
cases of stock-outs, etc. Inventory control is also enabled through a set of reports and
alerts for proactive action for inventory planner.
 Inventory planning: At this level, the company takes scientific approach for deciding
where to hold inventory, how much to hold, when to order, etc. The company can have
several approaches like adopting collaborative approaches for planning inventory and
scientific process for inventory replenishment.
 Strategic inventory management processes: These are innovative processes that
differentiate a company from others.

Inventory Management Processes in ERP

As described above, inventory management processes can be grouped under inventory

transaction processes, inventory control processes and inventory planning processes. These three
sets of processes are discussed here with how ERP helps in managing these processes.

A. Inventory Transaction Processes

There can be different types of inventory transactions supported by the ERP system and these
are:

1. Goods receipt

2. Goods issue

3. Reservations

4. Stock transfer

2. Goods issue: There can be different types of goods issues like raw materials issue in the
factory for production, issue of materials to quality department for quality inspection, finished
goods issue from warehouse for dispatch, etc. These issues can be recorded in ERP inventory
management system so that the inventories are updated.
3. Reservations: Reservations are requests to the warehouse to have materials ready for issue at
a later date and for a particular purpose and it ensures that a material is available when it is
needed. Reservations are typically done for a customer.

4. Stock transfer: ERP systems allows different types of stock transfers like stock transfer from
one company code to another, from one plant to another and from one storage location to
another. A stock transfer consists of a goods issue from the issuing point and a goods receipt at
the receiving point.

B. Inventory Control Processes

1. Quantity control:

It is important for every organisation to know how much inventory is lying at what location.
Inventory transactions described earlier always updates stock position in the system and this
stock need to be in tally with physical stock actually available. Quantity control processes like
physical inventory or cycle counting or stock overview reports help in this.

Physical inventory: Difference of stock figures between what is in the system and what is
physically available is always a challenge. ERP systems help in managing physical inventory
process and controlling the difference between system inventory and actual physical stock.
Stocks are counted and the count results are entered in ERP system. Using the list of inventory
differences, variances in the stocks can be checked and if required, recount can be initiated. If the
difference is accepted, it is posted and the stock is corrected.

Cycle counting: This is a method of physical inventory counting where every material is
counted at regular intervals during the year and intervals/cycles are determined based on the type
of material. Thus, cycle counting allows fast-moving items to be counted more frequently than
slow-moving items and materials can be classified based on cycle counting frequency (for
example, A, B, C, D). For each category, cycle counting frequency can be defined in an ERP
system, based on which ERP system calculates the due date for next cycle counting for each
material. Class A items are all high-revenue products, which typically accounts for about 80% of
annual sales and represent about 20% of inventory SKUs. Class B items include products that
typically account for about 15% of annual sales and represent about 30% of inventory SKUs.
Class C items include products that typically account for about 5% of annual sales and represent
about 50% of inventory SKUs. To identify A, B and C class, a Pareto analysis is done depending
on annual dollar volume. As Class A items account for the major part of the business, a high-
frequency periodic review policy (e.g. a weekly review) is appropriate in this case. Similarly, a
periodic review policy is applied to control B class products although the frequency of review is
not as high as that for class A products. Finally, depending on product value, the firm either
keeps no inventory of expensive class C products or keeps high-inventory of inexpensive Class C
products. Figure 22.6 explains cycle counting and ABC classification process.
Stock overview: ERP systems at any point can display current stock situation at particular
factory level or at total company level. Stock can also be viewed at different batch levels.

2. Value control/Stock valuation

Along with quantity, it is also important to know the value of the stock that the company is
currently holding. Goods receipts are valuated depending on the valuation procedures defined in
the ERP system and leading ERPs support several valuation procedures like moving average
price procedure, standard price procedure, etc. In the standard price procedure, the system carries
out all stock postings at a standard price as defined in the material master and variances are
posted to price difference accounts. In the moving average price procedure, the system valuates
goods receipts with the purchase order price and goods issues with the cur-rent moving average
price.

C. Inventory Planning Processes

Inventory transactions and inventory control defined earlier are basic requirements for a business
and a business cannot run without these. Inventory planning is a more matured component of
inventory management. Though every company does some amount of inventory planning it can
differ from most basic to advanced level depending on maturity of the organisation.
 There are two basic drivers for better inventory planning:

 Never have a stock out as for a finished goods stock out, there will be customer
dissatisfaction and lost sales. For a raw material and component stock out, there will be
production loss.
 Never carry excess inventory as this increases cost of operation; moreover there is
chance of obsolence and heavy markdown.

So, inventory planning tries to achieve inventory of right items, at right location, at right time
and of right quantity. ERP and supply chain management solutions support better inventory
planning in variety of ways like:

Designing better process of inventory replenishment: