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2.1 REVIEW OF LITERATURE

Inventory managers are worried with the cost, criticality, and value of their holdings. There
are numerous costs associated with ordering and keeping inventory. Capital costs,
administrative costs, storage costs, shrinkage, taxes, and insurance are all examples of these.
The majority of these are proportional to the amount of inventory retained on hand. Reducing
or eliminating inventory is a straightforward cost-cutting method. In most circumstances, this
is probably not possible. Most companies in the United States, Western Europe, and Eastern
Europe figure out how much inventory they need to deliver an acceptable level of customer
service and how to size inventory as efficiently as feasible.

All functions in any business or organization are interconnected and tied to one another, and
they frequently overlap. Supply chain management, logistics, and inventory management are
all important parts of the business delivery function. As a result, both marketing managers
and finance controllers rely heavily on these functions.

Inventory management is a critical function that determines the supply chain's health and has
an impact on the balance sheet's financial health. Every business seeks to maintain optimal
inventory levels in order to satisfy its needs and avoid excess or under stocking, which can
have a negative influence on financial results.

In the following few paragraphs, an attempt is made to analyse some of the relevant studies
made so far in the field of inventory management.

1. R.S. Chadda (1964) Study had been made on inventory management practices of Indian
companies. The analysis suggested application of modern scientific inventory control
techniques like operations research. These modern scientific techniques furnish opportunities
for the companies, Companies can minimize their investment in inventory but there is
continuous flow of production. He argued that industrially advanced countries, like, USA,
were engaged in developing highly sophisticated mathematical models and techniques for
modernizing and redefining the existing tools of inventory investment.
2. Krishna Murthy (1964) Study was aggregative and dealt with inventories in the private
sector of Indian economy as a whole for the period 1948-61. This study used sales to
represent demand for the product and suggested the importance of accelerator. Short-term
rate of interest had also been found to be significant.

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3. National Council of Applied Economic Research (NCAER) (1966) Conducted a study in

1966 regarding working capital management of three industries namely cement, fertilizer and
sugar. This study mainly devoted to ratio analysis of composition, utilization and financing of
working capital for the period of 1959 to 1963. The study reveals that inventory constituted a
major portion of working capital i.e. 74.06 per cent in the sugar industry followed by cement
industry (63.1%) and fertilizer industry (59.58%). It was observed that inventory had not
managed properly. So far as the utilization of working capital was concerned, cement and
fertilizer industry had better implementation of working capital. The sugar industry had huge
accumulation of stocks so there was inefficient utilization of working capital heavily.
4. Krishnamurty and Sastry (1970) It is the most comprehensive study on manufacturers‟
inventories. They used the CMI data and the consolidated balance sheet data of public limited
companies published by the RBI, in order to analyse each of the major components, like the
raw materials, products-in-process and finished products, for 21 industries during 1946-62.
That study was time series one although there were some inter-industry cross-section
analyses that were carried out in the analysis. The Accelerator represented by change in sales,
bank finance as well as short-term rate of interest was found to be an important determinant.
Also utilisation of manufacturing efficiency with price anticipations was also found to be
relevant on study.
5. George (1972) It was study on cross section analysis of balance sheet data of 52 public
limited companies for period of 1967- 70. Accelerator, internal and external finance variables
were considered in formulation of equations for raw items that includes goods-in-process
inventories. However, equations for finished goods inventories conceive only output volatile.
Deliberation was given on accelerator and external finance volatiles.
6. Mishra (1975) It all about the study on six major public sector enterprises. He concluded that
(i) inventory constitutes most important component of working fund of public enterprises (ii)
efficiency of working funds employed in receivables is terribly low in selected enterprises
and (iii) In all units both current assets and quick ratios are greater than their standards.
Enterprises need proper control on receivables.
7. Dave Piasecki (2001) He focused on various model of inventory to calculating optimum
purchase quantity which used the EOQ method. He points out that many companies are not
using EOQ model because of poor results resulted from inaccurate data input. He says that
EOQ is an accounting formula which determines point at which combination of ordering
costs and stock inventory costs are the least. He highlights that EOQ method would not
conflict with the JIT approach. He further elaborates the EOQ model formula that includes

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parameters like yearly usage on unit, order cost and carrying cost. Finally, he proposes
several steps to follow in implementing the EOQ model. Now this literature limitation is as it
does not elaborate further association among EOQ and JIT. It does not associate stock turns
with EOQ so fails for mention profit gain with associated stock is calculated.
8. Sambasiva Rao. K(2002) According his investigation on Materials Managing in Public
Sector Ship Building Industry evaluates. Output of materials managing and identifies some
problems faced by materials managing in the heavy engineering industry. This investigation
method involves the 68 documentary evidence and survey of expert opinion. He evaluates the
existing purchase systems and lead time involved on procurement of stock item and adviced
the long lead time shall be reduced. His research points at additional stock in terms on
months production cost in all the engineering units. He also highlights some of the problems
in the area on materials managing such as delay in customer part on supplying own stock
item, existence and disposal of surplus and non-moving items, excessive lead times and
excessive dependence on imports. He claims that administrative and procurement lead times
for organization are on the higher side according to peculiar nature of industry. He suggests
liberalized purchase procedures, increased capital powers to the personnel, Opening up of
liaison offices in various countries to reduce the lead time.
9. Gaur, Fisher and Raman (2005) In their study examined firm-level inventory behaviour
among retailing companies. They took a sample on 311 public-listed retail firms for years
1987–2000 for investigate relationship on stock turnover about gross margin, capital intensity
, sales surprise. All observed that stock aggregate turnover for retailing company was
positively related to capital intensity with sales surprise while inversely related gross
margins.
10. S. Singh (2006) Analysed stock control exercises on single fertilizer company named IFFCO.
He statistically examined stock level according consumption, sales as well as other variables
along growth on these variables with inventory patterns. He concluded increments in
components of stocks lead to increment in the proportion on stock in current assets. The
special attention was made in stores with spares for calculate excess purchases resulting.
11. According to Lai (2006). Firms and the stock market are aware of this, which results in a
separating or pooling equilibrium, which is one way inventory translates into market
valuation. Finally, the model was built as though the corporation were a single, unified
organization with no potential conflicts of interest between management and stockholders.
Assume that managers seek to boost not only their share price for shareholders, but also their
private inventory benefits. which may come with higher inventory levels. "Inventory

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management systems are designed to obtain concise and precise information for control and
planning of planned items, issues, cuts, predictions, WIP, and finished goods."
12. According to Me Pharson (2007) Inventory management has been a source of concern for
academics and practitioners alike, given that inventory accounts for a significant portion of a
company's assets. Inventory management has an impact on a company's bottom line. Having
too much inventory is just as bad as having too little. Too much inventory results in needless
expenditures associated with storage, markdowns, and obsolescence, whereas too little
inventory results in stock outs or production disruptions.
13. Pradeep singh (2008) In his study made an attempt to investigate stock with working capital
managing Indian Farmers Fertilizer Cooperative Limited (IFFCO) / National Fertilizer
Limited (NFL). He concluded that overall position of the working fund of IFFCO / NFL is
satisfactory. But there arises need for improvement in stocking as situation of IFFCO.
Although stock were not properly utilized as well as maintained bay IFFCO during
investigation period. Also managing organization o of NFL surely try to properly utilize stock
with try to care stock according to requirements. So that liquidity will not interrupt.
14. Factors to consider for effective inventory management, according to Branam (2008) the
relevance of in-plant through time reduction was highlighted in particular since inventory
turnover ratio, which is one of the most important performance measures in inventory
management, is ultimately constrained by time. The time span from the moment of raw
material receipt to final assembly is the author's perception of the in plant throughout time,
improved forecasting, transportation, communication; technology, scheduling, and
standardization are all aspects that contribute to better inventory management.
15. Capkun, Hameri and Weiss (2009) Statistically analysed the association among stock levels
with fund situation in manufacturing companies using capital information on large sample on
US-based production units over a 26-year period, during, 1980 to 2005. According to them a
significant relationship existed between inventory performance along with the performance of
its components and profitability.
16. According to Pachura (2009), management should begin improving inventory management
by establishing the manufacturing type, benchmarking inventory control performance, and
validating strategy. Using an operational review to determine the root reasons and take
corrective action. He recommended specific inventory management approaches that focused
on improving cycle time, supplier relationships, production scheduling, and a cross-
functional strategy within a corporation. A corporation knows that customer happiness is a
critical factor in its success, according to Slack. et al (2010). Also, keep in mind that the

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consumer is always king, thus the company makes sure that materials are available in the
store to avoid any delays in the manufacturing process. The organization recognizes customer
satisfaction in such a way that inventory control managers establish how frequently inventory
levels are examined in order to determine when and how much to order. It can be done
continuously or on a regular basis. Inventory managers administer inventory policies, using
consumer demand to pull product through the distribution channel, as well as an alternative
mind-set in the company that allocates inventory based on predicted demand of product
availability.
17. According to Rajeev (2011) studied inventory management in small and medium business
and found a favourable association between inventory and sales as well as inventory and
production cost. This is not to say that inventory determines manufacturing cost and sales
automatically, or vice versa. However, it does illustrate that inventory levels might be a good
indicator of what the company‟s sales and marketing department should pay closer attention
to and corporate into sales projections.
18. As mentioned by Sunitha, K. V. (2012) in her thesis, inventory management is vital for
keeping costs down, when meeting regulations. It is difficult to balance demand and supply
and inventory management to make sure that the balance is untouched. The trained inventory
management and good quality software will help make inventory management a victory. The
ROI of Inventory management has seen better revenue and profits, positive employee
ambiance and increase in customer satisfaction.
19. Eneje et al (2012) Investigated the effects of raw materials inventory management on the
profitability of brewery firms in Nigeria using a cross sectional data from 1989 to 2008 which
was gathered for the analysis from the annual reports of the sampled brewery firms. Measures
of profitability were examined and related to proxies for raw materials inventory management
by brewers. The Ordinary Least Squares (OLS) stated in the form of a multiple regression
model was applied in the analysis. The study revealed that the local variable raw materials
inventory management designed to capture the effect of efficient management of raw material
inventory by a company on its profitability is significantly strong and positive and influences
the profitability of the brewery firms in Nigeria. They concluded that efficient management
of raw material inventory is a major factor to be contained with by Nigerian brewers in
enhancing or boosting their profitability.
20. Jose T Jayakumar A. &Sijo M. T. (2013) found the difference between EOQ & number of
pieces purchased. It is observed that the company is not using EOQ for buying the materials.

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Therefore, inventory management is not reasonable. From estimate of safety stock, company
can decide how much inventory the company can keep in back stock per annum.
21. Plinere D. & Borisov A. (2015) concluded that, inventory management is necessary to every
company, having inventories. Companies have stock, but so much as to keep away from
overstock and out-of-stock situations. Inventory management can better company‟s inventory
control existing condition and reduce costs of the company.
22.Edwin Sitienei and Florence Memba (2015) Conducted a study on Effect of Inventory
Management on profitability of Cement Manufacturing Companies in Kenya. The study
concluded that Gross profit margin is negatively correlated with the inventory conversion
period, Increase in sales, which denotes the firm size enriches the firm‟s inventory levels,
which pushes profits upwards due to optimal inventory levels. It is also noted that firms
inventory systems must maintain an appropriate inventory levels to enhance profitability and
reduce the inventory costs associated with holding excessive stock in warehouses.
23. Hong Shen, Qiang. Deng, Rebbaca Lao, Simon Wu (2016) focused on boosting the
inventory management to improve the supply chain of the company. Drop in inventory is
considered one of the most significant aspects of inventory management. In practice, small
inventory level is not always a better solution, so manufacturers need to maintain the correct
amount of inventory at the correct level.
24.Mohamad, S. J. A. N. bin S., Suraidi, N. N., Rahman, N. A. A., & Suhaimi, R. D. S. R.
(2016) concluded that efficiency of inventory management is a major concern area of
business. Suggestions are given to improve the performance of inventory management,
demand forecasting, scattered inventory & cycle counting.
25. Atnafu, D. &Balda, A. (2018) focuses on inventory management & explains the relationship
between inventory management practices, competitive advantage & organizational
performance. The finding of the study on basis of data analysis is that there is a positive
relationship between competitive advantages and inventory management performance. And
better organizational performance gives a firm bigger capital to apply various inventory
management techniques.

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2.2 THEORETICAL FRAMEWORK

Introduction

Inventory is an idle stock of physical goods that contain economic value, and are held in
various forms by an organization in its custody awaiting packing, processing, transformation,
us or sale in a future point of time.

Any organization which is in production, trading, sale and service of a product will
necessarily hold stock of various physical resources to aid in future consumption and sale.
While inventory is an evil of any such business, it may be noted that the organizations hold
inventories for various reasons which include speculative purposes, functional purposes,
physical necessities etc.

From the definition the following points stand out with reference to inventory:

 All organization engaged in production or sale of products hold In inventory in one

form or other.
 Inventory can be in complete state or incomplete state.
 Inventory is held to facilitate future processing value addition.
 All inventory resources have economic value and can be considered as assets of the
organization.

Inventory contributes a very significant part of working capital or current asset in

manufacturing organization. Inventory which consist of raw materials, components and other
consumables, work in progress and finished goods, in an important component of ' current
assets', there are several factors like nature of industry, availability of material, technology,
business practises, price fluctuation, etc. That determines the amount of inventory holding.
Holding inventory ensures smooth production process, price Stability and immediate delivery
to customers Inventory represents a large portion of the business investment and must be well
managed in order to maximise the profits. An undertaking neglecting the management of
inventories will be jeopardizing its long run profitability and may fail ultimately. Therefore,
there must exist some optimum inventory policy which balances the demands of the
production and transportation facilities.

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REASONS FOR HOLDING INVENTORY

 To stabilize production.
 To take advantage of price discounts.
 To meet the demand during the replenishment period.
 To prevent loss of orders.
 To keep pace with changing market conditions.

MOTIVES OF HOLDING INVENTORIES

 The transaction motive which facilitates continuous production and timely execution
of sales orders.
 The precautionary motive which necessities the holding of inventories for meeting the
unpredictable changes in demands and supplies of materials.
 The speculative motive which includes to keep inventories for tacking advantages of
price fluctuations, saving in re-ordering costs and quantity discounts etc.

COSTS ASSOCIATED WITH INVENTORY

 Production cost.
 Capital cost.
 Ordering cost.
 Carrying cost.
 Shortage cost.

INVENTORY CONTROL

The main objective of inventory control is to achieve maximum efficiency in production &
sales with minimum investment in inventory.

Inventory control is a planned approach of determining what to order, when to order and how
much to order and how much stock, so that costs associated with buying and storing are
optimal without interrupting production and sales.

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BENEFITS OF INVENTORY CONTROL

The benefits of inventory control are:

 Improvement in customer's relationship because of the timely delivery of goods and

services.
 Smooth and uninterrupted production and hence, no stock out.
 Efficient utilization of working capital.
 Economy in purchasing.
 Eliminating the possibility of duplicate ordering.

PRINCIPLES OF INVENTORY

 Inventory is only created by spending money for materials and the labour and
overhead to process the materials.
 Inventory is reduced through sales and scrapping
 Accurate sales & production schedule forecasts are essential for efficient purchasing,
handling & investment in inventory.
 Management policies which are designed to effectively balance size and variety of
inventory with cost of carrying that inventory are the greatest factor in determining
inventory investment.
 Forecasts help determine when to order materials. Controlling inventory is
accomplished through scheduling production.
 Records do not produce control.
 Control is comparative relative, not absolute. It is exercised through people with
varying experiences and judgment rules & procedures establish a base from which the
individuals can make evaluation and decision.
 With the consistent practices being followed, inventory control can become
predictable and properly related to production and sales activity.

INVENTORY CONTROL-TERMINOLOGY

 Demand:

It is the number of items required per unit of time. The demand may be either deterministic or
probabilistic in nature.

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 Order cycle:

The time period between two successive orders is called order cycle.

 Lead time:

The length of time between placing an order and receipts of items is called lead time.

 Safety stock:

It is also called buffer stock or minimum stock. It is the stock or inventory needed to account
for delays in materials supply and to account for sudden increase in demand due to rush
orders.

 Inventory turnover

If the company maintains inventories equal to 3 months consumption. It means that inventory
turnover is 4 times a year i.e., the entire inventory is used up and replaced 4 times a year.

INVENTORY COST RELATIONSHIPS

There are two major costs with associated with inventory. Procurement cost and carrying
cost. Annual procurement cost varies with numbers of orders. This implies that the
procurement cost will be high, if the item is produced frequently in small lots. The annual
procurement cost is directly proportional to the quantity in stock. The inventory carrying cost
decreases, if the quantity ordered per order is small. The two costs are diametrically opposite
to each other. The right quantity to border is one that strikes a balance between the two
opposition costs. This quantity is referred to as "Economic Order Quantity".

ECONOMIC ORDER QUANTITY

MEANING

A decision about how much to order has great significance in inventory management. The
quantity to be purchased should neither be small nor big because costs of buying and carrying
materials are very high. Economic order quantity is the size of the lot to be purchased which
is economically viable. This is the quantity of materials which can be purchased at minimum
costs. Generally economic order quantity is the point at which inventory carrying costs are
equal to order costs. In determining economic order quantity it is assumed that cost of
managing inventory is made up solely of two parts i.e., ordering cost and carrying cost.

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TYPE OF INVENTORY

Inventory of materials occurs at various stages and departments of an organization. A

manufacturing organization holds inventory of raw materials and consumables required for
production. It also holds inventory of semi-finished goods at various stages in the plant with
various departments. Finished goods inventory is held at plant, finished goods stores,
distribution canters etc. Further both raw materials and finished goods that are in transit at
various locations also from a part of inventory depending upon who owns the inventory at the
particular juncture.

Finished goods inventory is held by the organization at various stocking points or with
dealers and stockiest until reaches the workers and end customers. Besides Raw materials and
finished goods, organizations also hold inventories of spare part to service the products.
Defective products, defective parts and scrap also forms a part of inventory as long as these
items are inventoried in the books of the company have economic value.

PURPOSE OF INVENTORY

1. Meet Demand
In order for a retailer to stay business, it must have the products that the customer wants
on hand when the customer wants them. If not, the retailer will have to backorder the
product. If the customer can get the good from some other source, he or she may choose
to do so rather than electing to allow the original retailer to meet demand later (through
back-order). Hence, in many instances, if a good is not In inventory. a sale is lost forever.
2. Keep Operations Running

A manufacturer must have certain purchased items.(raw, materials, components, or

subassemblies) in order to manufacture its product. Running out of only one item can
prevent a manufacturer from completing the production of its finished goods.

3. Lead Time

Lead time is the time that elapses between the placing of an order (either a purchase order
or a production order issued to the shop or the factory floor) and actually receiving the
goods ordered. If a supplier (an external firm or an internal department or plant) cannot
supply the required goods on demand, then the client first must keep an inventory of the
needed goods. The longer lead time the larger the quantity of goods the firm must carry in
inventory.

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INVENTORY MANAGEMENT

Inventory management is the process of ensuring that a company always has the products it
needs on hand and that it keeps costs as low as possible. Inventory management is the
supervision of non – capitalize assets (inventory) and stock items.

OBJECTIVES OF INVENTORY MANAGEMENT

The main objectives of inventory management arc operational and financial. The operational
objectives mean that the materials and spares should be available in sufficient quaintly so that
work is not disrupted for want of inventory. The financial objective means that investments in
inventories should not remain idle and minimum working capital should be locked in it. The
following are the objectives of inventory management.

a) To ensure continuous supply of materials, spares and Finished goods so that production
should not suffer as any limb and the customers demand should also be met.
b) To avoid both over-stocking and under-stocking of inventory
c) To maintain investments in inventories at the optimum level as required by the
operational and sales activities.
d) To keep material cost under control so that they contribute in reducing cost of
production and overall costs.
e) To eliminate duplication in ordering or replenishing stocks. This is possible with the
help of centralizing purchases.
f) To minimize losses through deterioration, pilferage, wastage, and damages.
g) To design proper organization for inventory management. Clear cut accountability
should be fixed at various levels of the organization.
h) To ensure perpetual inventory control so that materials shown in stock ledgers should
be actually lying in the stores.

MOST EFFECTIVE INVENTORY MANAGEMENT TECHNIQUES

ABC Analysis

It is an inventory management technique where inventory items are classified into three
categories namely: A, B, and C. The items in A category of inventory are closely controlled
as it consists of high-priced inventory which may be less in number but are very expensive.
The items in B category are relatively lesser expensive inventory as compared to „A‟ category

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and the number of items in „B‟ category is moderate so control level is also moderate. The
„C‟ category consists of a high number of inventory items which require lesser investments so
the control level is minimum.

Just In Time (JIT) Method

In Just in Time method of inventory control, the company keeps only as much inventory as it
needs during the production process. With no excess inventory in hand, the company saves
the cost of storage and insurance. The company orders further inventory when the old stock
of inventory is close to replenishment. This is a little risky method of inventory management
because a little delay in ordering new inventory can lead to stock out situation. Thus this
method requires proper planning so that new orders can be timely placed.

Material Requirements Planning (MRP) Method

Material Requirements Planning is an inventory control method in which the manufacturers

order the inventory after considering the sales forecast. MRP system integrates data from
various areas of the business where inventory exists. Based on the data and demand in the
market, the manager would carefully place the order for new inventory with the material
suppliers.

Economic Order Quantity (EOQ) Method

Economic Order Quantity technique focuses on taking a decision regarding how much
quantity of inventory should the company order at any point of time and when should they
place the order. In this model, the store manager will reorder the inventory when it reaches
the minimum level. EOQ model helps to save the ordering cost and carrying costs incurred
while placing the order. With the EOQ model, the organization is able to place the right
quantity of inventory.

Minimum Safety Stocks

The minimum safety stock is the level of inventory which an organization maintains to avoid
the stock-out situation. It is the level when we place the new order before the existing
inventory is over. Like for example, if the total inventory in an organization is 18,000 units,
they place a new order when the inventory reaches 15,000 units. Therefore, the 3,000 units of
inventory shall form part of the minimum safety stock level.

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VED Analysis

VED stands for Vital Essential and Desirable. Organizations mainly use this technique for
controlling spare parts of inventory. Like, a higher level of inventory is required for vital
parts that are very costly and essential for production. Others are essential spare parts, whose
absence may slow down the production process, hence it is necessary to maintain such
inventory. Similarly, an organization can maintain a low level of inventory for desirable
parts, which are not often required for production.

Fast, Slow & Non-Moving (FSN) Method

This method of inventory control is very useful for controlling obsolescence. All the items of
inventory are not used in the same order; some are required frequently, while some are not
required at all. So this method classifies inventory into three categories, fast-moving
inventory slow-moving inventory, and non-moving inventory. The order for new inventory is
placed based the utilization inventory.

ADVANTAGES AND DISADVANTAGES OF INVENTORY MANAGEMENT

One of the principles of supplying goods to a market is that the company must hold enough
stock to satisfy customer demand without holding too much. Holding just the right quantity
of stocks to satisfy demand will help to minimize cost.

Inventory is the physical stock of item that a business or an organization keeps at hand for
efficient running of its affairs. Inventory management on the other hand involves the
supervision of non-capitalized assets and stock items. It sees to the flow of goods from
manufacturers to the warehouse and from these facilities to the point of sale. In short, it
involves ordering, storing and using of a company‟s inventory: raw material component and
finished. In addition, inventory management can also be seen as maintaining an effective
internal control over inventory including safeguarding the inventory from damage or theft,
using purchase order to track inventory movement, maintaining an inventory ledger and
frequently comparing physical inventory counts with the amount that is on record.

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Advantages of inventory management

1. It helps to maintain the right amount of stocks: contrary to the belief that is held by
some people, inventory management does not seek to reduce the amount of inventory
that you have in stock, however, it seeks to maintain an equilibrium point where your
inventory is working at a maximum efficiency and you do not have to have many
stocks or too few stocks at hand at any particular point in time. The goal is to find that
zone where you are never losing money in your inventory in either direction. With the
aid of an efficient inventory management strategy, it is easy to improve the accuracy
of inventory order.
2. It leads to a more organized warehouse: with the aid of a good inventory
management system, you can easily organize your warehouse. If your warehouse is
not organized, you will find it very difficult to manage your inventory. A lot of
businesses choose to optimize their warehouse by putting the items that have the
highest sales together in a place that is easy to access in the warehouse. This
ultimately helps to speed up order fulfilment and keeps clients happy. If you enter into
a warehouse or a facility without proper inventory management, it is immediately
apparent. Managers and business owners who do not implement an effective
inventory management system usually have troubles keeping track of assets and
executing work order so they just end up not being kept in the right place. It is not just
an eyesore but it can also lead to a variety of safety hazards as well.
3. It saves time and money: an effective inventory management system can translate to
time and money saved on the part of the business. By keeping track of the product
that you already have at hand, you can save yourself the hassles of having to do an
inventory recount in order to ensure your records are accurate. It also allows you to
save cash that would have otherwise been spent on slow moving products.
4. Improves efficiency and productivity: inventory management devices like bar code
scanners and inventory management software can help to greatly increase the
efficiency and productivity of a business. They do this by eliminating the manual way
of doing things thus allowing employees to do other more important things for the
business.
5. A well-structured inventory management system leads to improved customer
retention: for customers to keep patronizing you, you will need to always have the
goods they want, at the amount they want, and at the time they want it. Inventory

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management helps you to meet up this demand by allowing you to have the right
products all the times so that you and your customers are never stranded.
6. Avoid lawsuits and regulatory fines: like mentioned previously, inventory
management allows you to keep your warehouse or facility in order. If it is not kept in
order, it can result in lawsuits, injury and fines associated with not following
regulatory guidelines and rules. In addition, proper inventory management (including
keeping records of your staff activities) helps document your actions in the event of
an undesirable situation.
7. Schedule maintenance: once you get hold of a new appliance, you can begin to
schedule routine and preventative maintenance, issue work order to your staff and
track that the maintenance was actually carried out. This will help to elongate the life
span of that particular asset.
8. Reduction in holding costs: yet another benefit of an efficient management system is
that it helps to save on inventory cost. These types of cost can be large and can be
detrimental to a healthy profit margin. These types of costs are financing costs,
warehouse rent, warehouse staff salaries, electricity bills, security et al. The key to
keeping these costs in check is to have only the amount of inventory that you need at
a particular time. With an inventory management program that assists you to make
good forecasts, you can avoid over stocking and thus over pay on holding costs.
Furthermore, having confidence in your forecast will mean that you will not have to
hold a lot of “safety stock”.
9. Flexibility: a good inventory management strategy will allow the manager to be
flexible and adapt to situations as they arise. The business world is dynamic and often
unpredictable, and the same can also be said for inventory management. There are a
plethora of problems that could come up such as incorrect shipments, warehouse
accidents, manufacturing issues, theft et al. It is usually not possible to foresee or
predict with certainty when they could happen, but if they happen, the best case
scenario will be for the manager to know at once so that he or she can rectify the
issue.
10. Increased information transparency: a good inventory management helps to keep
the flow of information transparent. This information includes when items were
received, picked, packed, shipped, manufactured et al. You also get to know when
you need to order more of any good, when you have too much stock or too little stock.

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Disadvantages of Inventory Management

1. Bureaucracy: even though inventory management allows employees at every level of

the company to read and manipulate company stock and product inventory, the
infrastructure required to build such a system adds a layer of bureaucracy to the whole
process and the business in general. In instances where inventory control is in-house,
this includes the number of new hires that are not present to regulate the warehouse
and facilitate transactions. In instances where the inventory management is in the
hands of a third party, the cost is a subscription price and a dependence on another
separate company to manage its infrastructure. No matter the choice you go for, it
translates to a higher overhead cost and more layers of management between the
owner and the customer. From the view point of the customer, a problem that requires
senior management to handle will take a longer period of time before it will be
trashed out.
2. Impersonal touch: another disadvantage of inventory management is a lack of
personal touch. Large supply chain management systems make products more
accessible across the globe and most provide customer service support in case of
difficulty, but the increase in infrastructure can often mean a decrease in the personal
touch that helps a company to stand out above the rest. For instance, the sales
manager of a small manufacturing company that sells plumbing supplies to local
plumbers can throw in an extra box of washers or elbows at no charge to the customer
without raising any alarms. This is done for the sake of customer relations and often
makes the customer feel like he is special. While free materials can also be provided
under inventory management, processing time and paper work make obtaining the
material feel more like a chore for the customer or even an entitlement.
3. Production problem: even though inventory management can reveal to you the
amount of stock you have at hand and the amount that you have sold off, it can also
hide production problems that could lead to customer service disasters. Since the
management places almost all of its focus on inventory management to the detriment
of quality control, broken or incorrect items that would normally be discarded are
shipped along with wholesome items.
4. Increased space is need to hold the inventory: in order to hold inventory, you will
need to have space so unless the goods you deal in are really small in size, then you
will need a warehouse to store it. In addition, you will also need to buy shelves and

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racks to store your goods, forklifts to move around the stock and of course staff. The
optimum level of inventory for a business could still be a lot of goods and they will
need space to be stored in and in some cases additional operational costs to manage
the inventory. This will in turn increase cost and impact negatively on the amount of
profit the business makes.
5. Complexity: some methods and strategies of inventory management can be relatively
complex and difficult to understand on the part of the staff. This may result in the
need for employees to undergo training in order to grasp how the system works.
6. Some inventory management systems such as the fixed order period system compels a
periodic review of all items. This it makes the system a bit inefficient.
7. High implementation costs: some inventory management systems can come at a
high price because the business needs to install specialized systems and software in
order to use them. This can be problematic for large businesses which operate in
difficult locations. Even after installing the costly system, it still needs to be
maintained and upgraded on a regular basis, thus incurring more costs.
8. Even with an efficient inventory management method, you can control but not
eliminate business risk.
9. The control of inventory is complex because of the many functions it performs. It
should thus be viewed as a shared responsibility.
10. Holding inventory can result to a greater risk of loss to devaluation (changes in price).

FEATURES OF INVENTORY MANAGEMENT

Comprised of many components, the inventory management system makes handling the
inventories an easy and simpler task. Owing to the inventory management services, the
overall efficiency and productivity of the business improve. It is essential to use such
kinds of inventory software for the business as they handle the regular tasks and time
consuming chores efficiently and this, in turn, lets the focus be on the production part.

The following are a few of the features of an inventory management system.

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1. Order management:
With the help of a proper and effective inventory system, an adequate amount of
inventory can maintain at all times.
The system raises an alarm in the case where the inventory drops down a specific
threshold limit or exceeds over and above the prescribed limit. In both the conditions,
due steps take and the needful is done.

2. Asset tracking:
Tracking of the asset is yet another feature of asset management.
In the case where there is a requirement of a specific product/raw material and it‟s not
easily traceable with the naked eye or stored in the warehouse, then in that case measures
take and the location of the same is identified using the software. This easy tracking of
the product helps a great deal in saving the time and energy of the person in charge of
finding it and the same can invest somewhere else and productivity can reap. The
identification in such a case can make through serial numbers, barcodes, etc.
3. Service management:
In the case of companies that deal primarily with the service industry, this kind of
management system helps in tracking the cost of the materials which use for providing
services and includes the cost of cleaning, supplies, etc. This, in turn, helps in attaching
the cost to the total cost of the services.
4. Inventory optimization:
Inventory management methods help a great deal in optimizing the inventory. It helps in
deciding the reorder point for a manufacturing process, i.e., when should the fresh order
for inventory be placed along with the appropriate quantity of inventory. It also helps in
managing the stock in hand as well the days for which the stock will be available in case
there arises some emergency due to which the fresh order cannot be placed for new
stock. All of these features of the inventory management system make it one of the most
important systems which should integrate within any business for better productivity and
more efficient results.

INVENTORY MANAGEMENT CHALLENGES

1. Getting Accurate Stock Details:

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If you don‟t have accurate stock details, there‟s no way to know when to refill stock
or which stock moves well.

2. Poor Processes:

Outdate or manual processes can make work error-prone and slow down operations.

3. Changing Customer Demand:

Customer tastes and needs change constantly. If your system can‟t track trends, how
will you know when their preferences change and why?

4. Using Warehouse Space Well:

Staff wastes time if like products is hard to locate. Mastering inventory management
can help eliminate this challenge.

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