Inventory is Money - Introduction to Inventory Management

Introduction to Inventory Management

The term "inventory" refers to the items, goods or materials that are used by a firm for the purpose of production and sale. It also includes the items, which are used as supportive materials to facilitate production function.

There are three basic types of inventory: 

1. Raw Materials (RM)
2. Work-in-Process (WIP)
3. Finished Goods (FG)

Raw materials are the items purchased by firms for use in production of finished product. 

Work-in-progress consists of all items currently in the process of production. This includes semi-finished (SFG) goods also. These are actually partly manufactured products. 

Finished goods consists of those items, which have already been produced but not yet sold. 

Inventory constitutes one of the important items of current assets, which permits smooth operation of production and sale process of a firm. Inventory management is that aspect of current assets management, which is concerned with maintaining optimum investment in inventory and applying effective control system so as to minimize the total inventory cost.

Importance Of Inventory Management

Inventory management is important from the view point that it enables to address two important issues:

1. The firm has to maintain adequate inventory for smooth production and selling activities.

2. It has to minimize the investment in inventory to enhance firm's profitability.

Investment in inventory should neither be excessive nor inadequate. It should just be optimum. Maintaining optimum level of inventory is the main aim of inventory management.  

Excessive investment in inventory results into more cost of fund being tied up so that it reduces the profitability, inventories may be misused, lost, damaged and hold costs in terms of large space and others. At the same time, insufficient investment in inventory creates stock-out problems, interruption in production and selling operation. 

Therefore, the firm may loose the customers as they shift to the competitors. Financial manager, as he involves in inventory management, should always try to put neither excessive nor inadequate investment in inventory. 

The importance or significance of inventory management could be specified as below:

• Inventory management helps in maintaining a trade off between carrying costs and ordering costs which results into minimizing the total cost of inventory.
• Inventory management facilitates maintaining adequate inventory for smooth production and sales operations
• Inventory management avoids the stock-out problem that a firm otherwise would face in the lack of proper inventory management
• Inventory management suggests the proper inventory control system to be applied by a firm to avoid losses, damages and misuses.

***INVENTORY IS MONEY***