What is inventory? Inventory can be defined as a complete list of all the things and products a company keeps in its possession. Inventory is important to any type of business, as it helps you determine how much of the total resources your firm has at any given time. In short, inventory is the sum total of all the resources at a single point in time.
Basically, inventory is a simple process of creating a list that includes your current assets (which we are assuming here to be cash and goods that are not merchandise) and your current liabilities, which are also called current assets. An asset list may include accounts receivables, accounts payables, inventory, capital equipment, working capital, and any current assets previously owned and considered available for use. Liabilities include accounts payable, accrued expenses, current accounts, and other debts that have not been paid yet.
In simple terms, inventory can be a store of items, raw materials, components and parts that a business uses in production, or acquires from outside sources. As a manufacturer, you practice inventory control so that you have sufficient inventory on hand and can identify any shortages.
Inventory analysts determine inventory levels using several different methods, such as a balance of buy and sell items, an indicator of oversupply, and a pull system that identifies undersupplied items. The inventory definition then consists of the methodologies used by inventory managers in order to make inventory determinations.
Now that you have your two categories – your current assets and your current liabilities – you can do a bit of interesting work with your inventory information. For example, if you currently own the manufacturing facility and have an existing conveyor system, you will know how many loads per minute the conveyor moves. You can then multiply that number by the number of hours in a typical day at the facility and get your weighted average inventory cost per employee. You would then deduct the load per minute from your weighted average cost per employee to get your cost per employee. Your inventory costs are then based on the weighted average cost per employee. This may seem complicated but once you understand the method you can calculate your inventory cost to be almost completely accurate.
Now, let’s assume that you don’t own the facility but you have access to raw materials like coal, steel, aluminum and iron ore that are needed in production. In this case, the first thing you need to do is determine the cost of your raw materials plus the cost of your finished goods or raw materials. Once you’ve figured this out, you can divide your inventory by your required number of employees and divide your inventory per employee by your required number of finished goods per employee. This will give you a good idea of how much inventory is really necessary to manage on a daily basis.
Next, you must determine what percentage of your inventory should be allocated to storage costs versus replenishment of inventory. If you’re a large manufacturer that purchases a lot of goods sold in bulk, then you may want to consider storing your excess inventory to avoid a stock run. If you’re a small retailer, then you can probably stick with replenishment. Again, remember to factor in the weighted average cost per employee for your inventory.
Now it’s time to do a bit of analyzing about what you know about the items in your inventory. You need to make sure that your products are selling fast enough but that they’re not being depleted too quickly. One way to estimate this is to figure out how long it would take for your average inventory to sell if you kept it replenished at the same rate it was replenished. This gives you a good idea of how fast your inventory turnover should be and how many items you should keep in stock at any given time.
Finally, your final essential guide to inventory management is your demand forecasting. In order for your business to run smoothly, you have to be able to anticipate the types of customers who will be buying from you. It’s important to have a basic understanding of demand forecasting methods such as case studies and surveys. Without a proper demand forecasting system, you may be over-allocating resources that could be better used elsewhere. On the other hand, you may under-estimate the demand that you’ll have for your product line and therefore over-allocate resources for inventory management that will be necessary once you actually start selling the product line.
This is a brief overview of the three most essential guides to inventory management. I suggest that you spend some time implementing each of these suggestions. If possible, talk to someone experienced in inventory processes to better understand how your current inventory process functions and how you can improve upon it. Once you’ve taken note of the improvements, I believe that you will also be more confident in your ability to properly manage your inventory process.