Differentiated between planning of inventory. and significance of inventory
Answers
The key difference between inventory control and inventory management is that inventory control is a method of regulating the inventory level in the company warehouse whereas inventory management refers to the activity of forecasting and replenishing inventory which is focused on when to order the inventory, how much to order and from whom to order. Inventory control and inventory management play a key role in manufacturing and distribution companies since they deal with a significant amount of inventory. Companies should always have appropriate levels of inventory in order to meet customer demands.
CONTENTS
1. Overview and Key Difference
2. What is Inventory Control
3. What is Inventory Management
4. Side by Side Comparison – Inventory Control vs Inventory Management
5. Summary
What is Inventory Control?
Inventory control is a method of regulating the inventory level in the company warehouse. This includes ensuring that no stock out situations will be experienced and what and how much items are being stocked. Further, inventory control should ensure that all items remain in usable condition. Maintaining inventory is expensive due to storage and insurance costs. Below measures can be adopted to ensure an effective inventory control system.
Using Inventory Budgets
Inventory budgets can be used to calculate the cost of acquiring and holding inventory and how much revenue can be generated through the sale of finished goods. This type of budget helps the company to plan inventory effectively.
Establishing Annual Stock Policy
Defining a minimum and maximum stock level for each inventory category (raw materials, work in progress and finished goods), along with a list of suppliers from whom the company will purchase goods can make stock control effective. Further, sufficient buffer stock (safety stock) should be maintained in order prevent stock outs.
Maintaining a Perpetual Inventory System
Perpetual inventory system is a method of accounting for the increase or decrease in inventory immediately following a sale or purchase. This system keeps continuous track of inventory balances, and provides complete details of changes in inventory through immediate reporting. The main advantage of perpetual inventory system is that it demonstrates how much inventory is available at any given point of time and prevents stock outs.
What is Inventory Management?
Inventory management refers to the activity of forecasting and replenishing inventory which is focused on when to order the inventory, how much to order and from whom to order.
When to Order?
This is determined by the ‘reorder level’ or ‘reorder point’. It is the inventory level at which a company would place a new order for products.
Reorder level is calculated as
Reorder Level = Average Daily Usage Rate x Lead Time in Days
E.g. XYZ Company is a manufacturing firm that has an average daily usage rate of material is 145 units and the lead time is 8 days. Thus,
Reorder level = 145* 8 = 1,160 units
When the inventory level reaches 1,160 units, the new order for raw materials should be placed.
How Much to Order?
The number of products that should be ordered will be decided upon finalizing the reorder level where the decision is made regarding how much of new inventory should be ordered. The same is referred to as the ‘economic order quantity’ where the number of units that should be ordered that minimizes total inventory cost.
Economic Order Quantity = SQRT (2 × Quantity × Cost per Order / Carrying Cost per Order)
Continuing from the above example,
E.g. XYZ Company uses a quantity of 22,500 units of raw materials per annum. Its cost per order is $340 with a carrying cost per order is $20. Thus,
Economic order quantity = SQRT (2 × 22,500 × 340 / 20) = 875 units
From Whom to Order?
Rigorous and transparent policies in selecting suppliers are needed in order to obtain the most suitable ones who will deliver quality goods on time as an when it is required.
By ensuring the correct amount of inventory is available at the correct time, the company can continue operations in a smooth manner. Inventory turnover ratio is an important ratio that indicates the movement of inventory (the number of times that the inventory is replaced); a higher ratio indicates that inventory management is in line with the demand.
Answer:
Inventory Planning is what most companies look for to understand their inventory position and to control their inventory levels and investment. Inventory Planning in its simplest form is included with Inventory Management. And, an optimal inventory plan will and should include Inventory Optimization. So, they are intertwined and Inventory Planning sits in the middle.
From a top-down perspective, Inventory Planning is the forward looking investment in inventory spend. This is generally performed at a product category level and deemed to be your open-to-buy budget and extremely popular among retailers where working at the item by location level can be cumbersome (especially in fashion).
Explanation: