Overview

Inventory management or control refers to the management of idle resources which have economic value tomorrow. Alternatively, Inventory may be defined as usable but idle resources that have economic value.
Inventory Management refers to maintaining, for a given financial investment, an adequate supply of something to meet an expected demand pattern. It thus deals with determination of optimal policies and procedures for procurement
In business management, inventory consists of a list of goods and materials held or available in stock. Management of inventory or Inventory management is all about handling functions related to the tracking and management of material. This includes the monitoring of material moved into and out of stockroom locations and reconciling the inventory balances, setting targets, providing replenishment techniques, reporting actual and projected inventory status.
The task of ABC analysis, lot tracking, cycle counting support etc. can even be a part of inventory management.
¾ Inventory control is concerned with minimizing the total cost of inventory. The three main factors in inventory control decision making process are:
¾ The cost of holding the stock (e.g., based on the interest rate). The cost of placing an order (e.g., for row material stocks) or the set-up cost of production. The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.
The third element is the most difficult to measure and is often handled by establishing a “service level” policy, e. g, certain percentage of demand will be met from stock without delay.
Terminology used in Inventory management / control:
Maximum Limit: When devising a suitable Inventory model, the Maximum limit establishes the upper limit to which the stock of an inventory item shall be allowed.
Minimum Limit: It is the lower limit to which the stock can be allowed to fall in course of replenishment of the stock of an item. Normally, this is taken to be the safety stock also.
Safety Stock: This is the stock that is maintained to counter the variation in demand of an item during the replenishment lead time.
Demand or Usage: Replenishment of stock and usage of an item is an ongoing phenomenon in inventory control. Demand thus is the rate of usage of an item. Over a period of time demand is considered to be stable. However, demand can be seasonal or cyclical in nature depending upon an item’s nature.

Inventory Management / Control basics

Inventory management or control refers to the management of idle resources which have economic value tomorrow. Alternatively, Inventory may be defined as usable but idle resources that have economic value.

Assess Inventory Levels

Simplistic Method – Historical Inventory Levels
most methods of accounting take the beginning inventory of a period, add it to the ending inventory of a period, and divide by 2. This essentially provides the mathematical average for a given month.
For example, if your inventory level for a good is 2000 on July 1st, you produce 3000 units and sell 1000 units by July 31st. This leaves you with 4000 units. The formula is:
Avg. Inventory = (Beginning Inventory+(Beginning Inventory ++its Produced-Units Sold))/2 Avg. Inventory = (2000+(2000+3000-1000))/2 = 3000 Or more simply:
Avg. Inventory = (Beginning Inventory Ending inventory)/2 Avg. Inventory=(2000+4000)/2=3000
So this covers historical looks using an accounting approach. A lot of firms use this method to evaluate their average inventory levels.

Daily Weighted Average Inventory Approach

Suppose you start with 10,000 units on May 1st. Also suppose you produce 10,000 units in that month spread out across 21 business days. Now (and this is the important part) suppose you sold 20,000 units in May. This brings the ending inventory to 0. Using accounting methods, the formula gives us 10,000 as the average inventory.
So why is this so bad? In short, because the average inventory is not 10,000 units. In fact, there were only two days in which 10,000 units or less were held and these days were May 1st (10,000 units) and May 31st (0 Units). Assuming that production was level through the 21 day working month, this means that 500 units were produced daily, thus raising inventory by 500 units a day until inventory was dropped by 20,000 on the 31st.