Definition of Inventory Management

Definition of Inventory Management – Inventory control is one of the most important functions in management, especially in production and operations management. Excessive inventory will cause high expenses such as interest expense, storage costs, risk of damage to inventory.

Meanwhile, inadequate inventory will cause delays in the smooth production so that there is a risk of loss of sales and customer dissatisfaction due to the desired product can not be received at the right time. Good inventory management is inventory management that can maintain a balance between inventory investment with the level of service to consumers.

In general, Inventory can be defined as everything or organizational resources that are stored in anticipation of fulfilling demand. Inventories can also be interpreted as idle resources in an organization.

In Production, Inventory can also be defined as a collection of physical products at various stages of the transformation process, from raw materials to processed goods to finished goods that are ready to be sent to customers.

Inventories in manufacturing companies generally include raw materials, processed goods (WIP), sub-materials, sub-components, assembled components from other companies or their own companies (assembled components) / modules) and also the inventory of finished products / Finished Goods. But there are also many companies or organizations that include money, space that is not occupied (space), labor, machinery, spare parts, and equipment as supplies to meet customer demand.

Inventory Control Function

Some of the functions of inventory control are as follows:

  1. As a buffer of the production process (buffer) so that the operating process can continue.
  2. Determine the number of goods that must be stored as a resource in order to remain available.
  3. Avoiding lack or excess material
  4. Reducing the risk of price changes due to inflation and rising prices from suppliers

Also read: Understanding Inflation and Causes of Inflation.

Costs in Inventory

The costs in the Supplies can be divided into 4 cost categories namely Storage Costs, Ordering Costs, Preparation Costs, and Depletion Costs or material shortages. The following below are the costs that fall into these 4 cost categories.

Holding Cost / Carrying Costs

Storage costs are costs incurred to store goods that have been ordered. These storage costs include:

  • Costs for storage facilities such as lighting costs, costs for temperature and humidity regulators and warehouse rental fees
  • Capital Cost
  • Obsolescent Costs
  • Costs of physical counts and conciliation reports (stock take cost)
  • Insurance fee
  • Costs due to theft, vandalism or robbery
  • Inventory handling costs
  • Cost of inventory depreciation
  • Costs due to price changes
  • Costs for Implementing the warehouse

Order Costs

Ordering costs are costs associated with the activities of ordering goods, ranging from placing an order (order) until the availability of the item. Ordering fees usually depend on the frequency of bookings made (how many times an order is made). Included as a booking fee include:

  • Order processing and shipping costs
  • Shipping costs (wage costs and transportation costs)
  • Communication costs (such as telephone fees, fax fees, correspondence)
  • Packing fee
  • Inspection cost

Preparation Costs (Setup Cost)

Preparation costs or setup costs include:

  • The cost of idle machines
  • Direct Labor Preparation Costs
  • Scheduling fee

Out of cost / shortage of material inventory (Shortage Cost)

What is meant by running out / lack of material inventory is the cost arising from the unavailability of the desired material when needed. These costs include:

  • Loss of Sales
  • Losing Customers
  • Special booking fees
  • Special Shipping Fee
  • Disruption of Production

To balance the costs of Orders and Storage Costs, we can use the Inventory Control Calculation Method called Economic Order Quantity or abbreviated as EOQ.

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