Question

In: Finance

what are the key steps in the inventory management process and the relevant documentation systems?

what are the key steps in the inventory management process and the relevant documentation systems?

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Expert Solution

Inventory, as we all understand, consists of raw materials used in the production process, the work in progress as well as the finished goods that are available for sale. For a business, it is an important area to be managed by taking into consideration all factors such as its demand, supply, availability, lead time, storage conditions, cost etc. This process of inventory management is essentially maintaining an optimal level of inventory such that there is sufficient quantity available when needed while maintaining a low cost of holding. The key steps and documentation required can be understood as follows:

Based on past experiences, identify the times when there was an inventory management problem - for example overstocking of inventory or shortage of inventory. Identify what went wrong in the process and try to design a more effective management system by not repeating the past mistakes.

Understand the existing level of demand-supply characteristics and try to gauge the future trends of inventory and accordingly be prepared to meet the future demand or accumulate less inventory if future demand is expected to fall or cost of holding is expected to be more than benefits of storing the inventory.

Different types of inventories have different purchase cost, storage cost, lead time, etc and therefore another step should be to categorize the inventory in their appropriate groups and use an appropriate coding system where required. Inventory categories can be serially or alphabetically numbered.

Proper record maintenance forms an important step in inventory management system. There are 2 methods of maintaining inventory records. They are perpetual inventory system and periodic inventory system.

These steps involve a lot of documentation - for example- appropriate record keeping right from the time inventory was required by the production department to the time it was issued to them must be maintained. The details of number of stock items, price at which they were purchased, the name of the supplier from which they were purchased, grade of materials, expiry date (for specific categories of inventories), etc must be properly documented. Bin cards, Stores ledger accounts/cards etc must be maintained.


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