Benefits of inventory management and control


Proper management and control of inventories will result in the following benefits to an organization:

1. Inventory control ensures an adequate supply of materials and stores minimizes stock outs and shortages and avoids costly interruptions in operations.

2. It keeps down investment in inventories, inventory carrying costs and obsolescence losses to the minimum.

3. It facilitates purchasing economies through the measurement of requirements on the basis of recorded experience.

4. It permits a better utilization of available stocks by facilitating inter-department transfers within a company.

5. It provides a check against the loss of materials through carelessness or pilferage.

6. It facilitates cost accounting activities by providing a means for allocating material costs to products, departments or other operating accounts.

7. Perpetual inventory values provide a consistent and reliable basis for preparing financial statements.

Process of inventory Management and Control

As mentioned earlier, inventory management and control refers to the planning for optimum quantities of materials at all stages in the production cycle and evolving techniques which would ensure the availability of planned inventories. Four steps are involved in the process, namely:

1. Determination of optimum inventory levels and procedure of their review and adjustment.

2. Determination of the degree of control that is required for best results.

3. Planning and design of the inventory control system and

4. Planning of the inventory control organization.

Optimum Inventory Levels

Determination of inventory that an organization should hold is a significant but difficult step. Too much of inventory results in locking up of working capital accompanied by increased carrying costs (but reduced ordering costs). Excess inventories, however, guarantee uninterrupted supply of materials and components, to meet production scheduled and finished goods to meet customer’s demand. Too less of inventory releases working capital for alternative uses and induces carrying costs (increases ordering costs). But there is the risk of stock out cost.

The actual level of the inventory may also be improved by a close study of the manufacturing cycle. How long does it take to bring out a road roller or a rail coach or an electric motor from the raw materials stage to the finishing stage? A study in co-operation with the manufacturing function of the ratio of actual processing time to waiting time may be most revealing, and when unnecessary details are eliminated, the work in process inventory can be considerably reduced.