INVENTORY MANAGEMENT

One issue is infrequent large orders vs. frequent small orders. Large orders will increase the amount of inventory on hand, which is costly, but may benefit from volume discounts. Frequent orders are costly to process, and the resulting small inventory levels may increase the probability of stock-outs, leading to loss of customers. In principle all these factors can be calculated mathematically and the optimum found.

A second issue is related to changes in demand (predictable or random) for the product.  For example, having the needed merchandise on hand in order to make sales during the appropriate buying season.

And a third issue comes from the view that inventory also serves the function of decoupling two separate operations. For example work in process inventory often accumulates between two departments because the consuming and the producing department do not coordinate their work. With improved coordination this buffer inventory could be eliminated.

Inventory management problems can interfere with a company’s profits and customer service. They can cost a business more money and can lead to an excess of inventory overstock that is difficult to move. Most of these problems are usually due to poor inventory processes and out-of-date systems.

There are a number of problems that can cause havoc with inventory management. Some happen more frequently than others. Here are some of the more common problems with inventory systems.

1.     Too much distressed stock in inventory. Distressed stock is products or materials in inventory that has or will soon pass the point where it can be sold at the normal price before it expires. This happens all the time in grocery stores. As a particular food product nears its expiration date, the business will discount the item in order to move it quickly before it expires.

2.    Excessive inventory in stock and unable to move it quickly enough. This is probably the most common problem for most businesses. Cash-flow comes from moving inventory. If a company buys an amount of product for their inventory and they do not move it, the company ends up losing money.

3. Computer inventory systems are too complicated. There are many inventory software programs available for business use. The problem is that many of these programs are not user-friendly. Computer software developers do not take into account that most of the people who will actually be using these systems are not tech savvy. A company does not always have the time and money to invest in training of personnel to use software effectively.

4.  Items in-stock is misplaced. Even if the computer accurately shows the item as in stock, it may have been misplaced somewhere at the warehouse, or in the wrong location within a store. This can lead to a decrease in profits due to lost sales and higher inventory costs because the item must be re-ordered. Plus, the company must spend the time for employees to track down the misplaced item.

5.  Not keeping up with the rising price of raw materials. This falls more into the accounting end of inventory management. By not keeping current with the rising price of raw materials, a company will lose profits because they are not adjusting the price of their finished products. Finished items in inventory must be relative to the cost of raw goods.