Inventory Management Techniques

Inventory is often the largest priced asset of the business after the fixed assets. The inventory of a business is often defined to be a list of all items that are present in the stock of raw materials. Keeping the inventory also means keeping a tab on the realizable value, market value and the book value of all the stocks, stock in production and finished stock. Often inventory control methods are mistaken with inventory management methods, due to the almost synonymous meaning of the terms.

The two terms are however different and inventory control methods are practical models that help the organization to curb over consumption of a particular item of the inventory. Inventory control also involves the measurement of time element that is required to consume a given volume of raw materials. The inventory management formulas are basically used for the following purposes:

• Allotment of resources at the right time
• Minimization of re-order time and cost
• Maintaining a constant and equivalent inflow and outflow of raw materials

The end result is that the combination of inventory management models and inventory control techniques help in a smooth inflow of raw materials at a relatively cheap cost and at a perfect timing.

Modern techniques to manage inventory are basically formulas and models that are established by firms on the basis of the need of the raw material and availability of the raw material.

Types of Inventory Management Techniques

The basic equation that is used for the ordering and re-ordering of goods by all firms is economic order quantity. The formula of EOQ, goes as follows.

√ 2.A.R. × C.O. / √ C.U. × C.C. %

Where,
Annual requirement (AR)
Cost per order (CO)
Cost per unit (CU)
Carrying cost % of CU (CC)
Carrying cost Per unit

The answer of the formula is precise level of fall in the stock that indicates a reorder. It basically means that if your inventory has 1000 units, and your EOQ, is say 250, then the moment this stock reaches 250, you should be placing an order for a new stock. Such an order will ensure that the stock arrives on time and the stock is also cheap. The given formula is quite complex and there are a considerable number of modifications that can be included. Though the economic order and reorder quantity formula is just the basic formula, there are several constraints and problems due to which this model has to modified. The following are some techniques that are based upon the EOQ, but have some or the other modification as per necessity:

• Fixed Order Quantity Model: The fixed order quantity model is used when the supply of a raw material is done only in specified denominations such as 10 meters of cloth, 10 kg of stainless steel, etc. In such a situation, the carrying costs, cost per order or even carrying cost per unit are constant. The annual requirement is, however, uniform and has to be set according to the supply denominations.
• Fixed Order Interval Model: The fixed order interval models are used when the supply has to be uniform at uniform intervals, such as 10 meters cloth per week. Here all the costs and annual requirements are uniform, with an occasional rise or fall in ordering costs.
• Single Period Models: Single period models are used in cases where the inventory items are of perishable nature. Here all time elements of the EOQ are uniform and unchangeable.

There are countless inventory management models that are formulated by companies for their own requirements. The key to formulate really good techniques is to have really good order cost, frequency and amount of ordered material. Many companies have also programmed different inventory software that simplify the process even further.