A Detailed Guide to Inventory Management and Control

What is Inventory Management?

Inventory management refers to the process of overseeing and controlling the stock of goods in a business. It ensures that a company maintains an adequate supply of products without overstocking or running out of items. Proper inventory management helps businesses meet customer demand efficiently while minimizing excess costs. For example, Aayushmaa must ensure that handloom sarees and blouses are in stock when customers need them, but without having too much unsold stock that ties up capital.

What is Inventory Cost?

Inventory costs represent the expenses associated with storing and managing inventory. These costs can be categorized into several types:

1. Item Cost: This is the cost of purchasing or manufacturing a product. For instance, if Aayushmaa buys a handloom saree from a supplier, the item cost would include the price paid for the saree.
2. Holding Cost: Also known as carrying costs, these are the costs associated with storing unsold inventory. Holding costs include warehousing fees, insurance, and depreciation. For a boutique, this might be the cost of storing sarees or blouses in a storage room.
3. Ordering Cost: This is the cost of placing and receiving an order. It includes shipping fees, order processing, and handling costs. If Aayushmaa orders handloom fabrics for their sarees, these costs are considered ordering costs.
4. Shortage Cost: These costs occur when there is not enough inventory to meet customer demand. Shortage costs can include lost sales, customer dissatisfaction, or the cost of expediting orders. For example, if Aayushmaa runs out of a popular saree design, they could lose potential sales and customers.

Inventory Control Systems

An inventory control system helps businesses manage stock levels efficiently. There are two common types of inventory control systems:

1. Continuous System: In this system, inventory is constantly monitored, and orders are placed automatically when the stock level falls below a predetermined threshold. For example, if Aayushmaa keeps track of their saree stock using barcodes and sensors, a system could trigger a new order when stock falls below a certain number.
2. Periodic System: In a periodic system, inventory is checked at regular intervals (e.g., weekly, monthly). Orders are placed based on the stock level at that time. For instance, Aayushmaa might conduct a full inventory check at the end of each month to determine what to reorder.

Inventory Control Methods

Several inventory control methods can help businesses decide how to manage and organize their inventory. Some of the popular methods are:

1. ABC Classification: In this method, inventory is divided into three categories:
   • A items: High-value items with low sales frequency (e.g., premium sarees).
   • B items: Moderate-value items with moderate sales frequency (e.g., popular blouse designs).
   • C items: Low-value items with high sales frequency (e.g., accessories like bangles).
   By focusing more on high-value items (A items), businesses can optimize their inventory investments.
2. VED Analysis: VED stands for Vital, Essential, and Desirable. This method classifies inventory based on its importance to business operations. For instance, vital items like raw materials for sarees are essential, while less crucial items like decorative accessories are desirable.
3. FSN Analysis: This classification method stands for Fast-moving, Slow-moving, and Non-moving items. It helps businesses identify which items are selling quickly, which ones need attention, and which ones are not selling at all. Aayushmaa might identify fast-moving saree designs and slow-moving seasonal collections.
4. HML Classification: HML stands for High, Medium, and Low value items. In this method, items are classified based on their monetary value. High-value items (e.g., rare silk sarees) would require more careful management, while low-value items (e.g., thread for blouses) can be ordered in larger quantities.
5. SDE Classification: This method categorizes items as Scarce, Difficult to obtain, or Easily available. It is especially useful for managing rare or hard-to-source items.

What is Reorder Point (ROP)?

The reorder point is the inventory level at which a new order should be placed to avoid running out of stock. It considers factors such as lead time (how long it takes for an order to be delivered) and demand rate (how quickly an item sells). For example, if Aayushmaa knows that it takes 7 days to restock a particular saree, and they sell 10 sarees per day, their reorder point would be 70 sarees.

What is Economic Order Quantity (EOQ)?

EOQ is a formula used to determine the ideal order quantity that minimizes total inventory costs (ordering and holding costs). The goal is to strike a balance between ordering too frequently (which increases ordering costs) and ordering too much (which increases holding costs).

The formula for EOQ is: EOQ=√2DS/H

Where:

• D = Demand for the product
• S = Ordering cost per order
• H = Holding cost per unit per year

For example, if Aayushmaa orders sarees that cost ₹100 each, with a demand of 500 sarees per year, ordering costs of ₹20 per order, and holding costs of ₹5 per saree per year, EOQ can be calculated.

Inventory Systems

There are two main inventory systems used to manage stock:

1. Single Period Inventory Model: This model is used for items that are sold in a single season or during a short period (e.g., seasonal clothing). It helps businesses optimize stock levels to avoid overstocking and understocking during that short time.
2. Multi-Period Inventory Model: This is used for items sold over multiple periods. Two common approaches are:
   • Fixed Order Quantity Model: In this model, inventory is reordered when it reaches a specific reorder point. The order quantity remains fixed.
   • Fixed Time Period Model: Here, inventory is reviewed at fixed intervals (e.g., every month), and orders are placed based on the stock at that time.

Material Requirements Planning (MRP)

MRP is a system used to manage inventory and production scheduling for manufacturing operations. It ensures that the right materials are available at the right time for production. The key components of MRP are:

1. Master Production Schedule (MPS): A plan for producing finished goods.
2. Bill of Materials (BOM): A detailed list of materials needed for production.
3. Supplier Lead Times: The time it takes for suppliers to deliver materials.
4. Production Cycle Times: The time required to manufacture a product.
5. Material Needs per Cycle: The amount of material needed for each production cycle.

For example, if Aayushmaa wants to create a batch of handloom sarees, the MRP system will calculate the amount of fabric, thread, and labor needed, along with the lead times for ordering and production.

Conclusion

Effective inventory management is essential for any business to maintain a balance between meeting customer demand and minimizing costs. By understanding the different types of inventory costs, control systems, methods, and models, businesses can streamline their operations and improve profitability. For Aayushmaa, managing handloom sarees and other boutique items efficiently will lead to smoother operations and happier customers.