Inventory Management: A Comprehensive Guide for Businesses

Posted on Aug 31, 2024 in Economy

Inventory Management

Commercial vs. Industrial Companies

Commercial companies purchase items for resale, while industrial companies acquire components to incorporate into their production process, ultimately creating finished goods.

Stock Definition and Classification

Stock refers to tangible, storable assets acquired by companies, often from abroad, for use in production or equipment maintenance. Here’s a breakdown of stock classifications:

1. According to the PGC (General Accounting Plan):

  • Raw Materials: Elements used in the production process to create the final product.
  • Embeddable Components and Assemblies: Parts integrated into the final product but not forming its core structure.
  • Consumption and Replacement Materials: Used for maintaining the company’s infrastructure.
  • Work in Progress: Materials undergoing production at the end of the fiscal year.
  • Semi-Finished Products: Products requiring further processing before completion.
  • Finished Products: Completed goods ready for sale.
  • Goods: Inventory held by commercial companies for resale.

2. According to their Contribution to Product Cost Determination:

  • Direct Materials: Directly incorporated into the final product.
  • Indirect Materials: Used in the manufacturing process but not directly traceable to a specific product.

3. Based on Storage Capacity:

  • Storable: Items that can be stored for a period (e.g., screws).
  • Non-Storable: Items that cannot be physically stored (e.g., electricity, gas).

Storage and Inventory Management

Storage encompasses the operations a company undertakes to ensure the necessary materials are available for production. Key features include:

  • Estimating material requirements.
  • Order processing.
  • Receiving and quality control.

The objective is to perform these functions cost-effectively.

Functions of Storage and Inventory:

  • Storage: Safeguarding and organizing incoming materials based on specific criteria.
  • Inventory: Preventing delivery delays and ensuring production continuity. Inventory volume is determined by demand and supplier lead times.

Coding and Identification

Coding serves to identify materials and their location within the company. Common coding systems include:

  • Alphabetic
  • Numeric
  • Alphanumeric

Steps to Establish a Coding Structure:

  1. Choose a system based on company needs and existing knowledge.
  2. Determine the number of digits and letters.
  3. Specify the elements to be coded.
  4. Create an index or ledger.

Barcodes and EAN13

Barcodes enable efficient tracking and processing of inventory. The EAN13 barcode, used for consumer goods, contains 13 digits:

  • First 2 digits: Country of origin.
  • Next 5 digits: Assigned by authorized bodies in the country of origin.
  • Following 5 digits: Assigned by the manufacturer.
  • Last digit: Control digit.

ABC Method of Inventory Classification

The ABC method categorizes products into three groups based on their value and quantity:

  • A Items: High-value items representing a small proportion of total units.
  • B Items: Moderate-value items with a moderate proportion of total units.
  • C Items: Low-value items representing a large proportion of total units.

This method allows companies to prioritize inventory management efforts on the most valuable items.

Inventory Costs

  • Acquisition Cost: Purchase price plus procurement costs, minus discounts and returns.
  • Possession or Storage Cost: Expenses related to warehousing, maintenance, and handling.
  • Direct Cost: Costs directly attributable to the production process.
  • Indirect Cost: Costs not directly assigned to a specific product but allocated based on certain criteria.
  • Fixed Cost: Costs that remain constant regardless of production volume.
  • Variable Cost: Costs that fluctuate with production levels.

Break-Even Point and Inventory Valuation Methods

The break-even point is reached when revenue equals total costs, resulting in zero profit or loss.

Common inventory valuation methods include:

  • PMP (Weighted Average Cost): Values inventory at the average cost of all units.
  • FIFO (First-In, First-Out): Assumes the first units purchased are the first sold.
  • LIFO (Last-In, First-Out): Assumes the last units purchased are the first sold.