Inventory Management: Optimizing Stock Levels
Supply Function T-9
The supply function involves the acquisition of materials necessary for the company’s activity. It aims to provide the production department with the necessary materials for manufacturing and selling the products to be marketed. Generally, the supply function consists of three fundamental aspects: purchasing, warehouse management, and inventory management.
The procurement cycle is the period that elapses from the time of purchase until the product is sold. If this is a production company, it consists of purchase, storage, production, and then storage and sale. If it is a commercial company, it will be purchase, storage, and sale.
The Existence of Inventory
Inventory refers to materials that the company stores, and they may be of different types: raw materials, finished products, semi-finished products, merchandise, etc. The types of inventory are:
- Raw materials
- Semi-finished products
- Products in progress
- Finished goods
- Merchandise or commercial inventory
- Other supplies
- By-products
Inventory costs are those that the company incurs to keep stock in warehouses and, in general, should be minimized. They can be classified as:
- Order costs: These are charges for ordering or replenishment, including administrative costs resulting from managing and placing orders with suppliers.
- Inventory maintenance costs: These are costs that the company has to maintain a specific amount of stock in its warehouses.
- Stockout costs: These costs arise when the company runs out of stock, i.e., when it cannot fulfill a customer’s order due to a lack of product, or when it cannot produce due to a lack of raw materials or other inventory needed for production.
Inventory Management
Organizing warehouses should allow the company to determine stock levels to fulfill two goals:
- Effectiveness: Having the necessary stock so the company can carry out its economic activity.
- Efficiency: Minimizing the overall cost of inventory, contributing to the company’s overall goal of maximizing profits.
Inventory management also controls and determines the level of stock, taking into account various indicators within the field of inventory administration:
- Maximum stock: The greatest amount of a material that can be held, depending on its importance and cost.
- Minimum stock or safety stock: The smallest amount that can be held to prevent the company from stopping its activities due to a stockout.
- Order point: The level of stock at which an order should be placed with the supplier.
The ABC Model of Inventory Management
This model is used to rank the relative importance of various stocks of a company (important, less important, unimportant) when dealing with a wide variety of products and when it is not possible to devote the same time or resources to each, because each has a different influence on inventory management. It is classified into three categories:
- A Stocks: These are the most important items for supply management.
- B Stocks: These stocks are less relevant to the company than the previous ones; control is much less strict.
- C Stocks: These stocks have little relevance to supply management and do not need implicit control.
Just-In-Time (JIT) System
The JIT system is an integrated production and supply management system, developed in Japan in the 1980s and later applied in the U.S. It is based on the principle that the company does not manufacture any product until it is needed, that is, until there is a firm order from a customer or a production order. JIT also attempts to minimize inventory maintenance costs through efficient production planning and the procurement process in general.