Whenever we hear the word “inventory” most of us imagine huge warehouses sitting right next to a big port or a production facility. Inventory is a much bigger concept than stock and warehouses. In this article we’ll review the meaning and purpose of inventory, different types of inventory, inventory management, LIFO (Last In First Out) and First In First Out (FIFO).

So let’s start by understanding what is inventory?

 In simple words, inventory means company’s goods. Irrespective of whether these goods are raw materials or on the production floor or if they are ready to consume, these goods at all different stages is inventory.

Types of inventory

Let’s take an example of a chocolate factory where the output is chocolate candies and bar. Roasted cocoa beans, milk and sugar is raw material inventory, once these are moved to the production floor it becomes work in progress inventory. The finished product in the form of chocolate is the finished goods inventory.

We can easily tell that inventory is a valuable asset for any company. But unless this inventory is efficiently managed it can become a liability. For example inventory sitting idle on the shop floor is a liability. Unless inventory moves from one place to another for the specific purpose, there is no significance to it.

Now let’s learn more about two important accounting concepts around inventory management:

FIFO(First In First Out)

 FIFO in simple words means assets or goods purchased first are sold or disposed first. For example if 100 apples are purchased at $200 and the next day again 100 apples are purchased at $300. FIFO would assign the cost of the first 100 apples to be sold at $200.

LIFO (Last In First Out)

 LIFO is the method in which the most recently produced items are sold first. For example if 100 bananas are purchased at $200 and the next day again 100 bananas are purchased at

$300. LIFO would assign the cost of the first 100 bananas to be sold at $300.

Inventory Management Process

 Inventory Management Process is tracking of goods or stock as it moves from suppliers to warehouses and finally getting it delivered to customers. While it is important to keep the inventory levels stacked to meet the production requirement, inventory should not be overstocked as it may lead to business losses. Successful businesses create and implement an effective inventory management process which gives optimal Return On Investment (ROI) with minimum expense.

Let’s quickly see what Inventory Management Process is from a procurement point of view:

1.  Goods are delivered to the warehouse from the point of origin. This point can be a shipping port or a manufacturing area where the goods are produced.
2.  Goods are reviewed and stored in special stock areas. Few companies adopt latest techniques like Stock keeping unit (SKU) or barcode for easier tracking.
3.  Inventory levels are checked periodically to make sure that inventory management measures are in place. At this stage dead stocks are checked and the possible risks are
4.  A requisition or sales order is received by the warehouse and it is verified with original Purchase Order (PO).
5.  The required goods are pulled and sent to the production
6.  Records are then updated with respect to all the relevant systems and stakeholders.

Building a Robust Inventory Management System

Most of us agree with the fact that no two companies are the same. Needless to say that the inventory management needs will also differ.

Companies have now realised that a robust inventory management will lead to business success in the long term.

Below are few suggestions to build a robust inventory management system

1.     Using the best technological tool

 Companies which use cloud-based enterprise resource planning (ERP) and latest accounting software meet their financial goals easily. Latest technology help businesses make sound decisions and connect the financial dots.

2.     Smart warehouse solutions

 While each company has unique warehouse requirements, choosing a comprehensive warehouse management is a smart business decision. Co-ordinated efforts from a shipping corridor to the company warehouse or from the company warehouse to production floor are quite detrimental for meeting your production goals.

3.       Analysis and forecasting

 While most of the companies skip this step, it is important to analyse and forecast future demand and sales. Businesses that have done this have climbed the ladder of success very quickly. There are forecasting tools which are available in the market and these are customisable too, so that you can take sound decisions based on these analysis.

FUTURE TECHNOLOGIES AROUND INVENTORY MANAGEMENT

 The future technologies looks very promising and it will continue to revolutionise inventory management, making them more attractive for business success.

While future technologies are making strides around inventory management, there is a different ball game and a new marketplace which is emerging and transforming the way inventory management is seen.

Here are the future technologies to look for:

i.                 Artificial Intelligence (AI)

AI will reduce material waste, making inventory monitoring more accurate with almost zero wastage.

ii.               Internet of things (IoT)

Inventory location and status has always been a pain point, with IoT it will be a thing of the past.

iii.             Blockchain and intelligent order system

 Companies will benefit from improved demand forecasting and automation with intelligent order system. Blockchain will further connect disparate parties making transactions record under a unified system.

While Inventory management is an inexhaustible topic, what’s promising is the exciting future it holds and how companies are making the best use of technology to keep its expenses down and have the optimal Return on Investment. (RoI)

Author bio:

Praveen Dokania brings 10+ years of tech expertise with him. Praveen is a wizard in software development modules like cloud ERP, procurement software, vendor management, inventory management, sales order management, finance management, asset management, supply chain management and equipped with the latest technology of front-end and back-end processes. He has exemplary knowledge in database administration, server management, app development, and IT development consulting. In his previous role, he was instrumental in developing various applications and software. Praveen is the backbone of tech-development at TYASuite and is the man behind digitising decades of knowledge and experience of finance professionals in the field of business process including financial process.