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NIOS Class 10 Warehouse Principles & Inventory Management Chapter 17 Importance of Inventory Management
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Importance of Inventory Management
Chapter: 17
Intext Questions 17.1
(i) What is Transit Inventory?
Ans: Transit inventory, also known as pipeline inventory, is stock that moves between manufacturers, warehouses, and distribution hubs. It could take weeks for transit inventory to move between facilities.
(ii) What is Safety Stock?
Ans: Safety stock is an extra quantity of a product which is stored in the warehouse to prevent an out-of-stock situation.
Intext Questions 17.2
(i) What is Lead Time?
Ans: Lead time is the amount of time that passes from the start of a process until its conclusion.
(ii) What do you mean by consumer demand?
Ans: The lifeblood of inventory management is consumer demand.
Intext Questions 17.3
(i) Name two challenges faced by inventory management.
Ans: The needs of customers are always changing. Too much inventory could result in outmoded inventory that you can’t sell, while keeping too little inventory could prevent you from fulfilling customer requests.
(ii) Which of the following is not an inventory?
(a) Machines.
(b) Raw materials.
(c) Finished products.
(d) Consumable tools.
Ans: (a) Machines.
Intext Questions 17.4
(i) Do you know what EOQ stands For?
Ans: EOQ stands for Economic Order Quantity.
(ii) Tell me can Forecasting help in Controlling Inventory?
Ans: Yes, through the use of forecasts inventory levels can be set to meet the demands while keeping levels as low as possible.
(iii) Do you know what an Order Point is?
Ans: An order point is a point in time at which an order is placed to replenish goods in inventory.
Intext Questions 17.5
(i) Do you know when a Physical Inventory will be taken?
Ans: An inventory should be taken at least once a year. If items are perishable, seasonal, or highly demanded inventory should be taken more often.
(ii) Explain can A computer help in Forecasting Future Demand?
Ans: Yes, in the market today there are many computer software packages that can compute forecasted demand for goods held in inventory.
Intext Questions 17.6
(i) Which of the following ratios is least likely to be used to evaluate the efficiency or effectiveness of inventory management?
(a) Days of inventory on hand.
(b) Gross profit margin.
(c) Quick ratio.
Ans: (c) Quick ratio.
(ii) Which of the following is most likely to be an indicator of highly effective inventory management?
(a) Low inventory turnover ratio.
(b) Low gross profit margin.
(c) Low number of days of inventory on hand.
Ans: (c) Low number of days of inventory on hand.
| Terminal Exercise |
1. What is inventory management?
Ans: Inventory is a substantial asset on the balance sheet; nevertheless, too much inventory can become a practical problem. One of a company’s most significant assets is its inventory. A company’s inputs and final goods form the foundation of its operation in retail, manufacturing, food services, and other inventory-intensive industries. A scarcity of inventory when and where it is required might be disastrous.
2. Describe the impact of over stocking in inventory management.
Ans: Having too much inventory on hand might be as bad as having too little. Overstock negatively influences a company’s cash flow and can lead to inventory-related issues like storage and loss.
3. Give some examples with explanations about inventory.
Ans: Inventory can be viewed as a liability (if not in an accounting sense). Large inventories are vulnerable to spoilage, theft, damage, and demand fluctuations. Inventory must be insured, and if it is not sold on time, it may be forced to be sold at clearance prices—or destroyed entirely. Inventory management is critical for businesses of all sizes for these reasons.
Examples of Inventory:
(i) Finished goods.
(ii) MRO goods.
(iii) Work in progress.
(iv) Safety stock.
(v) Excess inventory.
4. Give solutions to overcome inventory management challenges.
Ans: The solution to overcome inventory management challenges are:
(i) Centralised Tracking: Upgrade to tracking software that includes automated re-ordering and procurement features. Inventory management platforms offer centralised, cloud-based databases that allow for precise, automatic inventory changes as well as real-time data backup.
(ii) Transparent Performance: To address warehouse inefficiencies, measure and report warehouse performance measures such as inventory turnover, customer satisfaction, and order processing time. Share this information with your staff and vendors.
(iii) Stock Auditing: Stock auditing techniques that occur often, such as daily cycle counting, reduce human error and give more accurate, up-to-date inventory data for cash flow management. For more reliable financial data, organise audits by category and cycle count smaller inventory samples on a regular basis.
(iv) Demand Forecasting: Demand forecasting tools are available on several inventory management platforms. This feature combines accounting and sales data to help you forecast demand and plan orders based on changing consumer preferences, material availability, and seasonal trends.
(v) Go Paperless: Give staff the inventory tools they need to do their jobs. They require software to replace manual inventory records and paperless invoicing and purchase orders.
(vi) Preventive Control: To manage problem inventory, such as perishable goods, fragile equipment, or obsolete materials, implement stock control systems. If the manufacturer specifies, perform routine preventative maintenance on machinery and equipment in storage. To keep track of shelf life and avoid waste, keep track of data on issue stock locations, costs, and quantities.
(vii) Measure Service Levels: Supplier data should be monitored and tracked, such as shipment problems, damaged or defective products, and missed delivery appointments. To discover and fix supply chain problems, decrease complexity, and streamline logistics, track your supplier’s performance
(viii) Optimise Space: To optimise storage space and inventory flow, employ inventory management systems with warehouse management functions. Automate order picking, packaging, and shipping workflows by categorising inventory storage by shelf, bin, and compartment.
(ix) Automate Reorders: Backordered inventory causes delays in production and poor customer service. To avoid overselling, use inventory management software to define automated reorder points based on preset stock levels and current availability.
(x) Safety Stock: Maintain a reserve of safety stock to help handle rising lead times as a result of shifting worldwide competition for raw resources. Inventory planning allows businesses to respond to changing global supply chains.
(xi) Classify Inventory: To manage shifting trends, such as packaging measures to reduce plastic waste, create inventory classes. Sort stock into categories based on the kind of packaging, dimensions, and product. Use this data to better manage transportation costs and storage locations.
(xii) Multi-Location Warehousing: To track and control rising inventories, use multi-location warehouse management features. Automated inventory tracking alerts and scheduling capabilities keep track of warehouse location and in-transit inventory, allowing you to take advantage of receiving and putaway schedules.
(xiii) Leverage Lead Times: When placing orders for high-demand products, keep lead times in mind. Tracking and managing your high-demand inventory using cycle counting data to avoid stock outs to determine automatic reorder points and average lead times.
(xiv) Reduce Human Error: Use inventory control processes like blind reception with barcodes and mobile scanners to prevent human error, inventory manipulation and shrinkage due to theft or negligence.
(xv) Update Platforms Upgrading to cloud-based inventory management software provides more than simply the most up-to-date functionality. While it’s being deployed, you can benefit from the vendor’s knowledge and training.
5. Explain some of the factors which will influence the inventory management.
Ans: The factors which will influence the inventory management are:
(i) Economic Factors: Because every phase of the process entails significant financial risk, getting the financials correct is critical. You may handle your inventory management process smoothly while reducing major cash flow difficulties by effectively managing the spending of each inventory management task such as item ordering, tax charges linked with stocks, transportation, storage, and so on.
(ii) Demand from consumers: Because our major goal is to have satisfied consumers, consumer demand is also vital for inventory management. Consider this scenario: clients purchase a large quantity of toothpaste but only a small quantity of toothbrushes. It means that stocking equal numbers of both will result in toothpaste scarcity, an excess toothbrush inventory, or both. To avoid negative financial effects on your business you have to track customer demands and product sales, and order inventory accordingly.
(iii) Suppliers: It’s critical to work with the proper suppliers, as they’re one of the most influential aspects in inventory management. Managing supply chains may be challenging for businesses, especially if you can’t count on vendors to fulfil deadlines and produce high-quality goods. The following questions are important if you want to choose the right suppliers.
(iv) Type of Product: Inventory management must account for the many sorts of products on hand. Some items, for example, may be unstable and so have a shorter shelf life than others. Inventory must be maintained in this situation to guarantee that these items are cycled by their expiration dates.
(v) Managing technology and tools: Technology is another issue that has an impact on inventory management. Modern technology can help inventory management operations save time and money while increasing efficiency. You’ll be able to streamline your inventory management process even further with the correct management tools. With the use of inventory management software and tools like barcode scanners, label printers, and mobile laptops, you can double or even treble the pace of your inventory procedures. Furthermore, modern technology will assist you in more efficiently implementing counting, recounting, receiving, choosing, and other procedures.
(vi) Lead Time: The time between placing an order to refill inventory and receiving it is known as lead time in inventory management. It has a direct impact on your overall inventory levels. The greater your lead time, the more inventory you’ll need to keep on hand. Longer lead times make delivery more unpredictable and force companies to place orders based on demand estimates.
(vii) Consumer Demand: The lifeblood of inventory management is consumer demand. Consider this scenario: If your clients buy a lot of soap but a little bit of shampoo, it’s not a good idea to keep equal supplies of both on hand. You’d most likely run out of soap, have too much shampoo on hand, or both in this situation. You must track client needs and product sales, and buy inventory accordingly, to avoid these unfavourable events and their financial consequences for your organisation.
(viii) Amount of Inventory: It’s critical to keep the proper amount of inventory on hand. If you order too much, you risk being stuck with inventory that you’ll have to sell at a loss or dispose of . Overstocking can cause substantial cash flow issues and budget gaps because of spending enormous sums of money on goods all at once. If you order too little, you risk compromising customer service by not having requested items available. To achieve this delicate balance, you’ll need an inventory management system that can properly estimate consumer demand based on historical sales data.
(ix) Inventory Price: Your inventory cost is substantially more than the capital required transporting the item from the producer to your warehouse. You must also consider the carrying costs, storage facilities, warehouse workers, and variable costs like shortages. Use the economic order quantity (EOQ) calculation to calculate your inventory price. The EOQ can be calculated (the quantity of items a company needs in inventory for each order to maximise cost efficiency.
(x) Software Systems: Implementing software can greatly increase your ability to estimate demand and stock your shelves properly. With the correct inventory management software, you can arrange your warehouse, order the right amount of stuff, and keep track of your previous triumphs and mistakes. Your software determines the success of your inventory management efforts in maintaining your business above the bottom line.
(xi) Management Solution Customization: There are no two firms that are alike. There should be no two software solutions that are alike. You’ll need a bespoke software solution tailored to your company’s specific demands for optimal inventory management. This is the only method to secure inventory management success in the present and future.
6. Explain the type of inventory management.
Ans: Different types of inventory management are discussed below:
(i) Raw Materials & Components: The raw materials to develop and finish items are known as raw materials. When the product is finished, the raw elements, such as the oil needed to make shampoo, are usually indistinguishable from their previous state. Components are comparable to raw materials. They are the materials that a company utilise to make and finish things, except that they, like screws, remain recognizable after the product is finished.
(ii) Work In Progress (WIP): WIP inventory refers to items in production and includes raw materials or components, labour, overhead and even packing materials. A cell phone comprises a casing, a printed circuit board, and many components. WIP is the process of putting the pieces together at a dedicated workstation.
(iii) Finished Goods: Finished goods are items that are ready to sell. A jeweller manufacturer makes charm necklaces. To make a finished object suitable for sale, staffs connect a necklace to a preprinted card and slide it into cellophane envelopes. The finished good’s cost of goods sold (COGS) comprises both its packaging and the labour required to create it.
(iv) Maintenance, Repair and Operations (MRO) Goods: MRO is inventory, often in the form of supplies that supports making a product or maintaining a business. The few examples for MRO are Copy paper, folders, printer toner, gloves, glass cleaner, and brooms for sweeping up the grounds are examples of maintenance, repair, and operating supplies for a condominium community.
(v) Packing and Packaging Materials: Packing materials are divided into three categories. The primary packaging protects and makes the product usable. Secondary packaging refers to the final packaging of a product, which may include labels or SKU information. Bulk packaging for transportation is referred to as tertiary packaging. The primary packing material for a seed company is a wrapped bag containing, for example, flax seeds. The secondary packaging requires placing the flax seed bags in a box for transit and storage.
(vi) Safety Stock and Anticipation Stock: The additional inventory that a corporation buys and stores to handle unexpected situations is known as safety stock. Safety stock has a cost of ownership, but it helps to maintain customer happiness. Similarly, anticipation stock is made up of raw materials or completed goods that a company buys in response to sales and production trends.
(vii) Decoupling Inventory: Extra products or work- in-progress (WIP) is stored at each production line station to prevent work stoppages, which are referred to as decoupling inventory. While all organisations have safety stock, decoupling inventory is only applicable to companies that make items and is useful if segments of the line work at different speeds.
(viii) Cycle Inventory: Companies order cycle inventory in lots to ensure that the proper amount of stock is available at the lowest possible cost of storage. In the “Essential Guide to Inventory Planning,” you may learn more about cycle inventory calculations.”
(ix) Service Inventory: Service inventory is a notion in management accounting that refers to how much service a company can deliver in a certain time frame. In each week, a hotel with ten rooms, for example, has a service inventory of 70 one-night stays. A 12-hour-per-day café with ten tables where diners spend an average of one hour eating a meal is open. As a result, its daily service inventory is 120 meals.
(x) Transit Inventory: Transit inventory, also known as pipeline inventory, is stock that moves between manufacturers, warehouses, and distribution hubs. It could take weeks for transit inventory to move between facilities. A popular pencil set is ordered and paid for in 40 tins by an art store. The tins are in transit as they are on their way from the supplier.
(xi) Theoretical Inventory: Theoretical inventory, also known as book inventory, is the smallest amount of stock a corporation needs to operate without waiting. Theoretical inventory is mostly employed in the manufacturing and food industries. The real versus theoretical formula is used to calculate it. A restaurant intends to spend 30% of its budget on food, while the actual expenditure is 34%. The 4% of food that was wasted or squandered is referred to as the “theoretical inventory.”
(xii) Excess Inventory: Excess inventory, also known as obsolete inventory, is unsold or unused items or raw materials that a business does not anticipate using or selling but must pay to store. A shampoo firm makes 50,000special shampoo bottles for the summer Olympics, but only sells 45,000 once the games are done – no one wants to buy them, so they’re obliged to discount or discard them.
7. Explain Five Challenges and Benefits in inventory management.
Ans: The five challenges of inventory management are discussed below:
(i) Inconsistent Tracking: Manual inventory tracking techniques spanning many applications and spreadsheets are inefficient, redundant, and prone to errors. A centralised inventory management system with accounting features can assist even small enterprises.
(ii) Warehouse Efficiency: Receiving and putting away, choosing, packaging, and shipping are only a few steps involved in inventory management controls at the warehouse. The objective is to do all of these duties most efficiently and feasible.
(iii) Changing Demand: The needs of customers are always changing. Too much inventory could result in outmoded inventory that you can’t sell, while keeping too little inventory could prevent you from fulfilling customer requests. Ordering tactics for essential items and technologies for creating and executing an inventory strategy can help accommodate fluctuating demand.
(iv) Limited Visibility: Incomplete, incorrect, or delayed shipments result when inventory is difficult to identify or locate in the warehouse. Receiving and locating the correct inventory is critical to ensuring smooth warehouse operations and excellent customer experiences.
(v) Manual Documentation: Inventory management using paperwork and manual processes is inefficient and insecure. It also doesn’t scale well across numerous warehouses with a lot of inventory.
The five benefits of inventory managements are:
(i) Increased Sales: Businesses who actively manage their inventory report a 2-10% increase in sales.
(ii) Increased Information Transparency: Know when items are received, picked, packed, shipped, kitted, manufactured, etc. Also, know when you need to order more, overstock, or under-stocked.
(iii) Lower Costs: Effective inventory management practices help decrease inventory write-offs and lower inventory holding costs. Carrying extra inventory can be very costly for your firm.
(iv) Increased Employee Efficiency: Good inventory management solutions save time. Less time spent on managing inventory results in greater productivity for you and your clients.
(v) Accurate Planning: Stay steps ahead of the game and always have the right number of products on hand by making decisions based on inventory trends.
