A Study On Inventory Management Accounting Essay


The main goal of inventory management is to minimize the average cost per time unit incurred by the inventory system, whereas guaranteeing a pre-determined minimal level of service. Inventory control always seems to be a problem for the working capital management. It consists of managing a given of stocks in order to satisfy request to use it. When requests exceed the reserve of available stocks, a decision has to be taken, contract out some request to another supplier or to procure new pieces. A successful management and control of the material flow across the limitations between companies and their customers is essential to the success of companies, but is a difficult operation due to the demand magnification effect, identified as 'Forrester effect' .

Inventory management requires the collaboration of numerous departments each with its own set of priorities. Nevertheless diminution of required inventory levels reduces the working capital requirements. (AICPA 1992).

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Rational for inventory management

The first and the foremost objective of inventory management would be control the unnecessary cost relating to stock holding. Therefore an effective inventory management strategy is required in order to maintain sufficient levels of inventories which can accommodate both the customer orders as well as prevent rocketing cost levels. This would lead to customer loyalty as well as profit maximization.

The satisfaction of all the customer requests is mandatory as this becomes the key of business success and to build reputation. Therefore timely supply chain along with the required resource type and the number of resources are vital, hence inventory should be made available when needed, not too far ahead and not too late, thus leads to a need of an effective inventory management system.

Finally inventory should be managed for the purpose of realizing the competitive business strategies of an enterprise in terms inventory strategy must flow from the business strategy of an enterprise which should change accordingly to operationalise the competitive strategy of an enterprise.

Inventory management strategies

There are many inventory management techniques available. The material manager is responsible to make a choice between such techniques which are appropriate for the given organizations operational strategies. This is the era of change, due to the strategy changes the techniques will also change accordingly, so it's in the hands of the dynamic material manager to effectively use the techniques.

First and foremost an organization should comprise of an effective policy regarding control and management of inventory. This includes assigning responsibilities to specific individuals based on the categories of the inventories. These individuals should be conscious of the inventory policies and procedures pertaining in the company with relevant experience and qualifications. A major issue in inventory management is the collaboration of inventory policies adopted by diverse supply chain players, such as suppliers, manufacturers, distributors, so as to smooth material flow and minimize costs while meeting customer demand. This presents an approach to handle inventory decisions at all stages of the supply chain in an integrated manner. It allows an inventory order policy to be determined, which is intended to optimizing the performance of the entire chain of distribution (M. Christopher 1992)

Along with the inventory policies effective planning should emphasize fulfillment of product demand requirements rather than maximization of production capacity. Thus proper forecasting of the inventory levels ensures an effective anticipation of sales plan.

Thereafter establishment of inventory levels, order quantities and minimum volumes of safety stock enables for an effective inventory management strategy. There are two types of models through the use of a simple, periodic review model. An alternative approach for inventory management would be sensitivity analysis. The commonly used technique in determining the inventory levels would be EOQ (economic order quantity). This could be computed as the sum of the annual ordering cost and the annual holding cost. The objective is to minimize the cost equation by ordering the right amount on each reorder. This is used to determine management's control over its inventory purchasing procedures.

A tight synchronization among inventory policies of the different players in the supply chain is an essential thus the top management ought to develop a total business system perspective which integrates suppliers into business and flows through consumers in an approach that involves the material flow and the dual information flow. In this perspective forecasting, order processing, production planning, machine scheduling, vendor management, etc. must be handled in a reasonably integrated manner rather than focusing to solve any one of the functions in isolation. To this an appropriate information infrastructure would be required allowing all the players to make decisions with coordination. This can be namely referred to as networked inventory management information systems (NIMIS) however the exploitation of this systems can be beneficial provided the inventory management policies are strong enough to deal with the demand variability and market uncertainties .

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Further Towill demonstrates the impact of differential strategies such as the implementation of JIT, vendor integration and time based management. These techniques reduce the demand amplification while maintaining the flawless operation of the supply chain. This strategy also ensures fine-tuning of the existing ordering policies, reduction of delays and an effective use of information flow.

However the inventory strategy should be based on the business strategy of an enterprise which implies that when the latter changes the former must also change. In other words, inventory management operationalises the competitive strategy of an enterprise. It must do so by integrating itself with other operational strategies of the business like production, marketing, and finance. Successful business strategies depend to a very large extent on the right choice of operational strategies. Hence an effective management of inventory can be achieved through only by an effective business strategy.