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Getting Started
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What is Inventory?
Put simply, inventory is the
quantity of materials or stu
in storage. Within the context
of this ebook, it refers to all
forms of material intended for
sale kept by an organization.
ge
s to stora
tu goe
This s
1
g t ra ck of
in
Keep n-hand
-o
stock
What is
Inventory Management?
The core concept behind inventory management is to ensure
you have the right amount of inventory, in the right place, at the
right time, at the right cost.
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Types of Inventory
Dierent classes of inventory need to be managed dierently to
match your business objectives. On a basic level, we have:
SUISSE
SUISSE
100g 100g
Gold Gold
999.9 999.9
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From a functional perspective, we have:
25F EB
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Purpose Of Holding Inventory
Understanding the dierent reasons for holding inventory
helps you to manage your supply chain.
UNRELIABILITY OF SUPPLY
Holding inventory protects you from
unreliable suppliers, or when an item
is scarce and without the guarantee of
a steady supply of stock.
FLUCTUATION IN DEMAND
As demand levels are never an
absolute certainty, holding extra
inventory can enable organizations to
$
meet unexpected surges in demand.
QUANTITY DISCOUNTS
Many suppliers oer discounts based
A lot of on certain quantity breaks, because
coupons large orders tend to reduce total
book processing and shipping costs thanks
to economies of scale.
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Inventory Costs
Maintaining inventory is expensive, so factoring in inventory
costs will help in deciding the order quantity.
$
This includes facilities, insurance, tax and
HOLDING
handling etc.
COSTS
$
$
$
$
$
$
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Inventory Valuation
Inventory valuation is to determine an organization's prot, and
an understanding of the nancial importance of inventory is key
to measuring its impact on cash ow.
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The impact on bottom line and the taxes that an organization
must pay is closely tied to the inventory valuation method thats
used. This is best shown with the example below.
Shirt 1 October $1 $5
2 October $2 $5
3 October $3 $5
Revenue: $5 Revenue: $5
Cost of Goods Sold (COGS): $1 Cost of Goods Sold (COGS): $3
Gross Prot: $4 Gross Prot: $2
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Setting up an
Inventory Management System
Inventory management is for more than just implementing a
process. It also allows you to set up a standard system through
which you can manage and streamline your inventory and
business eciency.
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FIXED-TIME PERIOD A DV A N TA GE S
SYSTEM (PERIODIC)
Because orders are made in bulk,
organizations can take advantage
The inventory levels are checked of quantity discounts
The dierence between these two systems lies in the timing and quantity of
orders placed. Under the perpetual system, inventory levels are checked
continually and orders may be sporadic. Under the periodic system, inventory
levels are checked and orders are made based on the specied time interval.
Ultimately, your choice will depend on the overall objectives of your business.
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An Introduction to Economic Order
Quantity (EOQ)
The economic order quantity equation helps to decide the best
order quantity that minimizes total inventory holding costs and
ordering costs.
Q* = 2 D K
D = F I X E D C OST PE R
YE A R
K = DE MA ND IN
UN I T S P E R Y E AR
H = C ARRY I NG C OST
h
P E R UNI T PE R Y E AR
Alternatively, you can use a free online calculator to help with EOQ calculations
http://www.ultimatecalculators.com/economic_order_quantity_calculator.html
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The ABCs of
Inventory
Classication
Identifying your bestsellers
and prioritizing importance
based on high impact and
value will help prevent the
waste of precious resources
(especially time).
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Inventory Performance Metrics
Given the importance of inventory management on the nancial
and operational value in any organization, its important to
regularly measure and evaluate processes.
These can range from accuracy of records, eciency of storage methods, units
available, and dollar value tied to inventory. There are, however, two standard
metrics to measure the eciency of your inventory management and the
nancial health of your organization.
Inventory Turnover
This measures how quickly the
inventory is cycling through your
business. A higher turnover value is a
general indicator of success, but be
careful if its too high. An extremely
high turnover could also be an
indicator of pricing thats too low, or
inecient inventory forecasting.
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