Need for Inventory Management – Why do Companies hold Inventories?

Every function in any organization or business is interconnected and often overlaps. Critical elements like logistics, supply chain management, and inventory constitute the foundation for the delivery system. These functions are important for marketing managers, as well as financial controllers.

Inventory management is a crucial job that determines the quality of supply chains and the effect it has on the financial condition of the balance account. Every business strives to keep its inventory at optimum levels to ensure that it meets its needs and does not risk having a list over or below, which can affect the financial numbers.

The inventory is constantly changing. Inventory management requires continuous and meticulous assessment of internal and external variables and control via planning and reviewing. Many companies have separate departments or job functions known as inventory planners. Who continually examine, monitor, and control inventory and work with procurement, production, and the finance department.

Defining Inventory

Inventory is a thick stock of physical items that have economic value and are stored in various forms of organization awaiting packaging or processing, conversion, and future sale.

Any business involved in manufacturing, trading, selling, and service must have a stock of different physical resources that can assist in future sales and consumption.

Related to the definition above, we can identify the following aspects related to inventory:

  • All companies involved in selling or manufacturing goods maintain inventory in one way or another.
  • Inventory may be in an undamaged condition or a state that needs to be completed.
  • The inventory is kept to allow future sales, consumption or additional processing or value addition.
  • Every resource inventoried has economic value and may be considered an asset belonging to the company.

Different Types of Inventory

Materials inventory occurs in various departments and stages of an organization. Manufacturing companies have an inventory of consumables and raw materials needed to make the product. They also keep an inventory of semi-finished goods in various stages within the plant and other departments.

Inventory of finished goods is located in the plant, FG Stores, distribution centers, and distribution.

Apart from raw materials and finished products, businesses also keep an inventory of spare parts to service the products.

Inventory Management Concepts

Management of inventory, along with Supply chain management, is the foundation of all business operations. Thanks to the advancement of technology and the availability of process-driven software, Inventory solutions in Saudi Arabia have experienced revolutionary changes.

In the past decade, we’ve seen the development of better customer service concepts by manufacturers who have agreed to control and keep inventory. At the end of their customer’s orders, consequently affecting the image of Just In Time deliveries. While the idea is identical, various industries have named the models differently.

Computer manufacturing companies or mobile phone manufacturers refer to the  VMI – Vendor Managed Industry model. The automotive industry refers to JIT”Just In Time, whereas the apparel industry refers to the model ECR – Efficient Consumer Response. The fundamental model that underlies inventory management is the same.

DELL has partnered with third parties to establish warehouses next to their facilities and manage inventory on behalf of Dell’s suppliers. The 3PL – a third-party provider, receives the consignments and contains a list of components for Dell’s suppliers. The 3PL warehouse holds inventories for Dell’s suppliers, which could be over two hundred.

Let’s take examine the advantages of this model both for Dell as well as its Suppliers:

  1. Through the VMI method, Dell has reduced its supply chain in bounds and, as a result, has significantly reduced its inventory management and logistics costs.
  2. DELL can delay owning inventory until the point when it is consumed. So, since there are no inventories, DELL does not require working capital to invest in holding stocks.
  3. DELL doesn’t have to establish inventory operations or employ teams to manage processes and inventory functions.

Supplier Benefits

  1. The supplier can establish a more robust relationship and collaborate with DELL with a long-term outlook for the business.
  2. If they agree to hold inventory and put JIT supplies on the way to DELL, the supplier will be in a stronger position to negotiate and gain more excellent business from DELL.
  3. With the VMI model, suppliers can build a more value-added relationship with their DELL customers.
  4. The supplier has a forecast confirmed for the whole year, with commitments from Dell to the amount of take.
  5. 3PL handles VMI management, and the supplier doesn’t need to take on the responsibility of setting up and managing inventory operations on the premises of Dell.
  6. 3PL Managed VMI holds inventories of all suppliers, and the company charges each supplier per pallet or per sq. ft basis. The supplier is thus able the ability to pay per transaction without the need to tie fixed costs for inventory management.

Nowadays, the majority of Multi-National companies have successfully achieved a deal with their suppliers as well as 3PL service companies to establish VMI across their factories across the globe, and the model has now been the norm of the hour.

The need for Inventory Management – Why do companies have inventories?

Inventory is a must-have evil every business must keep in order for different purposes. The best inventory management practices are the objective of every inventor. Insufficient inventory or over inventory both impact the financial health of the business as well as impact business opportunities.

Meet variation in Production Demand

 In turn, the demand for raw materials to produce varies according to the production method concerning specific SKUs and batch numbers.

The storage of Inventory solutions in Riyadh a nearby warehouse can help release the needed quantity and product to production promptly.

Cater to Cyclical and Seasonal Demand

Demand and supply in the market depend on various variables like seasons, festivals, etc. Previous sales figures assist companies in anticipating the massive increase in market demand early. Thus, they stockpile supplies of raw materials, maintain supplies to stimulate production and bring supplies to market to meet rising demand.

Economies of Scale in Procurement

Purchasing raw materials in larger quantities and holding inventory is more cost-effective for the business than purchasing smaller ones. In such instances, one buys in bulk and keeps inventory in the plant’s warehouse.

Profit from price increases and quantity discounts

 In that case, companies prefer to purchase raw materials and then hold stock to protect themselves against rising costs.

Businesses often opt to purchase in bulk and keep an inventory of raw materials to get discounts on the quantity suppliers offer. In these cases, the savings resulting from the value provided is significantly higher than the cost of the cost to carry inventory.

Reduce Transit Cost and Transit Times

If the raw materials come from a foreign country or an outside supplier within the country, one could save in terms of transportation costs by buying bulk quantities and shipping in a container or as a complete truckload. Part-loading can be more costly.

There are a variety of reasons that cause delays in transportation and shipping. Which could impede the supply chain, forcing businesses to keep a safe stock of their raw material inventories.

High Demand Items should be kept in the inventory

Most raw materials supplied by suppliers come with a long lead time that extends for many months.. In these situations, it’s more secure to store inventory and keep a close eye on them.

Holding inventories can help companies to remain unaffected and unaffected by vendor dependence.

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