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Approach to Inventory Management

Approach to Inventory Management

We can manage inventory using one of the ways listed below, which include:

  • Method of EOQ (economic order quantity) 
  • MRP (material requirements planning), MRP is a method for planning material requirements. 
  • Method of JIT (just in time) 
  • The ABC technique of analysis

1. The method of EOQ (Economic Order Quantity)

The economic order quantity method, often known as the EOQ method, is a strategy for purchasing inventory based on the number of orders received.

The following is the explanation...

When a company receives an order for a product with the amount, specifications, and delivery time that the customer specifies. The company is assured of the requirements, specs, and prices for the raw materials it will need to complete the order.

A furniture manufacturer, for example, receives an order for 1,000 chairs with particular requirements that must be finished in three months.

Each chair, for example, takes 1 cubic of raw wood with specified dimensions and sizes, costing IDR 2,000,000 per cubic.

If the order is for 1,000 units, the raw wood needed is 1,000 cubic meters at a cost of IDR 2 billion.

So, during the following three months, the corporation can assure that 1,000 cubic meters of wood are required, as well as a IDR 2 billion fund.

It is obvious how much is required and how much is nominal.

Because the estimates are correct, businesses can order wood in the smallest quantities possible to reduce inventory expenses.

Pass. There is no more wood.

However, they are still able to meet their necessities.

If the corporation orders excess wood, there are no inventory expenditures such as maintenance, warehouse costs, or warehouse rentals.

Because the quantity bought may meet the needs at the lowest cost, the EOQ approach can be regarded to be the most optimal and cost-effective ordering method.

The EOQ approach, on the other hand, is only applicable if:

  • The cost of ordering is always the same.
  • The ordered commodities are unrelated to other items (independent)
  • With assurance, the order has been received.
  • The quantity of raw materials required can be calculated and is certain.
  • The cost of maintaining inventory is the same per unit.
  • The cost of items does not fluctuate (it is constant).
  • The supply of commodities is unrestricted.
  • Damage to the items is unlikely.
  • The number of requirements has remained constant.

2. The MRP approach (Material Requirement Planning)

The material requirements planning (MRP) approach is a planning and inventory control strategy for ensuring that materials or raw materials are always available to meet needs.

Not only that, but the MRP approach also seeks to keep inventory to a minimum. Because inventory expenses are lower when there is less of it, inventory costs will be lower as well.

This kind of planning can include a purchasing calendar, manufacturing timetable, and material supply timeline.

The MRP technique determines the amount of material required, manufacturing schedules, and even provides protection against unfavorable events.

This MRP approach has a number of advantages, including:

  • Give details on the factory's capacity.
  • Reduce inaccuracies in calculating demands while also serving as a reference. Quantity planning in production.
  • Improve and update the order and inventory numbers.
  • Maintain the proper amount and price of inventory.
  • Will be able to meet the need for materials that arrive in waves.

3. JIT (Just-in-Time) Method 

The just-in-time (JIT) method, also known as the just-in-time method, eliminates the need for a corporation to carry or maintain inventory.

This indicates that inventory is either zero (0) or near to zero.

If the company does not have inventory, the cost of inventory will not be borne by the company.

How can a corporation undertake production if it doesn't have raw material inventory?

The benefits of the just-in-time technique are as follows:

  • This strategy aims to only bring in raw materials when they are required.
  • At the appropriate time.
  • And in exactly the proper amount to avoid any leftovers.

As a result, the company does not have time to hold or store inventory because raw materials arrive only when they are required and in sufficient quantities to ensure that nothing is left over.

How do you do it?

Suppliers of raw materials are now the primary commercial partners. It should be treated as if the supplier is an employee of the company. Only "as if" should be remembered.

This approach to suppliers must be followed in order to build a strong relationship with them and nurture it for the company's long-term needs.

Suppliers should not be taken advantage of for the sake of a quick buck.

If a close relationship has been built between the supplier and the company, the supplier will make every effort to meet the company's raw material demands whenever and wherever they arise.

4. Analyze ABC Method 

The ABC analysis method is a classification system for inventory that is distinguished by its value.

The inventory value in question is the total inventory value, not the inventory value or price per unit.

Inventory will be divided into categories.

Class A, class B, class C, and so on are examples.

Why are classes like this necessary?

This type of class division is used to make the treatment of corporate inventory easier.

Each inventory item is given a unique treatment.

A furniture factory, for example, or furniture.

Wood, paint (coating), nails, and nuts are examples of raw material inventories.

Wood supplies, although the quantity is not as much as paint and nails. But the nominal value of wood is the greatest.

Companies can classify it into class A

Paint and nail treatments are not the same as wood treatment. Wood is a more durable material. It is not advisable to store high-quality wood in a humid environment. Cannot be submerged in water. Should not be stacked so densely that it takes up a lot of warehouse space. Take care not to become a termite meal. The moisture content of the wood must be maintained, as well as other particular treatments.

The argument is that there is an additional expenditure in order to retain the wood's quality.

Paints and other coatings, such as thinner, melamine, and similar materials, have a value that is lower than wood but higher than nails with a significant quantity per unit.

Class B can contain paint or coatings

Although there are unique ways for keeping paint in good condition, it is generally easier to store paint in a warehouse than wood, nails, and nuts.

Nails are the most abundant in terms of quantity, but they are the least valuable in terms of value when compared to wood and paint.

Nails can be classified as class C

Nail storage is simple and just takes up a small area of the room; simply put it away. Anywhere. It does not necessitate any specific treatment.

Even if something is misplaced or damaged, the face value is not excessive. These classes are not set in stone and can change depending on management and corporate regulations.

Class A, class B, and class C are not the only options. If necessary, it can be class D and so forth.

The value of inventory, inventory expenses per item type, and the complexity and risk of damage in warehouse storage are all factors to consider.

5. Method of Periodic Review

A way of ordering items at the same time interval or interval is the approach to the periodic review method.

Material orders are placed on a regular basis so that the finance management may estimate and plan for the expenditures that will be incurred.

One of the benefits of this strategy of periodic assessment is that it reduces demand and supply needs volatility.

This strategy is also simple to implement because it does not have a lengthy administrative process because inventory orders are planned on a regular basis.

This strategy, however, has a number of disadvantages.

One of them is that the amount of a material order is highly reliant on the amount of inventory available at the time of ordering, thus the number of orders placed is not always the same.

This may cause the supply stock to deplete first, before the time for the next material order arrives.

As a result, a significant safety stock or stock of just-in-case supplies is required.

As a result, high stocking costs are occasionally required.

Relationships between Inventory Management and Other Departments

Management Inventory management plays a crucial role in other management functions. Inventory management is handled by a number of management departments, including:

a. Purchasing 

Inventory management is concerned with purchasing managers' priorities and orientation when acquiring large quantities of products in order to obtain discounted pricing from suppliers (suppliers).

When you buy a lot of things, the supplier will frequently give you discounts and even free shipment to the company's warehouse.

b. Production Control

This link is obvious, production management, of course, requires a supply of raw materials in order to begin production activities.

Raw material requirements must be met in compliance with the needed quality and quantity criteria, according to production management.

Communication between these two divisions is critical to ensure that goods manufacturing runs smoothly and that the highest-quality items are produced.

c. Financial Administration

The difficulty of obtaining materials is inextricably linked to the interaction with financial management.

The effectiveness of the expenditure budget is always a priority for management.

Financial management is more interested in purchasing large quantities of commodities since they may be able to negotiate lower costs from suppliers.

However, in other circumstances, financial management may advise purchasing in small quantities and adapting to needs in order to avoid having too much inventory.

Inventory management, in conjunction with other management, is responsible for keeping inventory turnover up to date by reconciling with other inventory-related management.

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