Those of us who are in the logistics area have ever wondered how inventories came about? Well, inventories have their origins in ancient civilizations, they recognized the importance of organized systems for transporting goods and supplies, the Egyptians for example, were recognized for advanced work management techniques, organizing resources for large-scale projects.
Thus, an inventory is a tool that allows to keep control of the goods and resources of a person and also of the companies. Its use in the accounting and business area is of great importance, since it is considered an asset in a company.
The most common concept of inventory is that of "a document that lists the merchandise of a business to know the sales, purchases and identify money leaks due to theft, loss, expiration or damage of products", however, an inventory has more functions.
Another definition we can find is that inventories are all those items or stocks used in production (raw materials and products in process), support activities (maintenance and repair supply) and customer service (finished products and spare parts). Inventory represents one of the most important investments of companies in relation to the rest of their assets, since they are essential for sales and indispensable for profit optimization.
In the context of trade, inventory refers to merchandise available for sale in an establishment or warehouse. This inventory can be classified into several categories, such as stock in stock, in transit, or on display.
Finally, it should be noted that efficient inventory control is essential to ensure an adequate supply of products to meet market demand and avoid loss of sales due to stock-outs.
What is an inventory for?
We have already given some examples of the uses of inventory, however, we will add that according to Ehrhardt and Brigham (2007) inventory pursues two fundamental objectives: 1) to guarantee the operability of the company with the available inventory and 2) to maintain optimal levels that allow minimizing total costs (ordering and maintenance).
An inventory serves several essential functions in business and other contexts. Here are five key reasons to carry and manage an inventory:
1 .- Cost Management
Inventory is crucial for calculating the cost of goods sold in a specific period. By keeping detailed records of raw materials, work-in-process and finished goods, companies can accurately determine how much they have invested in the production and sale of products. This is essential for assessing profitability and operating efficiency.
2 .- Customer Satisfaction
A well-managed inventory helps ensure that a company can meet customer demand in a timely manner. Maintaining adequate stock levels prevents product shortages and reduces lead times for customers, which contributes to customer satisfaction and helps maintain a positive reputation in the marketplace.
3 .- Production Planning and Purchasing
Based on inventory data, companies can plan their production processes and make purchases more efficiently. Information on the amount of stock on hand and the speed at which it is depleted allows production levels to be adjusted and raw materials to be purchased strategically, avoiding surpluses or shortages.
4 .- Optimization of Financial Resources
Efficiently managed inventory helps optimize a company's financial resources. Maintaining adequate inventory levels reduces the need to store large quantities of products, which can tie up capital. It also avoids costs associated with product obsolescence and losses from expired products.
5 .- Accounting and Financial Reporting
Inventory is a key component of a company's financial statements. It directly affects the balance sheet and income statement. The correct valuation of inventory influences the determination of assets, stockholders' equity and operating costs, providing an accurate picture of the company's financial health.
In summary, a well-managed inventory contributes significantly to operational efficiency, customer satisfaction and strategic decision making in an organization.
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What are the characteristics of an inventory?
The characteristics of an inventory may vary depending on the context, whether in accounting, commercial or inventory management. The following are some general characteristics that are commonly applied to the concept of inventory:
| Ranking | Items in an inventory are usually classified into specific categories, such as raw materials, work-in-process, finished goods or merchandise available for sale. This classification facilitates the management and tracking of different types of inventory. |
| Valuation | Each item in inventory has an associated value. Inventory valuation is essential to determine the cost of goods sold and to properly reflect the company's investment in their production or acquisition. |
| Quantity | Inventory includes information on the quantity of each item or raw material on hand at any given time. This information is essential for planning production, making purchases, and ensuring that there is sufficient inventory to meet market demand. |
| Location | To facilitate efficient management and access, inventory often includes data on the physical location of products in warehouses or facilities. This is especially relevant in retail and logistics environments. |
| Rotation | Inventory turnover indicates the frequency with which products are sold or used in production. Tracking turnover is essential to avoid obsolescence and ensure that products do not remain in inventory for extended periods of time. |
| Expiration Date | In the case of perishable products or products with expiration dates, the inventory includes information on expiration dates. This is crucial to avoid losses due to expired products and to guarantee the quality of the products sold. |
| Periodic Updating | Inventory is updated regularly to reflect changes in inventories, whether due to purchases, sales or losses. Regular updating is essential to maintain an accurate representation of the current status of a company's assets. |
| Control System | Inventories are usually managed through control systems, either manually or through specialized software. An efficient control system helps to minimize errors, optimize inventory management and facilitate decision making. |
These characteristics are common to various types of inventories and provide essential information for efficient resource management and business decision making.
What is an inventory system?
An inventory system is an organized set of procedures, methods and tools designed to efficiently manage and control the inventory of a company or entity. The main objective of an inventory system is to facilitate the monitoring and management of the goods and products that an organization owns, whether for sale, production or any other specific purpose. These systems can vary in complexity depending on the needs and size of the company.
Some common features of an inventory system include:
| Data Registration | The inventory system allows the detailed recording of relevant information about each item in stock, such as quantity, cost, location, date of acquisition and other relevant data. |
| Automatic Updating | Modern systems often have the ability to automatically update inventory levels in real time. This can occur through integration with point-of-sale systems, purchasing systems, or through automatic bar code scanning and other tracking methods. |
| Classification and Categorization | Inventory systems allow to classify and categorize products or materials according to different criteria, such as type, location, demand, among others. This facilitates organization and strategic decision making. |
| Inventory valuation | These systems help to calculate the total value of inventory using specific valuation methods, such as average cost, FIFO (first-in, first-out) cost, or LIFO (last-in, first-out) cost. |
| Report Generation | Inventory systems often provide the ability to generate detailed reports on inventory status, sales trends, turns and other key indicators. These reports are useful for decision making and strategic planning. |
| Access Control and Security | Some inventory systems include access control features to ensure that only authorized persons have the ability to make changes to the inventory. They may also incorporate security measures to protect data integrity. |
| Integration with other systems | Inventory systems are often integrated with other business systems, such as accounting systems, customer relationship management (CRM), ordering systems and more, to ensure consistency and efficiency across the organization. |
Implementing an effective inventory system can improve operational efficiency, reduce human error, optimize inventory management and contribute to more informed business decision making.
Also read: Challenges in your inventory?
What is the relationship between inventory and other areas of the company?
Finance and Accounting
- Inventory is an important component of a company's financial statements, affecting both the balance sheet and income statement.
- Correct inventory valuation is essential to calculate cost of goods sold (COGS) and, therefore, to determine gross profit.
- Effective inventory management also influences working capital, as excessive investment in inventory can tie up capital.
Production and Operations
- The production team relies on inventory information to plan production and ensure that they have sufficient raw materials and products in process.
- Inventory management also influences operational efficiency and the ability to meet production deadlines.
Sales and Marketing
- Sales and marketing teams use inventory information to ensure that there is sufficient product availability to meet market demand.
- Marketing strategies, such as promotions or discounts, can affect demand and, therefore, the need to adjust inventory levels.
Logistics and Supply Chain
- Inventory management directly affects the supply chain, as proper inventory planning contributes to efficient supply chain management.
- Coordination with suppliers and optimization of delivery times are essential to maintain adequate inventory levels.
Human Resources
- Human resources teams should coordinate with operational departments to ensure that there are sufficient personnel to effectively manage and control inventory.
- Changes in demand and inventory strategies may require workforce adjustments.
Information Technology (IT)
- Information systems and specialized inventory management software are the responsibility of the IT department.
- Integration of inventory systems with other business systems, such as accounting or sales, is essential to maintain consistency of information.
Customer Service
- The availability of products in inventory has a direct impact on customer satisfaction. A well-managed inventory avoids shortages that could negatively affect the customer experience.
The relationship between inventory and these areas demonstrates how its proper management not only affects daily operations, but also has a significant impact on the financial health and overall competitiveness of the company. Collaboration and coordination between these areas are essential for efficient inventory management.
At ABC Logistics we integrate and implement many of these strategies with our clients with the sole purpose of offering quality service and adding value to your business.
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