Inventory management is the planning and controlling of inventory and stock. It is an element of supply chain management that deals with aspects such as planning and ordering of inventory and storage and monitoring of the stock.
What is the right amount of inventory to stock?
Every organisation holds some stock, but there is always a challenge of determining the right amount of inventory to maintain. Bearing in mind that owning a stock is very costly, which is why organisations strive to maintain an optimum inventory level. This implies that there is neither too little nor too much. Having too little stock might lead to stock out making your customers look elsewhere.
On the other hand, holding too much inventory is a detriment to the organisation due to risks of obsolescence and redundancy. A precise way of deciding the amount of inventory to hold is cross-checking the sales patterns in the previous years and months. Seasonality of demand allows an organisation to decide on what amount to hold at given periods of the year.
Don’t run out of stock
It is impossible to run out of stock when using the following inventory management models;
Economic Order Quantity (EOQ) is the amount of stock an organisation is supposed to add to the existing stock to replenish the inventory after an order is made. This model allows availability of stock while reducing holding cost and ordering cost. There is always a trade-off between inventory holding cost and ordering cost. Economic Order Quantity formula tries to come up with a quantity that minimises these two costs.
Fixed reorder quantity model sets a fixed level where the stock should not be lower than that. When the inventory goes below the set level, an order is made to replenish the stock. This is known as reordering point.
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