Inventory Management System

The term inventory refers to the stockpile of the products a firm is offering for sale and the components that make up the product. In other words, inventory is composed of assets that will be sold in future in the normal course of business operation. The assets which firms store as inventory in anticipation of need are (1) raw material, (2) work in process (semi-finished goods) and (3) finished goods. The raw material inventory contains items that are purchased by the firm from others and are converted into finished goods through the manufacturing (product) process. They are an important input of the final product. The work-in-process inventory consists of items currently being used in the production process. They are normally semi-finished goods that are at various stages of production in a multi-stage production process. Finished goods represent final or completed products, which are available for sale. The inventory of such goods consists of items that have been produced but are yet to be sold.

Inventory, as a current asset, differs from other current assets because only financial managers are not involved. Rather, all the functional areas, finance, marketing, production, and purchasing, are involved. The views concerning the appropriate level of inventory would differ among the different functional areas. The job of the financial manager is to reconcile the conflicting viewpoints of the various functional areas regarding the appropriate inventory levels in order to fulfill the overall objective of maximizing the owner’s wealth. Thus inventory management, like the management of other current assets, should be related to the overall objective of the firm. The success of a company that means the wealth maximization of a company is largely depends on proper arrangement of inventory management. So, the inventory management systems are very important for any manufacturing company.

Objectives of Inventory Management Systems

The basic responsibility of the financial manager is to make sure the firm’s cash flows are managed efficiently. Efficient management of inventory should ultimately result in the maximization of the owner’s wealth. Inventory should be turned over as quickly as possible, avoiding stock-outs they might result in closing down the production line or lead to a loss of sale. It implies that which the management should try to pursue the financial objective of turning inventory as quickly as possible, it should at the same time ensure sufficient inventories to satisfy production and sales demands. In other words, the financial manager has to reconcile these two conflicting requirements. Stated differently, the objective, the objective of inventory management consists of two counterbalancing parts: (1) to minimize investments in inventory, and (2) to meet a demand for the product by efficiently organizing the production and sales operations. These two conflicting objectives of inventory management can also be expressed in terms of cost and benefit associated with inventory. That the firm should minimize investment in inventory implies that maintaining inventory involves costs, such that the smaller the inventory, the lower the cost to the firm. But inventories also provide benefits to the extent that they facilitate the smooth functioning of the firm: the larger the inventory, the better it is from this viewpoint. Obviously, the financial managers should aim at a level of inventory, which will reconcile these conflicting elements. That is to say, an optimum level of inventory should be determined on the basis of the trade-off between costs and benefits associated with the level of inventory. We can say that the profit and loss of a company largely depends on its inventory management system. If the company properly controls its inventory management system, it will be profitable. Otherwise it will be cause of being loss.