Inventory management refers to the process of ordering, storing, and using a company's inventory. These include the management of raw materials, components, and finished products, as well as warehousing and processing such items.
For companies with complex supply chains and manufacturing processes, balancing the risks of inventory gluts and shortages is especially difficult. To achieve these balances, firms have developed two major methods for inventory management: just-in-time and materials requirement planning: just-in-time (JIT) and materials requirement planning (MRP).
An inventory account typically consists of four separate categories:
- Raw materials
- Work in process
- Finished goods
- Raw materials
Raw materials represent various materials a company purchases for its production process. These materials must undergo significant work before a company can transform them into a finished good ready for sale.
Work in process
Works-in-process represent raw materials in the process of being transformed into a finished product.
Finished goods are completed products readily available for sale to a company's customers.
Merchandise represents finished goods a company buys from a supplier for future resale.
The objectives of inventory management
The objectives of inventory management are to provide the desired level of customer service, to allow cost-efficient operations, and to minimize inventory investment.
Customer service is a company's ability to satisfy the needs of its customers. When we talk about customer service in inventory management, we mean whether or not a product is available for the customer when the customer wants it. In this sense, customer service measures the effectiveness of the company's inventory management. Customers can be either external or internal: any entity in the supply chain is considered a customer.
A customer service measure is appropriate when customer orders vary in the number of line items ordered.