Importance of Inventory Management

Importance of Inventory Management

Inventory is defined as a stock or store of goods. The term inventory refers to the goods or materials used by a firm for the purpose of production and sale. It is the management of inventory and stock. It also includes the items, which are used as support materials to facilitate production. A key function of inventory management is to keep a detailed record of each new or returned product as it enters or leaves a warehouse or point of sale.

Effective inventory management is essential for ensuring a business has enough stock on hand to meet customer demand. If inventory management is not handled properly it can result in a business either losing money on potential sales that can’t be filled or wasting money by stocking too much inventory. An inventory management system can also help you prevent a number of other mistakes:

Inventory management is important from the viewpoint that it enables to address two important issues:

  • The firm has to maintain adequate inventory for smooth production and selling activities.
  • It has to minimize the investment in inventory to enhance a firm’s profitability.

Investment in inventory should neither be excessive nor inadequate. It should just be optimum. Maintaining optimum level of inventory is the main aim of inventory management. Excessive investment in inventory results into more cost of fund being tied up so that it reduces the profitability, inventories may be misused, lost, damaged and hold costs in terms of large space and others. At the same time, insufficient investment in inventory creates stock-out problems, interruption in production and selling operation.

Avoid spoilt or dead stock

It’s not just storage costs where a retailer is potentially losing money from poor inventory management. Perishable items will be entirely wasted should too much be ordered at one time or it isn’t stored sufficiently.

Too much stock that becomes ‘dead’ due to going out of season or style is similarly wasteful. Better managing of inventory helps avoid wasting money on too much spoilt or dead stock.

Improve cash flow

Any inventory is likely to have been paid for upfront. But until this stock is sold, it’s just a hole in the bank balance and a dip in cash flow.

Therefore, the firm may loose the customers as they shift to the competitors. Financial manager, as he involves in inventory management, should always try to put neither excessive nor inadequate investment in inventory. The importance or significance of inventory management could be specified as below:

  • Inventory management helps in maintaining a trade-off between carrying costs and ordering costs which results in minimizing the total cost of inventory.
  • Inventory management facilitates maintaining adequate inventory for smooth production and sales operations.
  • Inventory management avoids the stock-out problem that a firm otherwise would face in the lack of proper inventory management.
  • Inventory management suggests the proper inventory control system to be applied by a firm to avoid losses, damages, and misuses.


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