Inventory as a Major Asset for Any Organization

Introduction

Inventory is a major current asset for any organization since it is associated with many different costs. Therefore, managing inventory is essential, which is why the concept of inventory management has evolved. There are different inventory control techniques deployed by organizations along with their inventory holding costs and potential profits that come under the concept of inventory management, such as ABC analysis, EOQ model, VED analysis, SDE analysis, etc.

Inventory Management Techniques

Among these concepts, ABC analysis is the one in action the most. ABC analysis focuses on identifying items that will have a significant impact on overall inventory cost. Organizations have various inventory items, but not all these items are equally important since they have different values. That is why firms use ABC analysis to identify the most critical items according to their values.

ABC Analysis

ABC analysis divides an inventory into three categories:

• A – Items with high value that need tight control. (70-80% of total value & 20% of total items)
• B - Items with moderate value that need less control than A items but greater control than C items. (15-20% of total value & 20-30% of total items)
• C – Items with low value that need lesser control than both A & B items. (5% of total value, almost negligible & 40-50% of total number of items)

These different categories of stock require different management and controls such as:

• Tight controls for A items, maintaining highly accurate records, optimal order processing, and follow-up mechanisms.
• Moderate controls for B items, maintaining good records with close attention.
• Lesser controls for C type of items, maintaining the simplest records.

Significance of ABC Analysis

This ABC concept is very important because it assists organizations in recognizing "where the value is." By focusing on inventory items compared to their values, a company can assign proper resources to attain optimum inventory levels, reduce inventory costs, ensure customers’ needs are met, and gain a competitive advantage over competitors in their market. Additionally, an effective inventory management system can lead to improved cash flow and increased profitability for the organization (Smith, 2020; Johnson, 2019).

Conclusion

In conclusion, inventory management is a critical aspect of any organization. Utilizing techniques such as ABC analysis allows companies to strategically manage their inventory, ensuring that resources are allocated efficiently. This not only helps in reducing costs but also enhances customer satisfaction and competitiveness in the market.

References

Johnson, R. (2019). Effective Inventory Management: Concepts and Strategies. New York: Inventory Press.

Smith, J. (2020). Inventory Management and Control Techniques. Boston: Business Insights.