The process of ordering, storing, tracking, and controlling goods to ensure the right quantity is available at the right time while minimizing holding costs.
Inventory Management encompasses the entire lifecycle of goods: demand forecasting, procurement, warehousing, stock tracking, order fulfillment, and disposal. Effective inventory management balances two competing costs: holding costs (storage, insurance, obsolescence, opportunity cost of capital) and stockout costs (lost sales, emergency procurement, production delays). Key techniques include: ABC analysis (classify by value), EOQ (Economic Order Quantity), JIT (Just-In-Time), safety stock calculation, and cycle counting. Modern inventory management uses barcode/RFID scanning, warehouse management systems (WMS), and ERP integration. For Indian businesses, inventory valuation impacts GST compliance, income tax, and financial reporting under Ind AS 2.
A retailer sells 12,000 units/year. Ordering cost: ₹500/order. Holding cost: ₹10/unit/year. EOQ = √(2 × 12,000 × 500 ÷ 10) = √12,00,000 = 1,095 units per order. Orders per year: 12,000 ÷ 1,095 ≈ 11 orders. With 7-day lead time and safety stock of 250 units, reorder point = (12,000 ÷ 365 × 7) + 250 = 480 units.
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ABC classifies inventory by value: A items (top 20% of SKUs = ~80% of value) get tight control and frequent reviews. B items (30% of SKUs = ~15% of value) get moderate control. C items (50% of SKUs = ~5% of value) get minimal control. This focuses management attention where it matters most.
Inventory Turnover (COGS ÷ Average Inventory), Days Sales of Inventory (365 ÷ Turnover), Stockout Rate, Fill Rate (% orders shipped complete), Carrying Cost as % of inventory value, and Dead Stock % (items with no movement in 12+ months). Track monthly for trends.
An inventory valuation method where goods purchased or manufactured first are sold or used first, meaning the oldest stock is consumed before newer stock.
An inventory valuation method where the most recently purchased or produced items are assumed to be sold first.
An inventory valuation method that calculates the average cost per unit by dividing total cost of goods available by total units available, updating with each new purchase.
The inventory level at which a new purchase order should be placed to replenish stock before it runs out, accounting for lead time and demand.
A unique alphanumeric code assigned to each distinct product or variant in inventory, used for tracking, ordering, and managing stock levels.
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