This eBook will introduce you to the key terms of inventory management, and how understanding and applying these will enable your business to best match customer demand. If terms like Economic Order Quantity, Inventory Valuation, and Reorder Points confuse you, this eBook will be the perfect starter guide. Download the full eBook here: http://www.tradegecko.com/ebooks/inventory-management-getting-started

1. http://tradegecko.com
Inventory Valuation
Inventory Management System
Economic Order Quantity (EOQ)
The ABCs of Inventory Classification
Inventory Performance Metrics
What is Inventory?
What is "Inventory Management"?
Types of Inventory
Purpose of Holding Inventory
Inventory Costs
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Inventory Management:
Getting Started

2. This stuff goes to storage
inventory is a big part of a company's
assets, but it can also be a liability that
ties up an organization’s working
capital. Having too little inventory can
be as costly as having too much.
The key to a successful business lies
in figuring out the optimum way to
manage your supply chain.
Put simply, inventory is the
quantity of materials or “stuff”
in storage. Within the context
of this ebook, it refers to all
forms of material intended for
sale kept by an organization.
What is Inventory?
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3. Different classes of inventory need to be managed differently to
match your business objectives. On a basic level, we have:
Types of Inventory
WORK IN PROGRESS (WIP)
Items which are in the process of
conversion into the finished product.
MAINTENANCE, REPAIR &
OPERATING ITEMS (MRO)
Miscellaneous items which are not
directly part of the production chain,
such as tools and office supplies.
RAW MATERIALS
Materials which can be converted into
components or products, such as gold
which is used for jewellery.
FINISHED GOODS
Items which are ready for purchase
and consumption.
SUISSE
100g
Gold
999.9
SUISSE
100g
Gold
999.9
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4. Inventory valuation is to determine an organization's profit, and
an understanding of the financial importance of inventory is key
to measuring its impact on cash flow.
Inventory Valuation
First-In,
First-Out (FIFO)
FIFO assumes that
the first goods
purchased are the
first to be used or
sold, regardless of
the actual timing of
their use or sale.
This method is
closely tied to the
actual physical flow
of goods in the
inventory.
Last-In,
First-Out (LIFO)
LIFO assumes that
the most recently
purchased/acquired
goods are the first
to be used or sold,
regardless of the
actual timing of
their use or sale.
This method best
matches current
costs with current
revenues.
Average Cost
Method
This inventory
valuation identifies
the value of the
inventory and cost
of goods sold, by
calculating an
average unit cost
for all goods
available for sale
during a given
period of time.
This method treats
all inventory in the
same way, thereby
levelling out price
fluctuations.
Specific Cost
Method
This method
requires tracking
the actual cost of
each individual unit
of merchandise
from beginning to
end -- best suited
for an environment
without much
inventory to track.
This complicated
method usually
requires the use of
a sophisticated
tracking system.
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5. The difference between these two systems lies in the timing and quantity of
orders placed. Under the perpetual system, inventory levels are checked
continually and orders may be sporadic. Under the periodic system, inventory
levels are checked and orders are made based on the specified time interval.
Ultimately, your choice will depend on the overall objectives of your business.
It requires plenty of administrative
processes when orders need to be
made and received
Difficulty in obtaining quantity
discounts that leads to high ordering
costs due to the random nature of
reordering
DISADVANTAGES
ADVANTAGES
Provides real time view of
inventory level
Provides greater system
responsiveness
The quantity of stock ordered with
this system is constant or fixed.
An order is placed when the
inventory level drops to a level
that marks the reorder point. With
this system, the inventory is
checked on a continual basis and
the current level of inventory is
assumed to be known.
FIXED-ORDER QUANTITY
SYSTEM (PERPETUAL)
Since inventory level is not checked
on a regular basis, a sudden surge of
demand can lead to a stock out
Gaps in stock movement leads to
lesser visibility and accuracy
DISADVANTAGES
ADVANTAGES
Because orders are made in bulk,
organizations can take advantage
of quantity discounts
Less administrative process since
orders are made in one sweep
The inventory levels are checked
periodically, and the quantity of
stock ordered can vary.
A target inventory level is
maintained in the system and
inventory is checked in intervals
(for instance every week or every
two weeks). Orders are then placed
to restore inventory levels to the
target quantity set.
FIXED-TIME PERIOD
SYSTEM (PERIODIC)
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6. An Introduction to Economic Order
Quantity (EOQ)
Alternatively, you can use a free online calculator to help with EOQ calculations –
http://www.ultimatecalculators.com/economic_order_quantity_calculator.html
While EOQs help you decide what to
order, ROP answers the question of
when to order. To do so requires the
knowledge of lead time — the interval
of how long it takes for the supplier to
restock the inventory.
This would ensure that there is
enough stock to cater to demand
during this period.
In a perfect world, we can assume that
demand and lead times are always
constant. In reality however, these
variables can fluctuate quite
dramatically. The purpose of safety
stock is to lessen the risk of these
uncertainties.
This is done by ordering buffer stock
on top of the value defined in the ROP.
Reorder Point (ROP) Safety Stock (SS)
The economic order quantity equation helps to decide the best
order quantity that minimizes total inventory holding costs and
ordering costs.
Q*= 2DK
h
D = FIXED COST PER
YEAR
K = DEMAND IN
UNITS PER YEAR
H = CARRYING COST
PER UNIT PER YEAR
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7. Given the importance of inventory management on the financial
and operational value in any organization, it’s important to
regularly measure and evaluate processes.
Thank you for reading!
Understanding the fundamentals of proper inventory
management is the first step to sales success.
Inventory Performance Metrics
These can range from accuracy of records, efficiency of storage methods, units
available, and dollar value tied to inventory. There are, however, two standard
metrics to measure the efficiency of your inventory management and the
financial health of your organization.
This measures the inventory quantity
relative to the number of fulfilled sales
orders. The aim is to keep the
inventory to sales ratio low, which
indicates productive use and
minimized cost of carry.
Inventory to Sales Ratio
This measures how quickly the
inventory is cycling through your
business. A higher turnover value is a
general indicator of success, but be
careful if it’s too high. An extremely
high turnover could also be an
indicator of pricing that’s too low, or
inefficient inventory forecasting.
Inventory Turnover
Visit tradegecko.com to download the full eBook.
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