What it is:
Inventory management is the process of ensuring that a company always has the products it needs on hand and that it keeps costs as low as possible.
How it works/Example:
Inventories are company assets that are intended for use in the production of goods or services made for consignment (subject to return by a retailer) or in transit.
There are three types of : raw materials, work-in-progress, and finished goods. Given the significant costs and benefits associated with , companies spend considerable amounts of time calculating what the optimal level of should be at any given time. Because maximizing profits means minimizing expenses, several -control models, such as the ABC classification method, the economic order quantity (EOQ) model, and just-in-time management are intended to answer the question of how much to order or produce.
internal controls over , including safeguarding the from damage or theft, using purchase orders to track movement, maintaining an ledger, and frequently comparing physical counts with recorded amounts.
Common methods include "first in, first out" (FIFO), "last in, first out" (LIFO), and lower of cost or (LCM). Some industries, such as the retail industry, tailor these methods to fit their specific circumstances. Public companies must disclose their methods in the accompanying their .
management makes its biggest mark on the line item of the balance sheet. That line item doesn't just reflect the cost of the ; it also reflects costs directly or indirectly incurred in readying an item for , including not only the purchase price of that item but the freight, receiving, unpacking, inspecting, storage, maintenance, insurance, , and other costs associated with it.
Why it matters:
Inventory management is a key component of cost of goods sold and thus is a key driver of tax liability. Many financial ratios, such as inventory turnover, incorporate values to measure certain aspects of the health of a business. For these reasons, and because changes in and other materials prices affect the value of a companyâs , inventory management is important., total assets, and
warehousing, insurance, shipping, and other services related to obtaining and maintaining . All of these affect the bottom line. Finding the best way to buy, store and move can make the difference between profits and losses for many companies.management is also a key part of managing a company's supply chain. Buy too much stuff, and a company can end up paying more for
Because there are several ways to account forand because some industries require more than others, comparison of management is generally most meaningful among companies within the same industry using the same methods. The definition of a "good" or "bad" management should be made within this context.