What is the Objective of Inventory Management?
The main objective of inventory management is to minimize various types of costs associated with the acquisition and storage of stocks. The importance of inventory management lies in two dimensions:
- The performance: to ensure the continuity of production and shipment of finished products.
- Efficiency: inventory management should be organized to maximize profits.
Based on the objective, managers define the scope and main operational tasks of inventory management that include the following activities:
- Determination and assurance of the desired level of resource reserves needed (by component, including details of “where” and “how much”).
- Forecasting the number of resources that will be spent during the planned period, which is usually based on the most accurate demand forecast.
- Definition of the replenishment process, which includes the selection of suppliers and the choice of transport mode that together determine the delivery time; and the range of the frequency and volume of deliveries.
- The tasks mentioned above must be properly planned and organized. Monitoring the implementation of the entire set of functions guarantees a successful solution to the problem – providing resources. The performance of the control function should involve identification of deviation cases from the planned ones; and the creation of specific techniques that aim to effectively and efficiently compensate for such adverse situations.
- Timely identification of operational risks and the development of tools and measures to minimize them.
Inventory management is a critical function that makes up the most crucial area of the logistics system, both in terms of labor intensity and associated costs. Stocks in one form or another are present throughout the logistics channels, immobilizing a significant part of the working capital of any company. Inventory management costs account for 6 to 25% of the total company’s expenses. Thus, it is essential to implement efficient inventory management and minimize costs to get profits.