Inventory management is an important part of the organization’s working capital management policy . This ensures an uninterrupted process in the production and sale of products at a minimum cost.
For any enterprise, it is a negative fact that there is both a shortage and an excess of inventories. Among the main factors that influence this process, the following are more significant:
Firstly, the system of conditions for the acquisition of fixed stocks (lot size, frequency of purchases, benefits and discounts).
Secondly, the possibility and alternatives to product sales. The following factors are significant: changes in sales, discounts in value, opportunities for demand, reliability and development of a network of dealers.
Thirdly, the conditions of the production process. Attention must be paid to the duration of the preparatory, as well as the main process, technologies and production methods.
Fourth, the presence of costs for storage of stocks (expenses for warehouse services, unexpected freezing of funds).
To optimize these processes, control models are used . Consider the main one in more detail.
Wilson's EOQ Inventory Management Model. It can be used to optimize the size of not only inventories, but also reserves of finished products. Such management models can help solve the problem of how much the enterprise needs to acquire at a time. The optimal order size is such a quantity of deliveries that can provide the necessary quantity of stocks, while minimizing the aggregate costs of their acquisition and storage at the warehouse. But to ensure such an effect, several important calculations will be required.
Such management models imply that it is necessary to divide costs into two large groups:
- Resources that depend on the order of the next batch of stocks (the cost should include transportation costs). They will not depend on the volume of the party.
- Costs required to store goods in a warehouse for a specific time. They will depend on the volume of the party.
For the correct application of the EOQ inventory management model, it is necessary to rely on two basic rules:
- To reduce the costs of the first group, the company is recommended to import materials, raw materials or goods for resale in the highest quantities. There is an obvious pattern: the larger their size, the more opportunities there are to reduce the operational cost of placing orders, delivering them to the warehouse and receiving.
- In order to reduce the costs of the second group, it is recommended to reduce the maximum number of batches that are currently in stock. You can take advantage of the minimum acceptable storage level, since a large stock size will entail a high level of operating storage costs.
But such control models, with their versatility, also have a system of shortcomings. Let's consider them in more detail.
First, a similar model can be applied to one type of product, the quantity of which must be continuously measured.
Secondly, the level of demand for it must be known, independent and constant over a certain period of time.
Thirdly, it is recommended to produce or purchase goods in separate and small batches.
Fourth, the order must come in separate delivery.
Fifth, the consumption of stocks cannot be interrupted. Inadmissible situations of additional deliveries are unacceptable.
Sixth, there should be no discounts on large volumes of supply.