Inventory management is given to enable the availability of goods at the time of requiring their use or sale, based on methods and techniques that allow knowing the optimal replenishment needs. Inventory is the set of merchandise or articles that companies have to trade, allowing the purchase and sale or manufacture before sale, in a given economic period. Inventories are part of the current assets group of any organization.
INTRODUCTION
Additionally, inventory is one of the largest assets in a company, and is reflected in both the balance sheet and the income statement: In the balance sheet, inventory is often the largest current asset. In the income statement, the ending inventory is subtracted from the cost of the goods available for sale, determining the cost of the goods sold during a certain period.
Inventories are tangible goods that are held for sale in the ordinary course of business or to be consumed in the production of goods or services for subsequent marketing. Inventories include, in addition to raw materials, products in process and finished products or merchandise for sale, materials, spare parts and accessories to be consumed in the production of goods manufactured for sale or in the provision of services; packaging and containers.
The basis of any commercial enterprise is the purchase and sale of goods and services; hence the importance of inventory management by it. This physical and accounting management will allow the company to maintain control in a timely manner, as well as to know, at the end of the period of its activity, a reliable state of the economic situation of the company.
The purpose of the inventory is to provide the company with the necessary materials for its continuous and regular development, that is, the inventory has a vital role in order to function accordingly and coherently within the production process and thus meet demand.
Given the importance of inventories in the economic success of companies, it is essential to have a broad knowledge of aspects related to their administration, costing and control methods, aspects that will be outlined in this investigation.
Inventory Management
An inventory is the existence of assets held for future use or sale. Inventory management consists of keeping these goods available at the time of requiring their use or sale, based on policies that allow deciding when and how much to replenish inventory.
Inventory management focuses on four (04) basic aspects:
- Number of units to be produced at any given time At which time inventory should be produced Which items in inventory deserve special attention? and Can we protect ourselves from changes in the costs of the items in inventory?
Inventory management consists of providing the inventories that are required to keep the operation at the lowest possible cost.
The objective of inventory management has two opposing aspects: On the one hand, it is necessary to minimize the inventory investment, since the resources that are not destined for that purpose can be invested in other acceptable projects that would otherwise they could not be financed. On the other hand, it is necessary to ensure that the company has sufficient inventory to meet demand when it occurs and to ensure that production and sales operations operate smoothly.
Both aspects of the object are conflicting, since reducing inventory minimizes investment, but runs the risk of not being able to meet the demand of the company's operations. If you have large amounts of inventory, the chances of not being able to meet demand and of interrupting production and sales operations are decreased, but investment is also increased.
Inventory saves time since neither production nor delivery can be instantaneous, there must be a product that can be used quickly so that the actual sale does not have to wait until the production process charge ends.
Controlling inventory effectively has its advantages and disadvantages. The main advantage is that the company can satisfy the demands of its customers more quickly. And as disadvantages can be mentioned:
- It involves a generally high cost (storage, handling and performance). Danger of obsolescence.
The management of inventories then has the goal of reconciling or balancing the following objectives:
- Maximize customer service. Maximize the efficiency of purchasing and production units, and Minimize inventory investment.
Inventory Analysis
- Optimal Inventory Level
To achieve efficiency in the handling of raw materials, and that the final product has an adequate cost for this concept, each company must establish a policy for the management of inventories, taking into account the conditions in which it develops its corporate purpose..
An efficient inventory policy is one that plans the optimal level of inventory investment and through control ensures that the optimal levels are met.
Optimal Inventory Level:
It is that level that allows to fully satisfy the needs of the company with the minimum investment.
There are different areas within the company that have different needs regarding the level of inventories:
When setting an inventory policy regarding its optimum level, the company will have to take into account various factors:
1. Rate of consumption: through experience determine how the consumption of raw materials is during the year:
- Linear: production always behaves in the same way Seasonal: there are periods where production is low and periods where it is high Combined: the company has production lines that behave linearly, but at the same time, it has lines seasonal production. Unpredictable: production cannot be planned, as it depends on uncontrollable external factors.
2. Purchasing capacity: Capital adequacy to finance purchases.
3. Perishable nature of the articles: The duration of the products is essential to determine the maximum time that the inventory can remain in the warehouse.
4. Supplier response time:
- Instant supply: Just in Time Delayed supply: High levels
5. Storage facilities: Depending on the capacity of the warehouses, more or less units may be kept in inventory. Alternatives:
- Warehouse rental Agreements with suppliers for periodic supplies.
6. Capital adequacy to finance inventory: Maintaining inventory produces a cost.
- If the rotation is high, the opportunity cost is low. If the rotation is low, the opportunity cost is high.
7. Costs associated with maintaining inventory:
- Handling Insurance Depreciation Leases
8. Protection:
- Against possible shortage of the product. Against untimely demand. Against price increases.
9. Risks included in inventories:
- Decrease in prices. Deterioration of products. Accidental losses and thefts. Lack of demand.
Inventory Management Techniques
As explained in the preceding sections, the objective of inventory management is to try to balance the investment in inventories and the real demand for the product or service offered, so that the needs at both the corporate and from customers. To achieve this goal, organizations must develop inventory control methods and techniques. Various methods of inventory control are explained below:
• THE ABC METHOD, IN THE INVENTORIES:
This consists of carrying out an analysis of inventories establishing investment layers or categories in order to achieve greater control and attention on inventories, which due to their number and amount deserve constant vigilance and attention.
Inventory analysis is necessary to establish three (03) groups of products: A, B and C. The groups must be established based on the number of items and their value. Generally 80% of the inventory value is represented by 20% of the items and 80% of the items represent 20% of the investment.
Articles “A” include inventories that represent 80% of the investment and 20% of the articles, in the case of an 80/20 composition. The articles "B", with an average value, cover a smaller number of inventories than the articles "C" of this group and finally the articles "C", which have a low value and will be a large number of inventories.
This system allows the investment to be managed in three categories or groups to pay attention to the handling of items “A”, which represent 80% of the investment in inventories, so that through its strict control and surveillance, it is maintained or in some In some cases, inventory investment is reduced through efficient administration.
• DETERMINATION OF THE POINT OF REORDER:
As some time elapses before the ordered inventory is received, the finance director must make the order before the present inventory is exhausted considering the number of days necessary for the supplier to receive and process the request, as well as the time in which the items will be in transit.
The reorder point is customary to handle in industrial companies, which consists of the existence of a signal to the department in charge of placing the orders, indicating that the stocks of a certain material or item have reached a certain level and that a new order must be placed.
There are many ways to mark the reorder point, ranging from a sign, paper, card, or a requisition placed in the stock lockers or in stacks of bags, and they indicate that a new order must be placed until More sophisticated ways such as carrying inventory inventory through computer programs.
Some tools of this inventory control are:
The traveling requisition: The objective of this is to save a lot of administrative work, since in advance control and approval points were established so that by this means new purchase orders are placed and that there are no missing materials or items from inventories in the stores. Business.
There are two basic systems that use the travel requisition to replenish stocks, these are:
• Orders or fixed orders. In this, the objective is to place the order when the quantity in stock is just enough to cover the maximum demand that may exist during the time that the new order arrives at the warehouse.
• Periodic refills. This system is very popular, in most cases when perpetual inventory control is established. The main idea of this system is to know the stocks.
• RESERVATION STOCK OR INVENTORY SECURITY:
Most companies must maintain certain security stocks to cope with higher than expected demand. These reserves are created to cushion shocks or situations that are created by unpredictable changes in item demands.
Stock inventories are sometimes kept in the form of semi-finished items to balance the production requirements of the different processes or departments of which the production consists and thus be able to adjust production schedules and supply on time.
In general, it is impossible to anticipate all the problems and fluctuations that demand may have, although it is very true that businesses must have certain reserve stocks if they do not want to have unsatisfied customers.
The existence of an inventory reserve is a price that companies pay for the philosophy of customer service that produces an increase in the market share that is served.
• INVENTORY CONTROL JUST IN TIME:
In just-in-time inventory control, the idea is for inventories to be acquired and inserted into production when they are needed. This requires very efficient purchasing, very reliable suppliers, and an efficient inventory management system.
A company can reduce its production in process through a more efficient administration, this refers to internal factors. The necessary raw materials can be reduced thanks to greater internal efficiency, but this mainly refers to external factors. With a teamwork that incorporates trusted suppliers, the quantity of raw materials can be reduced, compared to finished articles, we can say that if they are quickly replenished, the cost of running out of stock is reduced and in the same way they are reduced inventories of this type.
Inventory costs. Costing Methods
Identical items can be purchased or manufactured at different costs. Consequently, the problem to be faced is determining what costs are applicable to the items that have been sold and what costs should be assigned to the items remaining in inventory. Most of the acceptable methods for selecting costs to be considered applicable to inventory are based on assumptions regarding:
- The flow of goods, for example, the hypothesis that goods are sold in the order in which they are bought or produced; or The current of costs, for example, the hypothesis that the most recent costs are applicable to the goods sold, and that the oldest costs are applicable to the goods in stock.
The following is a brief overview of the methods for selecting the costs to be considered applicable to inventory:
1. "Specific Identification" Method
Premise: If in-stock items can be identified as belonging to specific purchases or production orders, they can be inventoried at the costs shown on invoices or cost records.
This method requires records to be kept whereby items can be accurately identified and their costs accurately determined. Although this method seems to have an excellent logical basis, its application is often impossible or impractical.
2. Method "Price of the last invoice"
This method uses the cost applicable to the last purchase transaction to value the entire quantity of the item in inventory.
For illustrative purposes, suppose the following information about XYZ Company's initial inventory, purchases, and ending inventory:
** There are 200 units in the ending inventory.
According to the method under study, the price of Bs.F 1.30 would be applied to the 200 units of the final inventory, that is, the result is Bs.F. 260.00.
If there is a rapid physical turnover of inventory in normal business operation and the items are sold in approximately the same order in which they are purchased, the price of the last invoice may produce results that are quite close to those achieved by the specific identification, with much less office work.
3. Simple Average Method
Premise: The simple arithmetic average of the prices per unit is determined by adding the unit prices of the initial inventory and of all purchases, and dividing the total thus obtained by the number of purchases plus 1 (by the initial inventory).
Using the same data from the previous example, the simple average unit cost and inventory valuation would be calculated as follows:
Inventory valuation: 1.17 x 200 = Bs.F 234.00
This method is illogical, because the unit prices applicable to both large and small purchases are given the same weight in calculation.
4. Weighted Average Method
Premise: The cost of purchases plus initial inventory is divided by the total of units purchased plus those of initial inventory, determining a weighted average unit cost.
Applying this method, to the same example that we have been citing, it produces a valuation that is calculated as follows:
Total cost = Bs.F 940.00
Total Units = 800
Unit Cost = 940/800 = 1,175
Inventory valuation = 1,175 x 200 = Bs.F 235.00
This method is theoretically illogical because it is based on the hypothesis that all sales are made proportionally to all acquisitions and that inventories will always contain some units of the oldest purchases - assumptions that are contrary to the ordinary purchase-sale procedure..
Since the costs determined by this method are affected by both the first purchases and the last purchases of the year, there can be a considerable delay between the purchase costs and the inventory valuations. Thus, in a rising market, weighted average costs per unit will be less than current costs, and in a declining market, weighted average costs will exceed current costs.
5. Moving or Moving Average Method
This method can be used when running a perpetual inventory system and calculating new average unit costs after each purchase. The cost of each sale is determined with the average obtained after the last purchase, and the valuation of the resulting inventory is based on the unit cost of the moving average.
This method is subject to the same theoretical objection applied to the weighted average. Implicit in this method is the assumption that each sale consists in part of merchandise from all previous purchases, which is contrary to the general procedure of sale.
Continuing with the same case of the XYZ Company, the application of the weighted or moving moving average method is shown below:
6. “First in, first out” method (PEPS)
This method is based on the assumption regarding the flow of articles: it is considered that the existence of these corresponds to the last purchases.
The hypothesis that the oldest stocks are those that come out first generally agrees with the proper policy of handling the goods. Although there are exceptions, for example: the first coal emptied into the pile of a coal mill will be the last one to be sold.
This method has also been considered convenient because it produces an inventory valuation more in accordance with the price trend; As inventory is valued at the latest costs, prices follow the market trend.
The PEPS method can be applied without great difficulty even if perpetual inventories are not kept; it is only necessary to determine the prices shown on the latest invoices in sufficient quantities to equal the number of units in the inventory.
Continuing with the data from previous examples, the following table shows the distribution of merchandise inventory, valued through the PEPS method:
7. Last-in-first-out method (UEPS)
The last entry, first exit method depends on the costs of purchasing a particular inventory. Under this method, the last costs that go into inventory are the first costs that go out to the cost of goods sold. This method leaves the oldest costs (those of the initial inventory and the first purchases of the period) in the final inventory.
When using the expression "last in, first out", we are not referring to the assumption regarding the movement of items, but rather to the assumption of the movement of costs.
Proponents of the method argue that more expressive income statements are produced during periods or exercises of changing costs and prices if current costs are applied to sales, achieving a better association of expense and income.
The method is illustrated through the following example:
Suppose a company sells one unit of item each year. At the beginning of the first year, I bought a unit in Bs. F 1.00 and marked it to be sold in Bs. F 1.50, considering a gross profit of Bs. F 0.50 (to cover expenses and obtain the desired profit). Before making any sale, the company bought a second unit at Bs. F 1.05 and raised the sale price to Bs. F 1.55. Sold a unit for Bs. F 1.55.
By the PEPS method, the gross profit would have been calculated as follows:
Using the UEPS method, the gross profit is calculated as follows:
Internal Control of Inventories
The various aspects of inventory responsibility affect many departments, and each department exercises some degree of control over products as they move through the various inventory processes.
All of these controls, ranging from the procedure for developing sales and production budgets and forecasts, to the operation of a cost system by the accounting department for determining inventory costs, constitute the internal inventory control system., the general functions of this system are: Planning, purchase or procurement, reception, storage, production, shipping and accounting.
Each of these functions is defined below:
• PLANNING:
The basis for planning production and estimating inventory needs is the budget or sales forecast. This must be developed by the sales department.
Production schedules, inventory budgets, and details of the raw material and labor required are prepared or developed with a view to the sales budget. Although these plans are based on estimates, they will have some variation with the actual results, however they facilitate a global control of production activities, inventory levels and offer a basis to measure the effectiveness of current operations.
• PURCHASE OR OBTAINING:
Two separate responsibilities are normally distinguished in the purchasing or obtaining function: Production control, which consists of determining the types and quantities of materials desired, and Purchases, which consists of placing the purchase order and maintaining the necessary vigilance over the delivery. timely material.
• RECEPTION: It is responsible for the following actions:
- Acceptance of the materials received, after they have been duly counted, inspected for quality and compared to an approved copy of the purchase order. Preparation of receipt reports to record and notify receipt and acceptance of the materials. The delivery or shipment of the received items, to the warehouses (warehouses) or other determined places. As a precaution against misappropriation of assets.
• STORAGE:
The raw materials available to be processed or assembled (assembled), as well as the finished products, can be in the custody of a department of warehouses. Responsibility for inventory in warehouses includes the following:
- Verification of the quantities received to determine that they are correct Facilitate adequate storage, as a measure of protection against the elements and unauthorized extractions Extraction of materials against the presentation of exit authorizations for production or shipment.
• PRODUCTION:
The materials in process are, generally under physical control, the internal control of the inventories, includes in this area the following:
- Adequate information on the movement of production and inventories. Rapid notification of waste produced, damaged materials, etc., so that the corresponding quantities and costs of inventories can be duly adjusted in the records. Quick and precise information On the part of the factory, it constitutes a necessity for the proper functioning of the cost system and the production control procedures.
• SHIPMENTS:
All shipments, including those items that are not part of the inventories, should preferably be made on the basis of shipping orders, duly approved and prepared independently.
• ACCOUNTING:
With respect to inventories, it is to maintain accounting control over the costs of inventories, as the materials move through the processes of acquisition, production and sale. In other words, inventory management refers to determining the amount of inventory that should be maintained, the date on which orders should be placed and the number of units that should be ordered each time. Inventories are essential for sales, and sales are essential for profit.
Internal control over inventories is important, as inventories are the circulatory system of a marketing company. Successful companies take great care to protect their inventories. Elements of good internal inventory control include:
- Physical inventory count at least once a year, no matter which system is used Efficient purchase maintenance, receipt and shipping procedures Inventory storage to protect against theft, damage or decomposition Allow access to inventory only for personnel You do not have access to accounting records. Maintain perpetual inventory records for high unit cost goods. Buy inventory in cheap quantities. Maintain sufficient inventory on hand to prevent deficit situations, leading to loss of sales. inventory stored too long, thereby avoiding the expense of having restricted money on unnecessary items.
CONCLUSIONS
Currently for the financial world, it is very important to determine what is the most optimal amount to invest in an inventory, for the production manager his interest will be in covering the raw material necessary for production at the time it is going to be processed, and for sales agents, knowing that they have enough units to cover their demand and any eventuality that may increase the company's profits, and for it to know how it can decrease its costs by having inventories that cover all these characteristics.
Skilled inventory management can make a significant contribution to the profits shown by the firm. With it, the company can carry out its production and purchasing tasks, saving resources, and also serve its customers more quickly, optimizing all the company's activities.
The efficiency of the administration process of an inventory system is the result of good coordination between the different areas of the company, having as premises its general objectives.
BIBLIOGRAPHY
- Finney - Miller. INTERMEDIATE ACCOUNTING COURSE I. Volumes 3 and 4. Superior Accounting Library. Theory and Practice Material. Uteha - Noriega Editores. 1999 Jonson, Robert W. FINANCIAL ADMINISTRATION - Inventory Management Chapter.Websites consulted: www.monographies.com - www.es.wikipedia.com - www.es.wikilearning.com
