Page 185 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management Tanima Dutta, Lovely Professional University

Notes Unit 12: Inventory Management

CONTENTS
Objectives
Introduction

12.1 Tools and Techniques of Inventory Management
12.2 Inventory Control Models
12.3 Valuation of Inventories

12.4 Inventory Management and Cash Flow Timeline
12.5 Summary
12.6 Keywords
12.7 Review Questions
12.8 Further Readings

Objectives

After studying this unit, you will be able to:
Identify the tools and techniques of inventory management

Discuss the inventory control models
Explain the valuation of inventories
Discuss the inventory management and cash flow timeline

Introduction

Inventory management is concerned with keeping enough product on hand to avoid running
out while at the same time maintaining a small enough inventory balance to allow for a
reasonable return on investment. Proper inventory management is important to the financial
health of the corporation; being out of stock forces customers to turn to competitors or results in
a loss of sales. Excessive level of inventory, however, results in large inventory carrying costs,
including the cost of the capital tied up in inventory warehouse fees, insurance etc.

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Caution A major problem with managing inventory is that the demand for a corporation’s
product is to a degree uncertain. The supply of the raw materials used in its production
process is also somewhat uncertain. In addition, the corporation’s own production contains
some degree of uncertainty due to possible equipment breakdowns and labour difficulties.
Because of these possibilities, inventory acts as a shock absorber between product demand
and product supply.
If product demand is greater than expected, inventory can be depleted without losing sales until
production can be stepped up enough to select the unexpected demand. However, inventory is
difficult to manage because it crosses so many lines of responsibility. The purchasing manager
is responsible for uninterrupted production and wants to have enough raw materials and
work-in process inventory on hand to avoid disruption in the production process. The marketing

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