What is Inventory Management? Functions, Control Techniques

  • Post last modified:5 June 2021
  • Reading time:6 mins read

What is Inventory Management?

Inventory management is the process of efficiently managing the constant flow of inventories into the business processes. This process usually involves controlling the transfer of units in order to prevent the inventory from becoming too high, or too less.

Because excessive investment in inventory results into more cost of fund being tied up so that it reduces the profitability, inventories may be misused, lost, damaged and hold costs in terms of large space and others.

At the same time, insufficient investment in inventory creates stock-out problems, interruption in production and selling operation. Investment in inventory should neither be excessive nor inadequate. It should just be optimum.


Functions of Inventory

Irrespective of its location in the supply chain, product inventory essentially serves the following functions:

  1. Balancing Supply and Demand
  2. Periodic Variation
  3. Scale Economies

Balancing Supply and Demand

The production and consumption cycle never matches. The sudden requirement of a product in large quantities may not be fulfilled immediately as the production cannot be taken up so soon. In such a case, the products are manufactured in advance in anticipation of demand and kept in stock for supply during peak period.

Periodic Variation

For seasonal products, the demand is at its peak for a certain period while it is lean for the rest of the year. Production runs in the factory are taken based on the average demand for the year. Excess production during the lean period is kept as inventory to take care of the peak demand.

In case where raw material for manufacturing food products is available seasonally, the products are manufactured and stocked as inventory to meet the demand of the finished product throughout the year.

Scale Economies

Products are manufactured at focused factories to achieve economies of scale. This is done because of the availability of the latest technology, raw materials and skilled labour. Hence the produce is kept in stock for distribution to consumption centers as and when it is required. Distribution is done in economical lot size for system efficiencies in speed and cost.


Inventory Control Techniques

  1. ABC Analysis
  2. HML Analysis
  3. XYZ Analysis
  4. VED Analysis
  5. FSN Analysis
  6. SDE Analysis
  7. GOLF Analysis
  8. SOS Analysis
  9. SAP Analysis

ABC Analysis

It often happens in the industry that 80% value of the total inventory is shared by only 20% of items. These category of items is called group ‘A’ items. The second category is group ‘B’, which has relatively lesser value than that of ‘A’. The third category is ‘C’ class items, which are of least value. Class ‘A’ and ‘B’ items require continuous review, while class ‘C’ items are subjected to periodic review.

In continuous review, the inventory levels are checked very frequently and as soon as the inventory level goes down by a predetermined level, order is placed. In periodic review system, an order of deficit from predetermined inventory is placed, whenever a review is carried out.

HML Analysis

The classification scheme of HML analysis is based on the annual consumption value of an item. On the basis of usage value of an item the classification is done so as to segregate high, medium and low items. The items are arranged in descending order of the unit value and it is the decision of the operations manager to demarcate the limits of these three categories.

XYZ Analysis

In this scheme, inventory stored is the basis of classification. The ‘X’ items have high inventory values. On the other hand, ‘Z’ items have low value. This analysis helps in identifying those items which held up large share of invested capital. It is generally used with ABC or HML analysis.

VED Analysis

It is used for controlling spare parts. It may not have much significance as far as service industry is concerned but some applications can be found in automobile services. Vital items are extremely critical, essential spares are somewhat important, while work does not suffer on the account of unavailability of desirable spares. Shortage of ‘vital’ supplies brings the service to haul.

These spares need not necessarily be expensive. It is expected that adequate quantity of ‘vital’ items should be maintained.

FSN Analysis

It is a classification scheme based on rate of movement of materials in the store or on the basis of consumption pattern of the components. It is especially helpful in controlling the obsolescence. Fast moving items are to be taken care of at priority.

An item is called as fast moving when the rate of movement of item out of store is very high as compared to that of other items. Non- moving items have very low turnover and are kept in lesser quantity to avoid obsolescence.

The general practice is to keep increasing the speed of items by continuously trying to move items from ‘N’ to ‘F’ category. Items left in ‘N’ category are generally of no demand because of possible change in technology or other environmental concerns.

SDE Analysis

It is used in a scenario of multiple item procurement. It classifies items in to scarce, difficult and easy to procure items. Scarce items are those items which are not readily available in the market and the lead time associated with procurement of that item is very high.

It may also involve development of supplier sourcing that item. While, difficult item is complicated in the way it is made. In easy category are those items which are readily available in the market and delivery is quicker.

GOLF Analysis

It classifies the source from which the items are procured. In this GOLF stands for government, ordinary, local and foreign source. It is useful in a scenario where the purchased items to be kept in inventory are procured from different types of resources. Since procedure of procurement from these sources is totally different from each other, they are kept in different categories.

SOS Analysis

It divides the items into seasonal and off-seasonal. Seasonal items are available only for a limited period of time while off-seasonal items are perennially available. The seasonal items must be procured in advance so that they can be used for rest of the year. Products like tobacco, fruits are such items.

SAP Analysis

Scarce, Available and Plenty status of inventory item is used for planning and forecasting of inventory requirement. The ordered quantity is governed by scarcity factor. The limitation in supply or obsolescence of an item in the near future will be the guideline for procurement policy decision.


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