Inventory Management Procedure
The Inventory Management Procedure minimizes inventory and costs of inventory ownership. The procedure ensures the best inventory practices are employed and align with overall company financial objectives and meet operational needs. It applies to all departments involved in managing inventories including the Finance, Accounting, Purchasing, Sales and Operations. (10 pages, 1455 words)
Inventory levels are an important facet of financial management. Carrying large inventories mean significant costs of ownership. The overarching goal of any organization should be to minimize inventory levels of all types through the use of best inventory management practices that meet the organizational needs and service level goals.
The purpose of inventory management is:
- To minimize and monitor inventory performance through metrics such as Days Inventory and Inventory Turns;
- To minimize and monitor Cost of Ownership;
- Ensure that inventory practices do not adversely affect the company’s financial performance; and
- Ensure that best inventory practices are employed and that they meet the company’s needs.
Inventory Management Responsibilities:
The CFO (Chief Financial Officer) is responsible for overseeing the company’s financial investment in inventories and for assisting in developing and reviewing the TM1020-1 INVENTORY MANAGEMENT PLAN.
Top Management is responsible for developing inventory policies and overarching inventory goals documented in the TM1020-1 INVENTORY MANAGEMENT PLAN.
Involved Department Managers are responsible for helping to complete the review of and implementing the TM1020-1 INVENTORY MANAGEMENT PLAN.
Inventory Management Definitions:
Inventory – Quantity of goods and materials on hand in the form of raw and purchased materials, work-in-process, and finished goods (and for retailers, resale goods); typically appears as an asset on the company’s Balance Sheet.
Work-In-Process (WIP) – All incomplete products and components in various stages of the manufacturing/assembly process.
Finished Goods – Complete products ready for sale and shipment.
Inventory Turns – The number of times that a company’s inventory cycles or turns over per year. Calculation methods vary slightly depending on the type of inventory being calculated (i.e. for raw/purchased inventory: cost of materials used/average cost of materials in inventory; for finished goods inventory: cost of goods sold/average cost of goods in inventory).
Days Inventory – The average number of days of inventory on hand per accounting period (i.e. Turns per year = 365 days/Inventory turns).
Inventory Management Procedure Activities
- Inventory Management Overview
- Inventory Management Planning Inventory Management
- Reviewing the Inventory Management Plan
- Improving Inventory Management
Inventory Management Procedure Forms