Inventory on hand
|Inventory on hand|
Inventory on hand –items immediately available to use that are one of the component of inventory position. The purpose of keeping on-hand inventory is meeting the demands so it is critical for company’s operating and it affects the results. Whenever the inventory on hand is low, the additional units are ordered(Blumenfeld D. 2001, p.107).
Tracking methods of inventory on hand
Entrepreneurs can track and measure physical inventory on hand in two ways(Epstein L. 2012,p.142):
- Periodic inventory – manual counting and weighting of each kind of inventory kept in the storage, done on specific dates (daily, monthly or per year – depending on business needs)
- Perpetual inventory – using computerized accounting system that adjusts the inventory after each sale based on cash register
Despite of using automated system, there is recommended to do psychical inventory counting in order to ensure that the numbers coming from computer match with the reality. The chosen method has also an influence on the costs of good solds.
Days inventory on hand
There are some measurements enable to verify the inventory effectiveness. One of them is days inventory on hand, called days/weeks of supply as well. It is calculated by dividing the quantity on hand (individual part or specific category of items) by the average daily demand or usage. The result shows how many days the company will be able to operate with available resources. In case of categories of parts and their different units, the method based on using dollar figures is more recommended. One of the questions in inventory management is how much of it should be kept in order to meet the demand and expectations of customers. The general rule assumes inventory maintenance on low level(Mercado Ed C. 2007, p.231).
Advantages and disadvantages of inventory on hand
Keeping inventory on hand is related to benefits and costs.
When it comes to advantages, it helps to cover up the mistakes in the production, especially when the component of product is destroyed in production process. If the supply of the part is questionable, the spare part could fill in a gap and resolve the problem. Another reason for keeping inventory on hand is possibility to meet the higher seasonal demands of customers(Bragg S.M. 2005, p.251-252).
Despite of above good reasons for maintaining the inventory, reducing the resources enables to decrease the costs. Keeping high level of inventory is related to below costs(Bragg S.M. 2005, p.251-252):
- Building costs – some products require to be kept in indoor warehouse so there is a need of owning or leasing building space and its maintenance
- Carrying costs – the money that have been used to purchase the inventory, could have been invested or used to pay off some debts,
- Change control & counting cost – tracking and changing old part to new component require additional staff time
- Damage costs – incorrect conditions of storage or moving the inventory can damage the products
- Handling costs – high number of staff is essential to keep the warehouse in use
- Insurance costs – existence of damage risk requires having insurance policy to cover destroyed resources
- Obsolescence costs – products may become unusable
In order to reduce the costs of maintaining inventory, many companies have implemented Just-In-Time (JIT) system that allows to eliminate all unneeded activities by providing the right part at the right place at just the right time. There are also MRP system (Materials Requirements Planning) that helps in increasing of inventory planning efficiency(Boone L.E 2010, p.370).
- Blumenfeld D, (2001),Operations Research Calculations Handbook, CRC Press, USA
- Boone L.E., Kurtz D.L (2010),Contemporary Business 2010, John Wiley & Sons, USA
- Bragg S.M. (2005), Controller's Guide to Planning and Controlling Operations, John Wiley & Sons, USA
- Epstein L. (2012),Bookkeeping Kit For Dummies, John Wiley & Sons, New Jersey
- Mercado Ed C. (2007),Hands-On Inventory Management, CRC Press, New York/London
Author: Christian Ferdouel