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What is Inventory Management?

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  • Written By: Tess C. Taylor
  • Edited By: W. Everett
  • Last Modified Date: 04 November 2016
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In general, inventory management refers to the method by which businesses handle tangible resources and materials in order to make sure resources are readily available for use. Inventories are generally managed using a paper list system or a computer software-enabled system. By using an inventory management system, a household can expect to keep necessary supplies on hand while a business can use resources more efficiently in order to generate revenues.

The simplest form of inventory management is the hard-copy method whereby a list is kept of materials that are used on a regular basis. When items are brought in, they are added to the list. When supplies run low, a purchase is made to replenish materials. In this manner, a running inventory of the most important materials can be provided at any time. This simple form of inventory management is helpful so that materials can be purchased at opportune times when prices are low and nothing critical ever runs out.

Another popular form of inventory administration is the computer-software-based inventory management system. As supplies accumulate, a computer inventory management system can be used to keep track of large amounts of products and materials. Whenever an individual material is brought in or leaves the inventory, the inventory-management software makes adjustments to correspond with these activities.

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A computerized inventory system is also helpful to evaluate the costs associated with the use of materials on a large scale. When linked with a central accounting system, computer inventory software can easily calculate the average cost per unit. A computer inventory method also reports the average revenue generated when materials are used to produce goods that are bought and sold.

The most important reason that inventory systems are used is to track supplies so that inventory problems can be identified quickly. If materials are in high demand, an inventory system will allow an organization to be strategic about handling materials, making planned purchases to keep supplies on hand, and reducing the waste of materials. In addition, many organizations are required to keep a running inventory list of goods for tax and insurance purposes.

Having an inventory management system that works well depends on size of the organization and the type of materials that are to be tracked. While a simple inventory method can work well for a small business; for large organizations with a large number of supplies, parts or materials on hand, a computer inventory system may be required to keep up with demand. Without a clear system for keeping inventory levels stable, problems can arise which can be costly and inconvenient.

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