The twenty-first century business environment is characterized by fierce competition, rampant change and rapid pace. With globalization, the world has changed into a single market - opportunities has been multiplied and global sourcing of materials has become a common trend even in the SME (Small and Medium Enterprises) world.

In this first paced global economy, businesses need, among many other things, an effective inventory management strategy.

Why inventory management is of such importance. Let us start with an example; a New Delhi based manufacturer of power back-up systems receives an order from an overseas importer. Assuming that they have enough raw materials to produce the specific amount of products, the company commits to deliver the products within one month. But when going to production, it is found that their New Delhi production unit is short one component and therefore they will have to transfer inventory from its another production unit located in Mumbai. But the process will result in unexpected delay which is potentially a deal breaker.

Thus, faulty inventory can give rise to numerous confusions - operation disruptions, stock shortages and overages, problems in shipments, purchasing difficulties, etc. - that may result in increased cost, customer dissatisfaction or even a broken deal. Inventory management dictates the fate of a businesses in one way or the other, and that is why it needs to taken care of. Faulty inventory can spell disaster for a business in bold letters.

What does the term inventory exactly refer to? It may be anything right from raw materials to finished goods, component parts and packing and packaging materials to work in process - all that is used to satisfy present or future demand. Inventory management is concerned with the storing of inventories, what their form and size should be, how they do not remain unused or unprofitable, and what to do for efficient and uninterrupted production, sales and customer-service activities at the minimum cost. Inventory control involves different policies,  procedures, and techniques to balance the loop of demand and supply in a business to have the right amount of stock in the right place at the right time.

Types of stock
In any business, the ultimate aim is to sell something - products, services or both. Stock refers to anything a business uses to make the products or provide services. There are primarily four kinds of stock-

• Raw materials and components which are ready to be used in the production.
• Unfinished goods in production process in progress.
• Finished goods which are ready to be sold in the market.
• Consumable such as fuel, stationary, etc. which are required in the production process.

How much of the above mentioned type of stocks should be kept depends upon the size and nature of a business. If you have the space to store raw materials and components, there is not a problem. But if you lack space, you may consider buying stock in bulk and pay the supplier to store them so that you may call it off when required. While keeping a stock of raw materials and components, confirm that your supplier is reliable and you have are alternative sources available.

Keeping stocks of unfinished goods is always a good idea as it helps to protect production even when there is not enough stock of raw materials while you may consider keeping stock of finished goods when you know that the demand is predictable and certain, goods are produced in batches or you are completing a large order. When it comes to keeping stock of consumable such as fuel or stationary, you should keep in mind certain things such as availability, reliability of supply, chances of price hike, discounts for buying in bulk, etc.

Keeping less or no stock of raw materials, finished and unfinished goods and consumables lower storage charges and minimize the fear of wasting stock. But it is advisable only when you are dealing in stocks that are perishable and it is quick and easy to replenish stock. In an environment where it is difficult to predict how much stock will be required and when, it is better to keep a considerable stock of at least those materials which you know will take a long time to re-order.  

Stock control methods
The problem with inventory management is that keeping too little stock may result in production problems while keeping too much means investing a lot of money unnecessarily. Finding the right balance is therefore necessary. There are various different ways to approach stock control -

Economic order quantity (EOQ): It is a complex method to arrive at a balance between holding too much or too little stock. How much stock should be kept varies in different firms and industries according to their to their requirement balance the costs of holding stocks with the costs of ordering stock. The output of EOQ formula helps to find out the optimum level of stocks that should be kept to minimize a firm's costs.

Fixed re-order stock level: In this type of method, a business identifies the minimum level of stocks it can tolerate, and re-orders when stock reaches that level  

Just-in-time (JiT): Originally developed in Japan, this method of inventory management aims reducing cost by keeping stocks to an absolute minimum. Raw materials are ordered 'just-in-time' (even a few hours ago) or only when they are required. This method involves risk of running out of stock, depends upon reliability of the suppliers, and requires  high level of organisational skill to be maintained effectively.  

Fixed time re-ordering: This method suggests nothing but reordering of stocks at a fixed time each month or week. Although the implementation of this method ensures regular supplementation of stocks, fixed time re-ordering is a little inflexible as a method as stocks may fluctuate quite a bit depending on market demand of products.      

Inventory management or stock control involves making a list of stock and noting down its location and value. This process can be made simpler by using bar-codes or a stock book. For small businesses, stock book is a better option as using bar-codes consumes much time and demands constant attention. Large business may consider using stocks cards to keep track of their stocks. But the system is a little bit complex  where each type of stock has an associated card, with information such as description, value, location, etc.

In these days, large companies use some more sophisticated stock control systems such as Radio Frequency Identification (RFID) and computer software. But for small businesses, it is a systematic approach rather than technology that counts. Gaining a tighter grip on your inventory does not have to mean purchasing an expensive  stock control system. Assess clearly what you really need and implement a manual or automated system that can track inventory across multiple warehouses, in different locations within one facility, and the unique serial or lot numbers of different inventory items. Even if it provides some near real-time information about your stock, it is better than having none.