Editing Inventory (section)

==High-level inventory management==
It seems that around 1880<ref>Relevance Lost, Johnson and Kaplan, Harvard Business School Press, 1987, p126</ref> there was a change in manufacturing practice from companies with relatively homogeneous lines of products to horizontally integrated companies with unprecedented diversity in processes and products. Those companies (especially in metalworking) attempted to achieve success through economies of scope—the gains of jointly producing two or more products in one facility. The managers now needed information on the effect of product-mix decisions on overall profits and therefore needed accurate product-cost information. A variety of attempts to achieve this were unsuccessful due to the huge overhead of the information processing of the time. However, the burgeoning need for financial reporting after 1900 created unavoidable pressure for [[financial accounting]] of stock and the management need to cost manage products became overshadowed. In particular, it was the need for audited accounts that sealed the fate of managerial cost accounting. The dominance of financial reporting accounting over [[management accounting]] remains to this day with few exceptions, and the financial reporting definitions of 'cost' have distorted effective management 'cost' accounting since that time. This is particularly true of inventory.

Hence, high-level financial inventory has these two basic formulas, which relate to the accounting period:

# Cost of [[Beginning Inventory]] at the start of the period + inventory [[purchase]]s within the period + cost of [[Production (economics)|production]] within the period = cost of goods available
# Cost of goods available − cost of [[ending inventory]] at the end of the period = [[cost of goods sold]]

The benefit of these formulas is that the first absorbs all overheads of production and raw material costs into a value of inventory for reporting. The second formula then creates the new start point for the next period and gives a figure to be subtracted from the sales price to determine some form of sales-margin figure.

Manufacturing management is more interested in ''inventory turnover ratio'' or ''average days to sell inventory'' since it tells them something about relative inventory levels.

:Inventory turnover ratio (also known as [[inventory turns]]) = cost of goods sold / Average Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2)

and its inverse

:Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio = 365 days a year / Inventory Turnover Ratio

This ratio estimates how many times the inventory turns over a year. This number tells how much cash/goods are tied up waiting for the process and is a critical measure of process reliability and effectiveness. So a factory with two inventory turns has six months stock on hand, which is generally not a good figure (depending upon the industry), whereas a factory that moves from six turns to twelve turns has probably improved effectiveness by 100%. This improvement will have some negative results in the financial reporting, since the 'value' now stored in the factory as inventory is reduced.

While these accounting measures of inventory are very useful because of their simplicity, they are also fraught with the danger of their own assumptions. There are, in fact, so many things that can vary hidden under this appearance of simplicity that a variety of 'adjusting' assumptions may be used. These include:
* [[Specific Identification]]
* [[Lower of cost or market]]
* [[Weighted Average Cost]]
* [[Moving-Average Cost]]
* [[FIFO and LIFO accounting|FIFO and LIFO]].
* [[Queueing theory]].<ref>{{Cite journal|doi=10.1016/j.jmsy.2010.08.003|title=A queueing approach to production-inventory planning for supply chain with uncertain demands: Case study of PAKSHOO Chemicals Company|journal=Journal of Manufacturing Systems|volume=29|issue=2–3|pages=55–62|author=Fathi, M.|year=2010}}</ref>

Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily a management tool. Inventory management should be forward looking. The methodology applied is based on historical cost of goods sold. The ratio may not be able to reflect the usability of future production demand, as well as customer demand.

Business models, including Just in Time (JIT) Inventory, Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI), attempt to minimize on-hand inventory and increase inventory turns. VMI and CMI have gained considerable attention due to the success of third-party vendors who offer added expertise and knowledge that organizations may not possess.

Inventory management also involves risk which varies depending upon a firm's position in the distribution channel. Some typical measures of inventory exposure{{Definition needed|date=November 2021}} are width of commitment{{Definition needed|date=November 2021}}, time of duration{{Definition needed|date=November 2021}} and depth{{Definition needed|date=November 2021}}.<ref>{{Cite book|last1=Bowesox|first1=Donald|last2=Closs|first2=David|last3=Cooper|first3=Bixby|title=Supply Chain Logistics Management {{!}} Inventory Functionality and Definitions|language=en|chapter=7|pages=156–160|publisher=Mc Graw Hill|year=2010|isbn=978-007-127617-7}}</ref>

Inventory management in modern days is online oriented and more viable in digital. This type of dynamics order management will require end-to-end visibility, collaboration across fulfillment processes, real-time data automation among different companies, and integration among multiple systems.<ref>{{Cite news|url=http://magentone.over-blog.com/2017/03/big-trends-for-inventory-management-in-2017.html|title=Big trends for Inventory Management in 2017 [Infographic] (UPDATED) - Magentone Developers Website|work=Magentone Developers Website|access-date=2017-07-19|language=en-US|url-status=live|archive-url=https://web.archive.org/web/20170718182930/http://magentone.over-blog.com/2017/03/big-trends-for-inventory-management-in-2017.html|archive-date=2017-07-18}}</ref>