Importance of Inventory Value in Supply Chain

• January 21, 2019
• Posted by: Admin
• Category: Oracle SCM Cloud

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Why inventory value is important?

Inventory bounds a lot of money. By the end of every financial year, inventory count in imperative and its value is added in the financial statement. The calculation of inventory value at the beginning or end of every financial year is usually done in order to figure out the cost of sales. The auditors may check inventory value randomly. Nevertheless, inventory value has an impact on profit.

How inventory is valued?

It’s not easy to determine the inventory value especially when you are purchasing a particular item continually at different rates. But companies use one of the following methods for inventory valuation.

First in First out (FIFO)

In this method, the first item purchased is assumed to be sold first. In other words inventory on hand is supposed to be used first either purchasing the new one.

Average Cost

In this method, the average cost of good purchased at the start of the year is considered for calculation

Last in First out (LIFO)

In this method, the last item purchased is sold first.

In the remaining article, we will discuss why inventory value is important in the supply chain

You need inventory optimization

Do you know how much inventory you need to hold, where and for how much time? Today difficult economic conditions, competitive market due to technology involvement, short product life cycle and unpredictability in demand make it more exigent to design your supply chain policies. Even it’s challenging to make a decision that how much time you should stock an item especially in the face of demand and variation in a lead time of your whole supply chain. Oracle inventory optimization empowers you to make more balanced and effective revenue. It enables you to provide higher service levels to your customers at significantly lower cost by applying inventory postponement recommendations. Some of its key features are :

• Demand, supply, and lead time variability

• Account for seasonality trends and product life cycle characteristics

• Model varying constraints over time

• Postponement optimization

• Min and max, quantity and days of supply

You have to consider all sorts of variability in your supply chain. Promotions, seasonal changes and introducing new products are the causes of variation in demand. Supply variability occurs due to lead-time uncertainties and supplier performance issues such as product quality and unreliable delivery. Keeping a close eye over variations in demand and supply enables you to figure out accurate inventory investment, which is required to reach your goals of profitability at minimum possible cost while maintaining your position within inventory budget.