Raw material inventory management 

Definition

Raw material inventory management is the overall planning, organizing, coordinating, staffing and controlling of the procurement department or section to ensure that there is material cost effectiveness during and after production. Therefore, in this article, we have interrogated the five (5) functions of management but specifically for the aspect of handling inventory of raw materials.

Inventory management of raw materials is under the purchasing department especially in big organizations. The department is headed by the purchasing manager who is responsible of obtaining all acquisitions be it raw materials, consumable stores, spare parts of machinery and even purchases for reselling purposes. The purchasing manager does the planning on how to ensure that the requisitions are received in time and in the right quantities and qualities. He/she also organizes for proper handling of those purchases and how they will be utilized in the future to optimize output. The manager also undertakes the control function of ensuring that the actual activities related to inventory such as purchasing, inventory quality and quantity is compared with the expected levels or standards so as to deal with variances whether favorable or adverse.

Control function is very important because any adverse variance such as purchase of excess raw materials may result to wastage especially for perishable goods or may result to additional expenses such as storage or holding costs. This may make the inventory more costly. Similarly, purchase of less inventory may imply losses such as failure to meet orders of the customers which may result to sales losses. Further, purchase of inferior raw materials may imply that quality of the final product may be low hence lose customer loyalty. This will lead to reduced sales hence translate to reduced profitability of the firm. Therefore, control function is key for it is a protector guard to the firm. So, the purchasing department need to lay down purchasing polies that can enable the firm to achieve the following specific objectives, namely;

1. Purchase of inventory cheaply without compromising the quality thereof.
2. Timely purchases to avoid shortages of raw materials which may lead to less supply in the market.
3. To purchase the right quantities.
4. To ensure that the firm’s products are in the market limelight to avoid loss of market share.
5. The next step as a learner/entrepreneur is to understand what is inventory management and the procedures thereof.

Inventory managerial procedures

Inventory management entails all the functions of planning, organizing, coordinating and controlling of inventory related activities so as to achieve the objectives of reducing inventory management costs and on the other hand maximize organization’s sales turnover by efficiently and effectively meeting customer demand. Therefore, inventory management system is composed of various procedures and processes which work in harmony to achieve the set inventory management goals. These procedures are and not limited to;

Step One: Inventory Purchase Procedures

Step Two: Inventory Issuance Procedure

Step Three: Inventory Storage Procedures

Step Four: Inventory Control Procedures

Step Five: Inventory Valuation Procedures

Therefore, with an assumption that you have re-visited our advanced accounting materials under the sub-topic of inventory valuation in a business, the following is the summary of inventory valuation methods used in cost accounting. These are;

1. First in First Out method (FIFO)
2. Last in First Out method (LIFO)
3. Simple Average method
4. Weighted Average method
5. Basic Stock method
6. Replacement Cost method (NIFO)
7. Standard Price