What does “effective inventory management” mean?

Let us analyze this phrase in parts: stocks, management, efficiency.
Inventories (stocks – eng.) – these are the supplied raw materials, materials, components, work in progress from them, finished products, purchased goods, means of production and objects of labor stored in the enterprise. They are formed every time when incoming or outgoing material resources are not used at the enterprise, although they are available. A stock is a material flow that has stopped its movement, temporarily or permanently (forever). Without stocks, at least minimal, it is impossible to manufacture finished products, works, services, trade in goods is impossible. Therefore, any company has stocks in one or another quantity.
Stocks need to be managed, which means inventory planning, inventory planning, inventory control, and improved inventory management. The object of inventory management is each SKU (Stocks Keeping Unit – English, inventory accounting unit) – the nomenclature position, which consists of a nomenclature list of stored stocks in each storage location. It is for SKU that the reserves are planned, the inventory plan is implemented, the reserves are controlled or improved by their management solutions.
Enterprise inventory management should be efficient. Efficiency is the ability to do the right job in the right way. Proper work at the enterprise, associated with stocks, is timely and in the required volume the transfer of material resources from the warehouse of material resources to the production of finished goods, works or services, the timely and ordered sales of goods to a wholesale buyer, a retail buyer or a final consumer. The correctness of work in the market of the buyer is determined by the requirements of consumers, since meeting the needs of consumers is the way to meet the needs of the enterprise in the net profit from its activities. Proper work needs to be done in the right way, i.e. due to such incomes and expenses, the difference between which (net profit) is optimally large.
Thus, effective enterprise inventory management is the timely satisfaction of the needs of internal (production) and external consumers (buyers) in the required quantity of reserves for each SKU, which is associated with optimally reduced inventory management costs, which, all other things being equal, is equivalent to an optimal increase in net profit enterprises.
Effective inventory management of all types in all places of their storage is the need of the enterprise, which has set itself the highest economic goals associated with the optimal increase in net profit, positive net cash flow and its market value.
What are the stocks of the company related to effective inventory management?
Effective inventory management is associated with stocks of material resources (raw materials, materials, components) for the production of finished products, stocks of work in progress, stocks of finished products in all storage locations (central distribution warehouse of the enterprise, regional warehouses of the enterprise), stocks of goods in distributors and warehouses retail (retail stores, pharmacies, gas stations, service stations, etc.). The peculiarity of these stocks is that they are regularly spent and replenished through supplies, as they are a tool to meet current consumer demand for products (finished products, works, services, goods).
Which businesses are potential customers to implement effective inventory management?
The need for the implementation of effective inventory management is in any enterprise that has reserves of any sector of the economy. The degree of relevance of the implementation of effective inventory management may be different, depending on the total size and cost of stored reserves. To quantify the degree of relevance of the implementation of effective inventory management, you can use the calculation of the coefficient of diversion of current assets of the company in stocks by the following formula:
The cost of inventories according to balance is the value of inventories of all types according to the financial balance of the enterprise at the date of its preparation, monetary units;
The cost of current assets on the balance sheet is the sum of the value of all types of inventories, the value of receivables of all types and the value of money and their equivalents on the financial balance of the enterprise at the date of its compilation, monetary units.
The economic meaning of this ratio is that it shows what percentage of the company’s current assets are diverted to inventory. The efficiency of working capital management, first of all, stocks and receivables of an enterprise, determines the efficiency of the whole enterprise.