Application of XYZ analysis in company inventory management

Warehouse management and the related inventory control have always been of great interest to the management of companies that own their own warehouses. This is mainly due to the freezing of a significant portion of working capital, the precise determination of safety stocks, and the economic order quantity.

Maintaining inventory is very often a necessary condition for the functioning of manufacturing, trading, and many service enterprises. In manufacturing companies, raw material stocks are a condition for maintaining production continuity, while work-in-progress stocks and finished goods and merchandise stocks (in trading companies) enable customer needs to be met. The size of inventory, like receivables, depends on sales – with the caveat that receivables are the result of sales (at the same time, the volume of sales also depends on the receivables management strategy), and inventory precedes this sale, being one of its conditions. The level of inventory should be adjusted to the forecasted sales. Many companies can only make sales if they have a stock of finished goods or merchandise (e.g., traditional trading companies, by displaying them in stores or at exchanges). There are also companies that do not physically possess certain products or goods at the time they are offered to potential customers. This applies, for example, to make-to-order production or e-commerce. However, even in these cases, it is difficult to avoid inventory, e.g., due to work-in-progress (in the first case) or goods (in the second case – even when orders are fulfilled within 24 hours). Maintaining inventory in an enterprise costs money, but it also has its positive aspects. Thus, in practice, in manufacturing and trading enterprises, eliminating inventory does not seem either possible or beneficial (inventory may not exist in some service enterprises). Undoubtedly, however, the efficiency of managing them should be increased, especially since errors in inventory management can lead, for example, to a decline in sales or inflated costs, which can have negative consequences for company results.

Often, enterprises lack simple inventory management mechanisms. Sometimes, some companies use the simplest method of material inventory management, which is to limit them as much as possible. The production volume (in value terms) is calculated, and the level of inventory the company can afford is assumed. Often, enterprises must act in such a way that, while freezing as little money as possible (i.e., by having the smallest possible warehouse stocks), they ensure conflict-free production, so that the required raw material is always available for production, because even the smallest failure to purchase raw material can stop the entire production process, leading to downtime. On the other hand, accumulating too much material can expose the company to a loss of financial liquidity. (…)

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