Inventory and Risk Management

In the due course of the project, inventory management plays a major role in controlling the
project cost. In order to carry forward the project as scheduled and keep it within the scheduled
budget, risk management takes full charge in minimizing the damage that might cause in the
project life cycle.

The purpose of inventory management is to ensure availability of materials in sufficient quantity

as and when required and also to minimise investment in inventories.

Inventory management is necessary for every management to give proper attention to inventory
management. A proper planning of purchasing, handling, storing and accounting should form a
part of inventory management. An efficient system of inventory management will determine

1. What to Purchase.

2. How Much To Purchase.

3. From Where To Purchase.

4. Where To Store Etc.

The purpose of inventory management is to keep the stocks in such a way that neither there is
over-stocking nor under-stocking. The investments in inventory should be kept in reasonable
limits.

In the initial stage of the construction project, the organization has to plan, schedule and
implement for materials, machinery and resources required. When it comes to the materials for
a scheduled project, planning engineer and the project manager must derive the materials
required using the relevant techniques available. Let’s say, the (EOQ) economic order quantity
for a particular activity can be calculated and meet the requirements.

This paper gives you a case study on the inventory and risk management in the project’s life
cycle. By the ABC analysis, vendor rating, selection criteria, financial comparisons through
procurement and other techniques used in controlling the project cost and its timely completion.

1. To study how inventory management practices plays an important role in supporting

other activities of an organization

2. To judge the success of the management in balancing the production with the demand.

3. To find out the difference between the theoretical and practical aspect of inventory
management.

4. To find out the techniques to select the vendor for particular works.

5. Comparison of the financial statement when inventory is over –stock and under stock
level

6. Classify the inventories and applying the tools and techniques.

The various costs and risks involved in holding inventories are as below

1. Capital Costs: Maintaining of inventories results in blocking of the firm’s financial

resources. The funds may be arranged from own resources or from outsides. In the
former case, there is an opportunity cost of investment while in the later case, the firm
has to pay interest to the outsides.

2. Storage and Handling costs: Storage and Handling costs: The storage costs include
the rental of the godown, insurance charges, etc

3. Risk of Price Decline: This may be due to increased market supplies, competition or
general depression in the market.

4. Risk of Obsolescence: The inventories may become obsolete due to improved

technology, changes in requirements, change in customer’s tastes, etc.

5. Risk Deterioration in Quality: The quality of the materials may also deteriorate while
the inventories are kept in store.

The following are the important tools and technique of inventory management and control.

• Determination of stock levels

• Determination of safety stocks.

• Selecting a proper system of ordering for inventory.

• Determination of economic order quantity.

• A.B.C. Analysis.

• Inventory turnover ratios.

• Aging schedule of inventories.

• Classification and codification of inventories.

• Preparation of inventory reports.