By Karan Gandhi

Value of materials and goods held by a firm

(1) for production (raw materials, subassemblies, work in process), (2) to support manufacturing activities (consumable stores), or

(3) for sale or customer service (finished goods, spare parts).

There are different types of inventory which business concerns holds. We can group up the different types of inventory into following main parts:
Categories
Raw Material

Explanation
These are the basic material supplied in crude form to be used for production e.g. rubber, cotton etc. This category includes those materials on which some work has been performed but have not been completed.

Work-in-Process

Finished Goods Inventory

These are completed products awaiting sale.

Categories Tools

Explanation These are the appliances which are used in the manufacturing operations e.g. hammers , screw-drivers etc. This category includes those products, which are complimentary to the main products produced for the purpose of sale. Examples of spare part items are bolts, nuts, clamps, screws etc. These spare parts are usually bought from outside or some times they are manufactured in the company also.

Spare Parts

Consumable These are the items which are used for stores smooth running of the machines e.g. lubricants, oil etc.

Inventory management is a scientific technique, concerned with Planning, Organizing &Control of flow of materials, from their initial purchase to destination.
Technique of maintaining inventory at the desired level, which is in the best interest of the organisation

Availability of Material
There should be continuous availability of all type of materials in the factory so that production may not be held up for want of any material.

No Excessive Investment in the Material

The system should ensure that there should not be overstocking; because this will raise product cost and firm revenue will fall.

Hedge against the future

Supplier may face certain type of unfavorable situations like there may be strike of labor in that case supplier will not be able to supply the material to the buyer but if adequate inventory is managed than these type of unseen situations can be tackled.

Protection against fluctuations in demand

Sometimes there is sudden increase in demand and this increase in demand can be met out with the finished goods inventory held by the firm. These type of situations can also be tackle if there is proper inventory control system applied in an organisation.

Better customer service

In certain type of industries (like Automobile industry) spare parts are necessary to be store.
Because these are to be supplied to the existing customers if original part of the product get damaged; And if the spare parts are not supplied to consumers on time than in future he will not buy the products of the firm. In this way company will be in heavy loss because of loosing its precious customers to its competitors.

Re-order level

It is the point at which if stock of a particular material in store approaches, the store keeper should initiate the purchase requisition for fresh supplies of that material. Formula

max. consumption per day X max. re-order period

Minimum (or Safety Stock) level

This represents the minimum quantity of the material which must be maintained in hand at all the times. Formula
re-order level (normal consumption X normal reorder period)

Maximum level

It represents the maximum quantity of an item which can be held in stock any time; this quantity is fixed so that there is no overstocking. Formula
Re-ordering level + re-order quantity-(min. consumption per day X min. re-order period)

Danger level

This means a level at which normal issues of material are stopped and issues are made only under specific instructions. The purchase officer will make special efforts to get the material. This level is calculated by taking into account the time required to get the materials by the shortest possible means. Formula
Avg. consumption per day X maximum re-order period for emergency purchases.

Danger level

EOQ basically is an formula which determines how much quantity to be ordered at one time which will minimize the total cost related to materials.

This quantity is fixed in such a manner which will minimize cost of carrying and cost of ordering the materials.
Total cost of material consist of = Acquisition cost + Total ordering cost + Total carrying cost

Carrying cost: it is cost of holding inventory in stores

Cost of storage space.

Cost of maintaining materials for avoiding deterioration.

Insurance cost Notional interest on the amount locked up in the inventory Clerical cost in stores

Ordering cost: it is the cost of placing the orders for purchase of material

Cost of staff posted in the purchasing department(includes cost of floating tenders and cost of evaluating tenders, cost of paper work involved in the placing orders ) Cost of staff posted in the inspection department Cost of stationery Postage and telephone charges

Relation of above costs with the with the number of units to be ordered

EOQ minimizes the sum of carrying and ordering costs Q= 2DCo/Ch

D = Annual demand Co = Ordering/setup costs Ch = Cost of holding one unit of inventory

EOQ =

D = annual demand = 6,000 Co = ordering/setup costs = Rs.60 Ch = cost of holding one unit of inventory Rs.3.00 x 24% = .72
2 x 6,000 x 60 = .72 720000 .72 = 1000 units

2DCo/Ch

Now at this 1000 units inventory carrying costs and inventory ordering costs are minimum and same.

Ordering cost:
Formula

Annual demand/EOQ X ordering cost

6000/1000 X 60 = 360 Rs.

Carrying cost:
Formula
EOQ/2 X Inventory carrying cost per unit
1000/2 X .72 = 360 Rs.

Economic order quantity balances both type of costs

ECONOMIC ORDER OF QUANTITY(EOQ)

PURCHASING COST

CARRYING COST

EOQ is different from Re-order quantity because it is determined with the help of scientific formula

In Traditional system of inventory management rawmaterial are stored in the stores for the smooth flow of production and finished goods are stored so that anticipated rise in demand can be met out easily. While

these inventories provide buffers against unforeseen events, they have a cost.

But now in the Modern era, some Japanese companies are following new inventory management system called Just-in-manufacturing and in this system As this

sequence suggests, "just-in-time" means that raw materials are received just in time to go into production, manufacturing parts are completed just in time to be assembled into products, and products are completed just in time to be shipped to customers.

With just in time (JIT) inventory, The exact amount of items arrive at the moment they are needed, Not a minute before OR not a minute after

Company should develop good relations with the suppliers and making timely purchases from proven suppliers(selected after proper vendor rating and vendor certification program me's) who can make ready delivery of goods as and when need arises.

Funds that were tied up in inventories can be used elsewhere. Areas previously used, to store inventories can be used for other more productive uses. Resulting in less wastages in stores & no risk of deterioration of material and obsolesce of finished goods Inventory. Carrying cost can be reduced as a result of low investment in inventory. Lower product prices due to reduced costs.

While machines from Compaq and IBM can languish on dealer shelves for two months Dell does not start ordering components and assembling computers until an order is booked. Other companies like

Harley Davidson Toyota Motor Company General Motors Ford Motor Company

A minor disruption in supplies to your business from just one supplier could force production to cease. Real Business Example:
Toyota the Developer of JIT System Just-in-time manufacturing system has many advantages, but they are vulnerable to unexpected disruptions in supply. A production line can quickly come to a halt if essential parts are unavailable. Toyota, the developer of JIT, found this out the hard way. One Saturday, a fire at Aisinseiki Company's plant in Aichi Prefecture stopped the delivery of all break parts to Toyota. By Tuesday, Toyota had to close down all of its Japanese assembly line. By the time the supply of break parts had been restored, Toyota had lost an estimated $15 billion in sales.