INVENTORY

MANAGEMENT
 IN TRO D U CTIO N

MEANING OF INVENTORY:
The meaning of inventory is stock of goods. In

accounting language it may include:

1.RAW MATERIAL: They are required to carry out
production activities uninterruptedly.

2.WORK-IN-PROGRESS: It is a stage of stocks between

raw material & finished goods.
3.CONSUMABLES: These are needed to smoothen
the process of production.

4.FINISHED GOODS: These are the goods which

are ready for the consumers.

5.SPARES: Form a part of inventory.

 Purpose/Benefi
ts ofH olding Inventories

Transaction Motive to facilitate

Continuous Production.
Speculative Motive for taking advantage
of price fluctuations, saving in re-ordering
costs and quantity discounts, etc.
Precaution Motive for meeting
unpredictable changes in demand and
supplies of materials
 Inventory M anagem ent
An efficient system of inventory
management will determine

What to purchase
How much to purchase
From where to purchase
Where to store
 Objectives Of Inventory Management
To ensure continuous supply of raw material, spares

and finished goods.

To avoid both overstocking and under stocking of

inventory.
To maintain investments in inventories at optimum

level.
OBJECTIVES OF INVENTORY
MANAGEMENT(cntd)

To eliminate duplications in orders

To keep material cost under control.

To minimize losses through wastage and

damages .
 C O ST O F IN V EN TO R IES
a) Ordering cost:
Every time an order is placed for stock replenishment, certain cost are involved. This
cost of ordering includes:
- Paper work costs, typing & dispatching.
- order inspection cost, checking & handling.

b) Carrying costs or cost of holding inventories

Carrying costs constitute all the cost of holding items in inventory for a given period of
time. This cost involves:
Capital Cost
-Storage & handling costs.
-obsolescence & deterioration costs.
-Insurance.
-Taxes.
-The cost of funds invested in inventory .
c) Stock out costs:
Stock out costs are incurred whenever a
business is unable to fill orders because the
demand for an item is greater than the amount
currently available in inventory. This cost
involves:
-Expenses of placing special orders.
-Expediting income orders.
-Cost of production delays.
Tools ofInventory M anagem ent

1. Re odering Levels

2. Safety Stocks

3. Reduction of lead time

4. Determination of EOQ

5. ABC Analysis
6.VED Analysis

7. JIT

8. Kanban system
 Fixation ofInventory level
Standard formula
Reorder level = Maximum usage *Maximum time

Maximum Level = ROL +EOQ-Minimum usage

*Maximum time
Minimum Level = ROL-Average usage* Average

delivery time
Danger Level= Average usage* Emergency time

Average =1/2 (Minimum+ Maximum)

Example

Min Average max

Usage = 50 100
150

Time = 4 5
6

EOQ = 600 units

 SAFETY STOCKS:
To meet the uncertainty arising from fluctuating demands, fluctuating lead-time or
unforeseen situations etcAn extra stock is invariably maintained for each
item in the inventory.

The extra stock is termed as Buffer stock and Safety stock.

Safety stock arises due to variation in consumption rates and variation in lead
time.
The Factor Influencing The Determination Of Safety Stock
Nature of the Item
Annual usage
Lead time of manufacturing
Stock out cost
Season ability
Risk of obsolesce
Macro/environmental issues
LEAD TIME REDUCTION:
A lead time is the latency (delay) between the initiation
and execution of a process. For example, the lead time for
ordering a new car from a manufacturer may be anywhere
from 2 weeks to 6 months.

Supply Chain Management:

A more conventional definition of lead time in the supply
chain management realm is the time from the moment the
customer places an order (the moment you learn of the
requirement) to the moment it is received by the customer.
Supply chain management
Economic Order Quantity:
The model was developed by Ford W. Harris in 1913.

A decision about how much to order has great significance in inventory

management. The quantity to be purchased should neither be small nor
big because costs of buying and carrying materials are very high.
Economic order quantity is the size of the lot to be purchased which is
economically viable. This is the quantity of materials which can be
purchased at minimum costs. Generally, economic order quantity is the
point at which inventory carrying costs are equal to order costs.

EOQ is made up of two parts :

1.Ordering cost: these cost are associated with the purchasing or ordering of
materials.

2.Carrying cost: these are the costs for holding the inventories.
Assum ption
Demand is known and is deterministic, i.e. constant;

The lead time, i.e. the time between placement of the

order and the receipt of the order is known and constant;

The order quantity is received all at once;

Quantity discount are not possible, in other words it dose

not make any difference how much we order, the price of

the product will still be the same; and
No shortages are allowed
.