INVENTORY MANAGEMENT

Presented by Gaurav

MEANING AND NATURE OF INVENTORY

Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an organization in its custody awaiting packing, processing, transformation, use or sale in a future point of time. Inventory management requires constant and careful evaluation of external and internal factors and control through planning and review.

Need for Inventory management

Meet variation in Production Demand Production plan changes in response to the sales, estimates, orders and stocking patterns. Accordingly the demand for raw material supply for production varies with the product plan in terms of specific SKU as well as batch quantities. Holding inventories at a nearby warehouse helps issue the required quantity and item to production just in time. Cater to Cyclical and Seasonal Demand Market demand and supplies are seasonal depending upon various factors like seasons; festivals etc and past sales data help companies to anticipate a huge surge of demand in the market well in advance. Accordingly they stock up raw materials and hold inventories to be able to increase production and rush supplies to the market to meet the increased demand.

Economies of Scale in Procurement Buying raw materials in larger lot and holding inventory is found to be cheaper for the company than buying frequent small lots. In such cases one buys in bulk and holds inventories at the plant warehouse. Take advantage of Price Increase and Quantity Discounts If there is a price increase expected few months down the line due to changes in demand and supply in the national or international market, impact of taxes and budgets etc, the companys tend to buy raw materials in advance and hold stocks as a hedge against increased costs.

Reduce Transit Cost and Transit Times In case of raw materials being imported from a foreign country or from a far away vendor within the country, one can save a lot in terms of transportation cost buy buying in bulk and transporting as a container load or a full truck load. Part shipments can be costlier. In terms of transit time too, transit time for full container shipment or a full truck load is direct and faster unlike part shipment load where the freight forwarder waits for other loads to fill the container which can take several weeks. There could be a lot of factors resulting in shipping delays and transportation too, which can hamper the supply chain forcing companies to hold safety stock of raw material inventories.

RISK AND COSTS OF HOLDING INVENTORIES

The various costs and risks involved in holding inventories are as below: Capital Costs: Maintaining of inventories results in blocking of the firms 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.

i.

ii.

Storage and Handling costs: The storage costs include the rental of the godown, insurance charges, etc.
market supplies, competition or general depression in the market.

iii. Risk of Price Decline: This may be due to increased

iv. Risk of Obsolescence: The inventories may become

obsolete due to improved technology, changes in requirements, change in customers tastes, etc.
v.

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

PREPETUAL INVENTOYR SYSTEM

The stock taking may either be done anually or

continuously. In the latter method, the stock taking continues throughout the year. A schedule is prepared for stock taking of various bins (store rooms). One bin is selected at random and the goods are checked as per shown in the bin card. Then some other bin is selected at random and so on. The institute of cost and management Accountants, London define perpetual inventory system as a system of records maintained by the controlling departments, which reflects the physical movements of stocks and their current balance.

Procedure of Perpetual Inventory System

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2. 3.

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The upto date position in stores ledger and bin cards should be made to know the current balance of stores. The programme is planned in such a way that in a year every item is checked 3-4 times. The stores which have not been inspected as yet should not be mixed with other stores because no entries are made for such items. There is a surprise checking every time. The physical stock available in the store after counting, weighing etc. is recorded on sheets provided for this purpose.

Advantages of Perpetual Inventory System

1.

Quick Calculation of Closing Stock: Under perpetual inventory system, the stock is checked regularly throughout the year. It helps in preparing Profit and Loss A/c and Balance Sheet without loss of time.

2.

Helpful in Formulating Purchase Polices: This system of stock taking is also helpful formulating purchase policies. The store-keeper is in know of the requirements of various departments. He can also tell the time, quantity and quality of materials needed by production departments. Such information is very useful in preparing purchase policies.

 Check

on Stores Personnel: The system of continuous stock taking acts a check on personnel incharge of stores. They are not told of checking programme in advance. This system also prevents pilferage of stores.
in Production Planning: Production planning can be done according to the availability of materials in stores because management is constantly kept informed of stores position. maximum stock levels within which stock limits are maintained. This system helps in avoiding under stocking and over stocking of stores and investments in inventory are kept under check.

Helpful

Investments Under Check: There are minimum and

 Errors and Shortages Easily Detected: The regular

checking of stocks helps in detecting errors and shortages in stores. There are may be a wrong entry in either stores ledger or in bin card. Such mistakes will be detected while stocks are checked.
Increasing Efficiency of Organisation: The regular

supply at proper time will enhance the efficiency of the whole organisation.

JUST IN TIME (JIT) INVENTORY CONTROL SYSTEM

The term JIT refers to a management tool that helps to produce only

the needed quantities at the needed time. According to the official terminology of C.I.M.A., JIT is a technique for the organisation of workflows, to allow rapid, high quality, flexible production whilst minimizing manufacturing work and stock level. There are broadly two aspects of JIT (i) just in time production, and (ii) just in time purchasing.
Just in time inventory control system involves the purchase of

materials in such a way that delivery of purchased material is assured just before their use or demand. The philospohy of JIT control system implies that the firm should maintain a minimum (zero level) of inventory and rely on suppliers to provide materials just in time to meet the requirements. The traditional inventory control system, on the other hand, requires maintaining a healthy level of safety stock to provide protection against uncertainties of production and supplies.

Objective of JIt
1. 2. 3. 4.

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The ultimate goal of JIT is to reduce wastage and enhance productivity. The important objectives of JIT include: Minimum / zero inventory and its associated costs. Elimination of non-value added activities and all wastes. Minimum batch / lot size. Zero breakdowns and continuous flow of production. Ensure timely delivery schedules both inside and outside the firm. Manufacturing the right product at right time.

Features of JIT
a. It emphasises that firms following traditions inventory

b.

c.

d.
e.

control system overestimate ordering cost and underestimate carrying costs associated with holding of inventories. It advocates maintaining good relations with suppliers so as to enable purchase of right quantity of material at right time. It involves frequent production / order runs because of smaller batch/lot sizes. It requires reduction in set up time as well as processing time. Purchase of produce in response to need rather than as per the plans and forecasts.

Advantages of JIT Inventory Control System

i. ii. iii.

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The right quantities of materials are purchased or produced at the right time. Investment in inventory is reduced. Wastes are eliminated. Carrying or holding cost of inventory is also reduced because of reduced inventory. Reduction in costs of quality such as inspection, costs of delayed delivery, early delivery, processing documents etc. resulting into overall reduction in cost.