Inventory Management

Dr Meenakshi Sharma
Inventory Control
⚫ An inventory control system is a system the
encompasses all aspects of managing a company's
inventories; purchasing, shipping, receiving, tracking,
warehousing and storage, turnover, and reordering.
⚫
Types of Inventory
⚫ There are four types, or stages, that are commonly referred
to when talking about inventory:
⚫ Raw Materials,
⚫ Unfinished Products,
⚫ In-Transit Inventory, and
⚫ Cycle Inventory.
⚫
Inventory Management
⚫ Inventory control is a method of regulating
the inventory you have on hand in your warehouse.

⚫ On the other hand, inventory management is the activity

of forecasting and replenishing inventory, focused on
when to order stock, in what quantities and from which
supplier.
⚫
VED analysis
⚫ VED analysis is based on critical values and shortage cost
of the item.
⚫ Based on their criticality, the items could be classified into
three categories: vital, essential and desirable.
VED
⚫ Vital Items: Includes those items that are crucial for any
business. The company should always keep an extra stock
as its shortage can hamper the whole production process.
⚫ Essential Items: It includes inventory next to vital for
your business. The difference is that they cause a
temporary loss in case of shortage.
⚫ Desirable Items: This category entails optional goods not
necessary to run business operations.
IMPORTANCE
⚫ Organizations mainly use this technique for controlling
spare parts of inventory. Like, a higher level of inventory
is required for vital parts that are very costly and essential
for production.
 Advantages/ Disadvantages
⚫ Advantages-
⚫ It helps in classifying items into three category and stocked
accordingly, for eg. vital items are stocked maximum. them
essentials and least amount of desirable item is stocked.
⚫ it brings economy in stock maintenance as each item need not
to be stocked in abundance.
⚫ Disadvantages-
⚫ this method is not suitable when thousands of items are used in
production.
⚫ Vital items are purchased in bulk and hence gets piled-up
sometime and increases cost.
FSN Analysis

⚫ FSN analysis in inventory management deals with the

classification of items based on usage, consumption rate,
and quantity.
⚫ Fast Moving (F): This refers to materials that have a high
usage frequency
⚫ Slow Moving (S): This refers to materials that have a slow
usage frequency
⚫ Non-Moving (N): This refers to materials that are only
utilized for a specific duration OR Dead stock
SDE Analysis

⚫ This analysis deals with the availability of an item in the market.

SDE Analysis is highly beneficial in a market environment where
certain items are not readily available. In such situations, it offers the
right guide in choosing inventory policies in relation to material
availability. The inventory is classified in the following way
⚫ Scarce (S): This generally refers to materials that are in short supply
(i.e. scarce). Materials that usually fall into this category include;
imported materials, raw materials, and spare parts.
⚫ Difficult (D): This signifies materials that are not easily found in the
market or would have to be gotten from a far place. It also refers to
materials with limited suppliers.
⚫ Easy (E): This generally refers to materials that can easily be found
in the market
Inventory Control Models
⚫ Inventory control models are
⚫ Economic Order Quantity (EOQ),
⚫ Just – In - System
⚫ ABC Analysis.
⚫ KANBAN

⚫ Each model has a different approach to help you know how

much inventory you should have in stock. Which one you
decide to use depends on your business.
⚫
Economic Order Quantity
⚫ Economic order quantity (EOQ) is the ideal order quantity
a company should purchase to minimize inventory costs
such as holding costs, shortage costs, and order costs.
⚫ This production-scheduling model was developed in 1913
by Ford W. Harris and has been refined over time. The
formula assumes that demand, ordering, and holding costs
all remain constant.
⚫
EOQ formula
Objective of EOQ
⚫ The objective of the economic order quantity (EOQ)
model is to minimize the total costs associated with the
carrying and ordering costs as the mount ordered gets
larger, average inventory increases and so do carrying
costs.
⚫
Limitations of EOQ
⚫ The assumption of constant usage and immediate
replenishment of inventories are not always practical.

⚫ Safety stock is always required because deliveries from

suppliers may be delayed for reasons beyond control. Also
because there may be an unexpected demand for stocks.
⚫
Just in Time
Just – in-time inventory system
⚫ The just-in-time (JIT) inventory system is a management
strategy that aligns raw-material orders from suppliers directly
with production schedules or depends upon demand/order
⚫ Companies employ this inventory strategy to increase
efficiency and decrease waste by receiving goods only as they
need them for the production process, which reduces inventory
costs.
⚫ This method requires producers to forecast demand accurately.
⚫
Importance of JIT
⚫ Just in Time Inventory Definition. Just in
time (JIT) inventory is a strategy to increase efficiency
and decrease waste by receiving goods only as they are
needed in the production process, thereby
reducing inventory costs.
⚫
Advantages of JIT
⚫ Less Spaces needed
⚫ Waste Reduction
⚫ Smaller Investment
⚫ Healthy Cash flow
⚫ Cost Efficient
Disadvantages of JIT
⚫ Risk of running out of stock
⚫ Lack of Control of supplier
⚫ More Planning ( must be sales forecasting)
⚫ Mistakes Can not control
ABC Analysis
⚫ ABC analysis is a type of inventory categorization
method in which inventory is divided into three categories,
A, B, and C, in descending value. A has the highest value
items, B is lower value than A, and C has the lowest value.
⚫
Graphical Presentation of ABC
Graphical Representation
ABC Analysis
Example of ABC Analysis
ABC Analysis
⚫ ABC analysis is an inventory categorization technique.
⚫ ABC analysis divides an inventory into three
categories—
⚫ "A items" with very tight control and accurate records,
⚫ "B items" with less tightly controlled and good records, and
⚫ "C items" with the simplest controls possible and minimal
records.