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Inventory MGT

This document discusses various aspects of inventory management including the meaning and types of inventory, reasons for holding inventory, inventory management techniques, costs associated with inventory, optimal inventory levels, and risks related to inventory. The key points are: 1) Inventory refers to raw materials, work in progress, and finished goods. It is held to facilitate production and sales. 2) Companies hold inventory for transactional, precautionary, and speculative reasons. 3) Inventory management aims to determine optimal inventory levels and minimize total inventory costs including ordering and carrying costs. 4) Techniques like EOQ, ABC analysis, stock level determination, and turnover ratios help manage inventory efficiently.

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Sneha Dixit
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55 views

Inventory MGT

This document discusses various aspects of inventory management including the meaning and types of inventory, reasons for holding inventory, inventory management techniques, costs associated with inventory, optimal inventory levels, and risks related to inventory. The key points are: 1) Inventory refers to raw materials, work in progress, and finished goods. It is held to facilitate production and sales. 2) Companies hold inventory for transactional, precautionary, and speculative reasons. 3) Inventory management aims to determine optimal inventory levels and minimize total inventory costs including ordering and carrying costs. 4) Techniques like EOQ, ABC analysis, stock level determination, and turnover ratios help manage inventory efficiently.

Uploaded by

Sneha Dixit
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Inventory Management

Inventory Management
Meaning of Inventory
Inventory refers to the stock of raw material held for
the use in manufacturing process and finished goods
for sale. It refers to stock of RM ,WIP and FG for sale.
RM- are the basic inputs that are converted into finished
goods through manufacturing process
WIP- Materials in production process but not yet been
completed
FG- Are completely manufactured goods which are ready
for sale
Consumable stores and spares- materials which help
production process to run smoothly like oil, fuels,
Broom ,soaps etc.
Motives for holding inventory
Transaction motive- Motive to hold inventory to
facilitate smooth production process. A firm should
have inventory to ensure uninterrupted
production.
Precautionary motive- Holding inventory to protect
itself against the risk of unexpected changes in
demand and supply forces.
Speculative motive- An enterprise holds materials to
take advantage of change prices and its
fluctuations. If the prices of raw materials are
likely to increase the enterprise can decide to
purchase and hold inventory.
Inventory management
It may be defined as proper planning and
controlling of raw materials, finished goods, stores
materials for efficient production and ultimate
selling. It includes
► Determination of inventory to be carried
► Determination of minimum and maximum stock
level
► Method of purchasing
► Method of storing and maintaining
► Assigning inventory control responsibilities
Objectives of inventory management
► The operational objective of the inventory
management is to maintain adequate inventory to
facilitate uninterrupted production and smooth
sales function
► To ensure adequate stock of finished goods to
facilitate smooth sales operations
► To avoid both excess stocking and inadequate
stocking of inventory
► To maintain investment in inventories at optimum
level
► To minimize carrying cost and ordering cost
Cost of holding inventory
There are 2 types of inventories
1. Ordering cost- It is the fixed cost incurred
for placing an order till the receipt of
inventory. This category of cost is associated
with the acquisition or ordering of inventory.
Firms have to place an order with suppliers to
replenish inventory of RM. Some of them are
 Preparing purchase order or requisition form
 Receiving, inspecting and recording of the goods
received to ensure both quality and quantity are
correct.
 Cost of transportation
 Administrative cost of maintaining staff.
2. Carrying costs- Carrying cost is the variable cost per
unit of holding an item in inventory for a specified time
period. It includes
► Cost of storing like maintenance of building, building
insurance, warehouse charges, store room utilities etc.
► Cost of capital i.e. interest on funds blocked in
inventories.
► Cost of obsolescence and deterioration.
► Cost of maintaining staff.

TOTAL COST- It is summation of both ordering


cost and carrying costs of inventory. The prime
objective of inventory management is to minimize
total cost of inventory.
Optimum level of inventory
It is that level of inventory where total of ordering
cost and carrying cost is minimum.
Dangers of excess investment in inventory
1. Unnecessary blocking of funds in inventory.
2. Excessive carrying cost
3. Loss of liquidity
4. Loss due to physical deterioration of inventories
due to passage of time.
Continued..
Dangers of inadequate investment in
inventories
1. Production stoppage
2. Failure to delivery commitments.
3. Loss of goodwill
Risks associated with inventories
► Risks refer to possibilities that inventories cannot
be turned in to cash through normal sales
without the loss of time and money.
1. Risk of price decline- due to operation of
demand and supply forces in the market.
2. Risk of product deterioration- Decline in the
quality of product due to elapse of time or
storing under improper conditions.
3. Risk of obsolescence – product becomes
outdated due to change in the customer tatse,
new production technique, improvements in the
product design and specifications.
Techniques of inventory management

1. EOQ (Economic Order Quantity) technique


2. ABC analysis
3. Determination of stock level
4. Inventory turn over ration method.
5. Perpetual inventory system
6. Others
- Just in Time approach
- VED analysis
- HML analysis
- FSN analysis
- SDE analysis
1. EOQ (Economic Order Quantity) technique

It determines ideal ordering quantity of inventory at


which the total inventory control cost (O.C+C.C) is
minimum. It decides should quantity to be
purchased in large or small lots.
► Buying in large quantities means higher
average inventory and higher carrying cost.
Number of orders will be less so ordering cost will
be less.
► Buying in small quantity means lower average
inventory and less carrying cost but ordering cost
will be more.
Calculation
EOQ=
2AO
C

Where A= Annual usage (In units)


O= Ordering cost/unit
C= Carrying cost/unit
Problems….
ABC System of inventory
► A-B-C ANALYSIS:
► The materials are divided into three categories viz, A ,B &C
► CATEGORY-A:
► Under this almost 10% of the items contribute to 70% of
value of consumption.
► CATEGORY-B:
► Under this category 20% of the items contribute about
20% of value of consumption.
► CATEGORY-C:
► Under this category about 70% of items of material
contribute only 10% of value of consumption.
Determination of stock level
Following are the levels of stock which firm has to fix
to ensure steady supply of adequate materials as
and when required
1. Maximum stock level- It is the level beyond
which the firm need not maintain the stock. If
the quantity exceeds maximum level it is called
overstocking .It increases carrying cost, wastage,
theft, pilferage, etc
Maximum level=
ROL +ROQ-(min consumption x min reorder period)
2. Minimum stock level- It is the level of stock that must be
compulsorily maintained always to ensure smooth production.
If stocks are lesser than minimum level it is called under
stocking.
Minimum Level=
ROL-(Normal consumption x Avg Reorder period)
3. Reorder level
It lies between max and min level. It is the point at which the
firm has place an order to supplier.
ROL= Max consumption x max ROP
ROL= Min level+ (avg consumption x normal lead time)
ROL= (Lead time x Average usage) + safety stock
Leads time is the gap between oredering of inventory and
obtaining them from supplier.
4. Danger Level- It is the level below which the
materials should not fall in any situation. It lies
below minimum level.
Danger level =
Min rate of consumption x Emergency delivery
period
Inventory turn over ratio
► Itis calculated as follows
ITR= cost of goods sold
Cost of avg stock
Avg stock= Opening stock+ closing stock
2
Other techniques
VED Analysis
Refers to Vital, Essential and desirable. Some of
the materials are important for their presence.
They may be inexpensive but their presence or
absence will affect the production process .
Vital -parts are to be stored adequately and are
most important
Essential- supportive materials proper care should
be taken
Desirable- May not be stored in large quantity.
FSN analysis
Fast moving- enjoy high demand
Slow moving- Less demand
Non moving- Refereed t as dead stock no
demand, out dated or obsolete inventory.
They should be disposed off as early as
possible. This is classification based on
movement of materials.
HML - High value, medium value low value
Inventory will be stored based on the unit
value and not on the annual usage value. Similar
to ABC technique

SDE – Scares, difficult and Easy


Scares items are short in supply, Difficult items
are difficult to procure, easy items are very easy to
acquire. This is classification based on availability
of items.

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