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Inventory Management: by Dr. Prasad Kulkarni

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Rushikesh Jadhav
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9 views

Inventory Management: by Dr. Prasad Kulkarni

Uploaded by

Rushikesh Jadhav
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Inventory Management

By
Dr. Prasad Kulkarni
Inventory
• Inventory is any kind of resource that is stocked to satisfy the present and the
future needs of any organization.
• The word inventory refers to any kind of resource that has economic value and
is maintained to fulfil the present and future needs of an organization.
• An inventory is an idle resource of any kind provided such a resource has
economic value.
• Resources may be classified into three broad categories:
(i)physical resources such as raw materials, semi-finished goods, finished goods,
spare parts, lubricants, etc.
(ii)human resources such as unused labour (manpower)
(iii) financial resources such as working capital, etc.
Examples
Inventory Control
1. Items to be stocked Since physical storage of inventory items is
expensive, therefore a control is needed to ensure that inventory level
remains as low as possible.
• inventory level of existing items is kept at reasonable level.
• unnecessary items are not added to the inventory.
• items which have not been used for long time are removed from the
inventory.
The decision to maintain specific inventory level of items need a cost-
benefit analysis for holding an item in stock and its demand. Thus,
regular audit is required on the usage of items already in stock.
Inventory Control
2. Time to replenish inventory There are two different approaches to
check stock of inventory items:
• Periodic review system, where orders are placed at fixed intervals of
time. The quantity ordered varies, depending on the inventory in hand
and consumption level at the time of review.
• Fixed order quantity system, where stock level of inventory items is
monitored regularly and when it drops to a specified level, a
replenishment order for a fixed quantity is placed.
Inventory Control
• 3. Quantity of replenishment order Every time an order is placed, there are
certain costs incurred on account of administration, transportation,
inspection, etc. If large and frequent orders are placed, it increases the
average stock of inventory items. If small and frequent orders are placed, it
increases the cost of ordering and delivery but the average stock of
inventory items becomes low. Thus, an optimal inventory control policy is
required to minimize the total inventory cost. The order quantity usually
depends on:
• Demand pattern
• Price of an item, discount options, total budget and warehouse space, etc.
• Lead time
Summary of Inventory Forms and Functions
Reasons for carrying inventory
• Improve customer service :An inventory policy is designed to respond to
individual customers and/ or organizations request for products or services in
an instantaneous manner.
• Reduce costs Inventory holding (or carrying) costs are the expenses that are
incurred for storage of items. However, holding inventory items in the
warehouse can indirectly reduce operating costs such as loss of goodwill
and/or loss of potential sale due to shortage of items. It may also encourage
economies of production by allowing larger, longer and more production runs.
• Maintenance of operational capability The inventory of raw material and
work-in-progress items act as buffer between successive production stages so
that downtime in one stage does not affect the entire production process.
• Irregular supply and demand Any unexpected change in production and delivery
schedule of a product or a service adversely affect operating costs and customer
service level. Hence, an optimum level of inventory and efficient delivery schedules
improves customer service level by meeting customer’s demand.
• Quantity discounts Large size replenishment orders help to take advantage of
price-quantity discount. However, such an advantage must keep a balance between
the storage cost and costs due to obsolescence, damage, theft, insurance, etc.
Investment on large stock of inventory due to bulk purchase, reduces cash that can
be used for other purposes.
• Avoiding stockouts (shortages) Under situations like, labour strikes, natural
disasters, variations in demand, and delays in supplies, etc., inventories act as buffer
and provide protection against reputation of constantly being out of stock as well as
loss of goodwill
Inventory System
Classification of
Deterministic
Inventory Control
Models
Inventory Model with Constant Demand and
Instantaneous Supply
Trade-Off between EOQ and Inventory Costs
List of the symbols
Example
• The production department of a company requires 3,600 kg of raw
material for manufacturing a particular item per year. It has been
estimated that the cost of placing an order is Rs 36 and the cost of
carrying inventory is 25 per cent of the investment in the inventories.
The price is Rs 10 per kg. Help the purchase manager to determine an
ordering policy for raw material

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