INTRODUCTION

Inventory management involves creating a purchasing plan that will ensure that items are available when they are needed and keeping track of existing inventory and its use.

Types of Inventory
Raw material Work in process Finished goods Cash and marketable securities

MOTIVES OF HOLDING INVENTORY

Transaction motive
Precautionary motive Speculative motive Contractual requirement

COST OF HOLDING INVENTORY

ORDERING COST CARRYING COST STOCK OUT COST

ORDERING COST
Every time an order is placed for stock replenishment, certain costs are involved which includes : Paper work cost, telephone and postal bills, travelling costs etc Cost involved in receiving, checking and handling the order in stores.

CARRYING COST
The costs of holding items in inventory for a given period of time is known as carrying cost. Cost involved : Storage and handling costs Obsolescence Insurance and taxes Cost of funds invested in inventories

STOCKOUT COST
Stockout costs are those when a business is unable to fill orders because the demand for n item is greater than the amount currently available in inventory .

CHARACTERISTICS OF INVENTORY SITUATIONS

LEAD TIME SOURCES AND LEVEL OF RISK STATISTICS VERSES DYNAMIC PROBLEM REPLENISHMENT RATE

LEAD TIME
Time lag between the placing an order and receiving an order.

SOURCES AND LEVEL OF RISK

Uncertainties involve lead times and demand levels. Where there are substantial uncertainties and where the cost of stock out are important strategies for addressing risk must be formulated.

 STATIC VERSUS DYNAMIC PROBLEMS

In static inventory problems the goods have one period life there can be no carryover of goods from one period to the next. In dynamic inventory problems the goods have value beyond the initial period they do not lose their value completely over time.

 REPLENISHMENT RATE
Once goods start to be received from a vendor or from the firms own production processes, there are differences among goods in the rate at which they are received.