Inventory Management

• Need to hold inventory

• Transaction motive
• Precautionary motive
• Speculative motive
 Inventory management
techniques
• ABC
• JIT(Just in time)
• FSN(Fast,slow,non moving)
• Always better control
• A - High value, low volume – 40- 60%(value)
• B - Avg value, avg volume – 30 -40%
• C - low value, high volume – 10-15%
 Percentage Annual
Importan of Total Consumptio
Type ce Inventory n Value Controls Records
Class A High 10% – 20% 70% – 80% Tight High
rupee Accuracy
value

Class B Medium 30% 15% – 20% Medium Good

rupee
value

Class C Low 50% 5% Basic Minimal

rupee
value
• Refrigerator
• Motor – high value (1)
• Condenser –high value (1)
• Outside body structure – medium value
• Toughened glass- medium value ( 2-4)
• Rubber frames -2 low value
• Accessories-side of doors – low value (3-5)
• Nuts and bolt –very low value (20)
 Just in Time

• Toyota-pioneer-based on excellent forecasting

• Dell
• Ensuring that their suppliers hold their components
and having very short lead times
• Apple-
• Shut down factories and warehouses; brought
inventory holding down from months to day
 Inventory Model

• EOQ(Economic Order Quantity)

• is the optimum order quantity a company should
purchase to minimize holding costs, shortage costs,
and order costs
• EOQ is the optimum quantity of
material that you have to order to
maintain a balance between
ordering and carrying costs.
 Economic order quantity

• Ordering costs:
• Requisitioning, transporting, receiving,
inspecting

• Carrying costs/Holding costs

• Storage, insurance, taxes, deterioration,
obsolescence
 EOQ Formula

• D=Annual Demand in units

• P= Cost of placing one order
• C=Carrying cost per unit (Purchase price per unit x carrying
cost %)
 Total Cost of inventory

• Total cost of inventory order =

• Ordering cost=cost per order*no of
orders +
• Carrying cost =(EOQ/2)*carrying cost
pu
 Quantity Discount

• Delta= Savings in costs from EOQ vs discount quantity

• D=Discount pu
• Q*=EOQ
• Q’= New qty desired to be ordered
• U =Annual usage in units ;F=Fixed cost per order
• P=Purchase price pu ;C=Carrying cost %