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Inventory Management
Inventory Management
Inventory Management
Management
by
Joginder Grewal
10/8/2017 1
Inventory Definition
A stock of items held to meet future
demand
Inventory is a list for goods and
materials, or those goods and materials
themselves, held available in stock by a
business.
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Introduction
The investment in inventory is very high in most of the
undertakings engaged manufacturing, whole-sale and
retail trade. The amount of investment is sometimes
more in inventory than in other assets. About 90
percent part of working capital invested in inventories.
It is necessary for every management to give proper
attention to inventory management. A proper planning
of purchasing , handling, storing and accounting
should from a part of inventory management. An
efficient system of inventory management will
determine (a) what to purchase (b) how much to
purchase (C ) from where to purchase (d) where to
store.
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Types of Inventory
Work in
process
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Nature of Inventories
Raw Materials Basic inputs that are converted into
finished product through the manufacturing process. The
purpose of holding raw material is to ensure
uninterrupted production in the event of delaying
delivery. The amount of raw materials to be kept by firm
depends on various factors such as speed with which
raw materials are to be ordered and procured and
uncertainty in supply of these materials.
Work-in-progress It includes partly finished goods
and materials held between manufacturing stages. It can
also be stated that those raw materials which are used
in production process but are not finally converted into
finished product are work-in-process.
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Nature of Inventories
Finished Goods Completely manufactured
products ready for sale. It helps to reduce the
risk associated with stoppage in output on
account of strikes, breakdowns, shortage of
material, etc.
Supplies Office and plant cleaning materials
not directly enter production but are necessary
for production process and do not involve
significant investment.
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Objective of Inventory Management
Availability of Materials: The first and foremost objective
of the inventory management to make all types of
materials available at all times whenever they are needed
by the production department so that the production may
not be held up for want of materials.
Minimizing the wastage: Inventory control is essential to
minimize the wastage at all levels i.e. during its storage in
the godowns or at work in the factory.
Better services to customers: In order to meet the
demand of the customers, it is responsibility of the concern
to produce sufficient stock of finished goods to execute the
orders received. It means, a flow of production should be
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maintained .
Objective of Inventory Management
To maintain a optimum size of inventory for
efficient and smooth production and sales
operations
To maintain a minimum investment in inventories
to maximize the profitability
Effort should be made to place an order at the
right time with right source to acquire the right
quantity at the right price and right quality
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An effective inventory management should
Ensure a continuous supply of raw materials to
facilitate uninterrupted production
Maintain sufficient stocks of raw materials in
periods of short supply and anticipate price
changes
Maintain sufficient finished goods inventory for
smooth sales operation, and efficient customer
service
Minimize the carrying cost and time
Control investment in inventories and keep it at an
optimum level
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Costs Associated with Inventory
Ordering Cost: Ordering cost is incurred whenever
the inventory is replenished. It includes costs
associated with the processing and chasing of the
purchase order, transportation, inspection for quality
and so on. It is also known as the procurement cost.
Stock out cost: Stock out cost means the cost
associated with not serving customers. Stock out cost
imply shortage. If the stock out is internal (I.e., in the
production system) it would imply that some
production is lost, resulting in idle time for men and
machines, or that the work is delayed which might
attract some penalty. While if the stock out is external,
it10/8/2017
would result in loss of potential sales and/or loss 10of
customer goodwill.
Costs Associated with Inventory
Carrying Cost: Also known as the holding cost or the
storage cost, carrying cost represents the cost that is
associated with storing an item in inventory. It is
proportional to the amount of inventory and the time
over which it is held. The elements of carrying cost
include the opportunity cost of capital invested in the
stock; the cost directly associated with storing goods
(like store men's salary, handling, insurance, lighting,
protective clothing etc.) deterioration costs and costs
incurred in preventing deteriorations; and fire and
general insurance etc.
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An optimum inventory level involves three
types of costs
Ordering costs:- Carrying costs:-
Quotation or tendering Warehousing or storage
Requisitioning Handling
Transportation Insurance
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Reasons To Hold Inventory
Meet variations in customer demand:
Meet unexpected demand
Smooth seasonal or cyclical demand
Pricing related:
Temporary price discounts
Hedge against price increases
Take advantage of quantity discounts
Process & supply surprises
Internal upsets in parts of or our own processes
External delays in incoming goods
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Factors Affecting Inventory Management
1.Characteristics of the Management System: The natures of the
production process, the product design, and production planning and
plant layout have significant affect on inventory policy.
i) Degree of Specialization and Differentiation of the products at
Various Stages: The degree of changes in the nature of the product
from raw material to final product at various stages of transformation
viz. Final assembly, assembly and packaging determines the nature
of inventory control operation, for example, if nature of product
remains more or less same at various stages of production then
economics can be achieved by keeping the right balance of stock of
semi finished product.
ii) Process Capability and Flexibility: Process capability is
characterized by processing time of various operations, e.g., the
replenishment lead time (length of delay in execution after issuance
of a replenishment order) directly influence the size of inventory.
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Factors Affecting Inventory Management
Similarly how rapidly and economically a system can adjust its
production rate, shift production facilities from one operation to
another and change equipment from one product to another,
determines the magnitude of flexibility. Inventory policy should
aim towards balancing the production flexibility, capability,
inventory levels and customer service needs.
iii) Production Capacity and Storage Facility: The capacity of
production system as well as the nature of storage facilities
considerably affects the inventory policy of an organization
,e.g., capacity for heating oil production in an oil refinery is
governed in part by its distribution system. Similarly if for any
product the cost of facility is high it sets a limit on the storage
capacity.
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Factors Affecting Inventory Management
iv)Quality Requirements: Quality is the performance of the product as
per the commitment made by producer to the customer . It is the
degree of excellence at an acceptable price and the control of
variability at an acceptable cost. The qualities required for various
factors are quality of material, manpower, machine and management.
The quality requirements of material directly affect the inventory
decision.
V) Nature of the Production System: It is characterized by the number
of manufacturing stages and the inter relationship between various
production operations, e.g., in product-line system inventory control is
simpler than in Job-type system. Similarly when there are many
operational stages then the inventory control system must provide
smooth adjustment of early operating stages and inventories to
fluctuations in finished stock.
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Factors Affecting Inventory Management
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Factors Affecting Inventory Management
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Inventory Control
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Objectives of Inventory Control
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Functions of Inventory Control
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Advantages of Inventory Management & Control
1. Inventory control ensured and adequate supply of materials
and stores minimizes stock-outs and shortages and avoids
costly interruptions in operations.
2. It keeps down investment in inventories, inventory carrying
costs and obsolescence losses to the minimum.
3. It facilitates purchasing economies through the measurement
of requirements on the basis of recorded experience.
4. It eliminates duplication in ordering or in replenishing stocks by
centralizing the source from which purchase requisitions
emanate.
5. It permits a better utilization of available stocks by facilitating
inter department transfers within a company.
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Advantages of Inventory Management & Control
6. It provides a check against the loss of materials through
carelessness or pilferage.
7. It facilitates cost accounting activities by providing a means
for allocating material costs to products, departments for
other operating accounts.
8. It enables the management to make cost and consumption
comparisons between operations and periods.
9. It serves as a means for the location and disposition of
inactive and obsolete items of stores.
10. Perpetual inventory values provide a consistent and reliable
basis for operating financial statements.
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Functions of Inventory Management
-Track inventory
How much to order
When to order
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Inventory Control System
The inventory Control system have been classified as:
1)Periodic Inventory System: Periodic inventory system is a method of
ascertaining inventory by taking an actual physical count (or measure
or weight) of all the inventory items on hand at a particular date on
which information about inventory is required. The cost of goods sold
is calculated as a residual figure (which includes lost goods also) as
under:
1) Cost of Goods Sold = Opening Inventory + Purchasing-Closing Stock
In other words, periodic inventory system defined as the method of
recording inventory at the end of the accounting year after making
a physical verification of the quantity in hand. Under this system,
inventory is ascertained by the physically counting the stock at
the end of the year. All the items of inventory are weighted,
measured or counted, then listed and priced so as to get the
valuation of inventory on that date, Thus, inventory is valued by
means of annual stock taking.
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Inventory Control System
2) Perpetual Inventory System: Perpetual inventory system
is a method of recording the store balance after every
receipt and issue, to facilitate a regular checking and to
prevent the closing down for stocktaking. After every
receipt or issue, the entry is made in the bin card and
the balance is adjusted. Thus, the bin card becomes a
perpetual inventory record and the store balance is
recorded continuously after every receipt and issue. All
errors detected are adjusted both in the in card as well
as in the stores ledger under proper authority.
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Classification of inventory
ABC Classification
EOQ Classification
FIFO Classification
VED Classification
LIFO Classification
ABC Classification
rupees B
Next 15% of items reflect 15% of annual
Assumption
Seasonal fluctuation in demand are ruled out
Trial
and Error method
Order-formula approach
Graphical approach
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EOQ & Re-order point
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Trial & Error Method
Assumptions:-
Annual requirement (C)=1200 units
Carrying cost (I) = Rs.1
Ordering cost (O) =Rs.37.5
Order size Q 1200 600 400 300 240 200 150 120 100
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Order- Formula approach
1/2
EOQ =(2CO/I)
C = Annual demand
O = Ordering cost per order
I = Carrying cost per unit
1/2
EOQ =(2*1200*37.5/1) = 300 units
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Graphical method to find EOQ
Cost in RS.
0 EOQ
Order quantity
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