INVENTORY MANAGEMENT AND WORKING

CAPITAL MANAGEMENT OF ACC SINDRI

PRESENTED BY: SUDHANSHU KUMAR

09/MBA/67
 PROBLEM RECOGNITION

 How to Determine Stock Needs

 How to Procure the Required Stock
 How to Manage Inventories
 Establishing Roles & Responsibilities

 How to Measure Performance and Benchmark

 Cost Impact of Inbound Logistics on Inventory Management
INVENTORY MANAGEMENT & WORKING CAPITAL

The systematic optimization of net working capital

(NWC) has been a focus of the companies since the
competition has emerged. With the globalization of the
businesses and the company's growing presence in new
markets, working capital has become an important
concern that how to optimize the NWC through
inventory management. Working capital is not only a
financial issue, but also an operational issue. It is about
the way we conduct business processes and transactions
involving inventories, suppliers and customers.
INVENTORY MANAGEMENT & WORKING CAPITAL

Inventory management (IM) is not just a short term operational

function. It has strategic repercussions for a company because of its
considerable impact on the level of net working capital.
Therefore the IM function has a double role:
 To manage a determined logistics system using optimal operational
criteria
 To plan the logistics system as effectively as possible for the
medium and long term
One of the fastest ways to enhance shareholder value is to manage
net working capital more effectively.
Net working capital is defined quite simply as current assets minus
current liabilities. But it is influenced by all business processes and
transactions involving customers, suppliers and inventories.
CONTD….
Good inventory management aims to optimize a company’s existing stocks by
minimizing their volume and cost without endangering the company’s ability to fulfil
its commitments to customers. In order to reduce downtime, parts need to be available
in the right quantity, in the right quality, in the right place and at the right time.

 Optimal inventory management pursues the following objectives:

To properly define the quantity of goods to order (lot size)

To properly define the date to place the order (reorder point)
To properly define storage locations and conditions
To properly define the inventory levels needed
To properly define replenishment activities
To properly control inventories
 HOW TO DETERMINE STOCK NEEDS
The existence of stock is usually due to a difference in volume and terms between
“goods reception flows” from a logistics chain and “goods issuing flows” generated
by demand. If we know with sufficient reliability what the “goods issuing flows” are,
it is relatively simple to plan the “goods reception flows” so as to minimize inventory
levels while taking into account technical and economic constraints. Consequently,
demand planning and forecasting are core aspects of inventory management. A key
driver in the optimization process is the availability of required items.
In order to optimize inventory levels of raw materials and fuels, it is vital to have proper
production planning.
In order to optimize inventory levels of spare parts, it is vital to have proper planning
and scheduling. This ensures that the need for spare parts can be communicated at an
early stage. It also facilitates a systematic approach to the detection of such needs
that gives due consideration to the criticality of equipment and the associated risk of
failure.
FUNCTIONS OF INVENTORIES

Inventories are idle resources maintained in various

forms
- Raw materials
- Purchased & manufactured parts
- Subassemblies
- Finished products
Since inventories represent a sizable investment in a
logistic system, we must be aware of the function they
perform.
 FIVE CATEGORIES OF STOCKS
 Pipeline stock (in progress stock, in transit stock)
 CYCLE stocks (batch production owning to –
economies of scale , technological requirements)
 SEASONAL stocks(time varying requirements of an
item)
 SAFETY stock(supply & demand uncertainties, lead
time uncertainties)
 Stock held for OTHER REASONS (decoupling stage
of production, - price, quantity discounts, - speculation)
INVENTORY RELATED COSTS

 Procurement costs
cost / order generally fixed (not dependent on order qty)
 costs associated with existence of inventories
(supply exceeds demand) [cost/unit/unit time]
 Costs associated with stock outs (demand exceeds
supply) [cost/unit/unit time]
PROCUREMENT COSTS

Cost of goods
Procurement cost
(cost/order generally fixed)
Ordering costs
(not fixed on order qty)

- Administrative components
- Handling
- Transportation
- Inspection of arrivals
INVENTORY HOLDING COSTS
 Costs associated with existence of inventories
(supply exceeds demand )
ic {i= inventory carrying cost rate}
- Storage & handling
- Interest on tied up capital
- Property taxes
- insurance
- Spoilage
- Obsolescence
- Pilferage
SHORTAGE COSTS
 Costs associated with stock outs
(demand exceeds supply)
(cost/unit) (cost/unit/unit time)

- Additional costs of special order

- Backorder, if possible
- Loss of consumer goodwill
- Lost sales
SELECTIVE INVENTORY CONTROL
In large number there are
significant items PARETO’S LAW

insignificant many

Typical organizations deal with large no of stock items

Depending on ranking of
 VALUE [∑(Annual demand x unit price)] ABC Analysis

 CRITICALITY[ Vital, essential, desirable] VED Analysis

 USAGE FREQUENCY FSN Analysis

(Fast moving , Slow moving, non-moving)
POLICY IMPLICATION OF SELECTIVE INVENTORY CONTROL

ABC Analysis
A class items- needs continuous, rigorous control
B class items- relaxed control (periodic review)
C class items- simple rule of thumb
VED Analysis
v class items– call for a high level of service
E class items- call for a medium level of service
D class items- call for a tolerable level of service
[JOINTLY DETERMINE SERVICE LEVELS]
FSN Analysis
FAST- mostly inventory model apply to this class
SLOW- (spare parts etc)
NON- Moving (dead stock)
A SAMPLE SET OF SERVICE LEVELS FOR DIFFERENT
CATEGORIES OF ITEMS

V E D

High cost of A .8 .75 .6

B .95 .95 .85
items C .99 .97 .95

Low cost of V E D
A .7 .6 .5
items B .9 .8 .7
C .95 .9 .85