INVENTORY

MANAGEMENT

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Meaning
Inventory: it refers to stock, raw material,
components, spares or work in progress
maintained in an organization to have continuous
production and sales.
Inventory Management: Ensuring continues
supply of raw materials is known as inventory
management.

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Objects of inventory management

To provide continuous supply of raw materials

To reduce wastages
To exploit the available opportunities
To provide right material at right price
To meet the demand in the market
To avoid excess inventory
To ensure effective utilization of the floor
space.

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Tools of Inventory Management
Fixation of Levels:
It is a tool through which the inventories are
maintained by fixing different levels namely. Maximum level,
Re-order level, Minimum level and Danger level. Fixations of
levels are made by considering different factors. Nature of raw
materials, cost, availability, lead time, storage space. The
above factors will act as an indicator for managing the
inventory.
Maximum Level:
it is the level set for materials beyond which it should not
be stored. Maximum level is set by considering different
factors. Nature of raw materials, cost, availability, lead time,
storage space. Materials stored beyond maximum level create
several financial and managerial problems to the firm.
Maximum Level = Re order Level +Re ordering Quality –
(Minimum Consumption Minimum Re Ordering Period)
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Minimum Level:
 It is also known as safety stock, below which
the storing of materials leads to server
consequences. In other words, it is a level at which
stores controller takes immediate action in procuring
the materials. Any negligence on the part of the in
charge of stores may lead to stoppage of production.
This level is set by considering lead time, rate of
consumption and the nature of materials.
 Minimum Stock Level = Re ordering Level –
(Normal Consumption x Normal Reorder Period)

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Re-order Level:
Re order level is that level fixed for the
materials to indicate the urgency of procuring
them from the market. This level is fixed by
considering the rate of consumption of materials,
lead time and the availability of raw materials.
Once the materials reaches this level, stores
controller place his request to purchase the
materials. So that, he can maintains storage of
such items to maximum level.

Re order Level =Maximum Consumption x

Maximum Reorder Period
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Danger Level:
 It is the level beyond which storage of
materials should not fall. It also indicates the
necessary to arrange for quick purchases of
materials. Otherwise, business firm has to stop
the production of major plants. The stores in
charge may procure the materials even at the
cost extra expenses and strain.
 Danger Level = Average Consumption x
Maximum Re order Period for emergency
purchases.

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ABC Analysis: (Always Better Control
Under this method, the materials are managed by
giving importance to its value. Classifications are made by
Grading the materials as A, B and C.
“A” Grade materials are costly high in value but less in
number and are supervised and controlled closely.
“B” Grade materials are moderate in value and moderate
numbers of such items are maintained with moderate
control.
“C” Grade materials are cheap in value but more in
quantity and least attention is given in monitoring
these items. The main purpose of adopting this technique
as a inventory control is to maintain scientific
investments.
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VED Analysis:
It is most suitable method for automobile industries
specially to maintain spare parts. All spare parts
are classified in to vital, Essential and Desirable
Components. Vital parts for the manufacturing of a
product will be closely monitored. Inadequate
supply of these parts may substantially damage the
productive activities.
Essential E type of materials is no doubt that they
are essential, but its level of stocks are moderately
low. Desirable (D) components may or may not be
maintained.non availability of D type spares do not
damage the normal functioning of the industry.
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Periodical Inventory Evaluation:
Under this system inventory valuation with
checking will be carried out at different
intervels.generally twice or thrice in a year.
During the period of stocking, normal
functioning of the organization will be closed for
one or two days and complete stock verification
and valuation will be done accordingly. Most of
the trading concerns adopt this technique for
their inventory management.

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Perpetual Inventory System:
 Referred as continuous stock checking.
Under this system, different registered are
maintained for materials, enteries are made as and
when the materials are received and issued. The
physical verification of materials are conducted
throughout the year. Hence it is identified as a
costly technique of inventory control. Though it is
costly technique, the benefits enjoyed by the
management are many. Statement of materials, follow
up action, monitoring .., can be smoothly carried out.
As a result of this benefit, many trading as well as
manufacturing concercens are adopting this
technique for inventory management.
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FSN Analysis:
Under this method, materials are grouped according to
the movements. Fast moving items, slow moving items
and non-moving items. Fast moving items are stored in
large quantity and close watches on the movement of
such items are kept. Slow moving items are not
frequently needed by the production department;
accordingly moderate quantity supervision will be
maintained.non moving items are rarely required by the
production departments. Hence a smaller number of
materials are kept in stores and less importance is
given in inventory management.
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Cost Associated with Inventory
The finance required to purchase the inventory and the cost the company bears for
mobilizing, it is known as financial cost therefore adequate supply of finance at
cheaper cost must be made available to maintain the inventory
Cost of Storage:
 Inventories are to be stored properly by protecting the quality. The required for
storing the inventory must be adequately provided. This cost consists of the rent
payable for storing the materials and maintenance of inventory cost (insurance)
Price fluctuation:
 Inventories are exposed to vide fluctuation in the prices. Many at time, the prices
of materials may be redused.if the price paid for procuring the materials are higher
than the price that is prevailing; it is a loss to the business firm.
 
Risk of Obsolescence:
 Due to the increased research and innovative and creative minds of technologies,
new materials and products will enter into the market. On such circumantances, the
product manufactured today becomes obsolete.
Deterioration in quality:
 In a practical situation, most of the materials stored may not be issued to
production department for various reasons. In the process, such material looses its
quality or deteriorates itself from original value.

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Theft, damage and accident:
The materials are stored in the warehouses. If
it is exposed to different types of uncertainty,
theft, damage and fire accident all these are
looses or increase the cost of production.

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 Inventory carrying cost :
It includes the expenses of maintance of stores, bins and
the salary to the staff who are in charge of warehouses or
storage. Hence theses costs are to be reduced to increase the
profitability of the firm.
 
 Cost of Shortage of Stock and Many at times, business firms
may be able to arrange the adequate supply of materials
regularly for various reasons. as a result, production work may
be stopped.therefore,sufficient care should be taken not to
have this cost in running the business.
 Order placing cost:
Order placing cost is a permanent cost which is incurred
by the business firm to place the order for materials, the
salary of the clerk, manger and establishment charges will also
be considered in to managing the inventory.

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Cash Budget
A cash budget is an estimation of the cash flows of a
business over a specific period of time. 
This could be for a weekly, monthly, quarterly, or annual
budget.

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The Utility of a Cash Budget
This budget is used to assess whether the entity has sufficient
cash to continue operating over the given time frame.
The cash budget provides a company insight into its cash
needs (and any surplus) and helps to determine an efficient
allocation of cash.
Keeping of excessive funds available in the business firm wont
fetch any return to the enterprise but this estimate of future
cash needs and resources will guide the firm to plan for an
effective investment out of the surplus funds estimated ;
enhances the wealth of the investors through proper
investment planning out of the future funds available.

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Cash receipts can be classified into
various categories

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Preparation of Cash Budget
A Cash Budget is prepared on receipts and payments method. It is the
projection of enterprises cash receipts and disbursement for a budget
period.
It has two basic components:
1. Estimation of cash receipts, and
2. Estimation of cash payments
Cash receipts included in the cash budget are on the following pattern:
1. Cash Sales
2. Collection from Debtors
3. Interest received on investment and dividend receipts.
4. Sole of marketable securities.
5. Issue of new securities for cash.
6. Raising of loans (borrowings)
7. Proceeds from sale of assets
8. Miscellaneous receipts

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Cash payments are as follows:

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Cont…
The items of cash expenditure are presented as follows:
1. Cash purchases
2. Payments to Sundry Creditors and Bills Payable.
3. Payments for wages and salary, rent and other expenses.
4. Payment in the nature of capital expenditure – Purchase of
assets.
5. Purchase of market securities.
6. Loan repayments
7. Tax payments
8. Redemption of securities.
9. Interest payments on bank loan and other borrowings.
10. Dividend payments
11. Miscellaneous payments.

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Steps in the Preparation of a Cash Budget:
 1. Ascertain opening balance of cash.
 2. Estimate cash inflows for the period of cash budget.
 3. Estimate schedule of disbursement or cash payments.
 4. Ascertain the closing balance of cash. This is found by
deducting anticipated cash outflows from the sum of
expected cash receipts and opening balance

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