UNIT 2

Inventory
Management

DR RAJKUMARI SONI
 Nature of Inventory

Stocks of manufactured products and the material that make up the product.

Components:
 raw materials
 work-in-process
 finished goods
 stores and spares (supplies)

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 Need for Inventories

 Transaction motive - Production & Sales

 Precautionary motive – Unpredictable Changes in Demand
and Supply
 Speculative motive - To get the advantage of Price Changes

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 Objectives of Inventory Management

To maintain a large size of inventories of raw material and work-

in-process for efficient and smooth production and of finished
goods for uninterrupted sales operations.

To maintain a minimum investment in inventories to maximize

profitability.

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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, and
 control investment in inventories and keep it at an optimum level.

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 Inventory Management Techniques

Economic order quantity (EOQ)

 ordering costs: requisitioning, order placing, transportation, receiving,
inspecting and storing, administration
 carrying costs: warehousing, handling, clerical and staff, insurance,
depreciation and obsolescence
 ordering and carrying costs trade-off:
A – Annual Consumption
2AO O – Ordering Cost per order
EOQ = C – Carrying Cost per unit per annum
c

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EOQ is the point where CC= OC
EOQ is the Point where your TC is Min.

CC is Positively Related with Q

OC is inversely related with Q
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Total Cost
Total Ordering Cost = Annual Demand * Ordering Cost per order / Order Size

TOC = A/Q * OC/order

Total Carrying Cost = Order Size / 2 * Carrying Cost per unit per annum

Q/2 * CC/unit

Total Cost = Total Ordering Cost + Total Carrying Cost

A = 5000 units

OC/order = Rs.750

CC = 10% = 20 * 10% = Rs. 2

Purchase Price = Rs. 20

Calculate EOQ and TC @ EOQ. Also Calculate TC @ 1000 units of order Size. Discount of 15% on PP.

EOQ = 1936 Units , TC @ EOQ = Rs. 3873 + 5000*20 = Rs. 1,03,873

TOC = A/Q * OC/order = 5000/1000 * 750 = 3750

TCC = Q/2 * CC = 1000/2 *1.7 = 850

TC = 3750 + 850 + 5000 * 17 = Rs. 89,600

Optimum Production Run
Economic Batch Quantity (EBQ) or Economic Lot Size (ELS)

Ordering Cost = Set up Cost

Quantity Discount

Price = Rs. 100 / unit - 1- 400 units

Price = Rs. 100 / unit( 1%) > 300 – 800 units

Price = Rs. 100/unit (2% ) > 800 units

Total Cost = Purchase Cost + TOC+ TCC

A = 3000 units , Ordering Cost per order = 100 Rs. , CC = 10% , PP = 100 Rs.

TC @ EOQ , @ Order Size of 500 units – 1% , @ Order Size of 1000 units – 2%

Particulars TC @ EOQ – 245 units TC @ 500 units TC @ 1000 units
TOC 1225 600 300 = 3000/1000 * 100
+ TCC 1225 2475 4900 = 1000/2 * 9.8
+ TPC 300,000 297000 294,000 = 3000 * 98
TC 302,450 300,075 299,200

TCC = Q/2 * C = 500/2 * 9.9 =

Re-Order Quantity (EOQ)

Re- Order Level

 Inventory Management Techniques

Reorder point under certainty

 lead time
 average usage
Reorder point = Lead time x
average usage

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 Cont…

Reorder point under uncertainty

 safety stock
Reorder point = (Lead time x
average usage) + safety stock

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 INVENTORY CONTROL SYSTEMS

ABC Inventory Control System

Just-in-Time (JIT) Systems

Out-sourcing

Computerized Inventory Control Systems

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 Graphic Presentation of ABC
Analysis

Value = Price *Q
A – 70 %
B – 20 %
C – 10%

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 Inventory Management Process

• Explicitly state the inventory policy

• Create an inventory monitoring cell
• Management group for controlling purchases
• Periodic meetings between purchase, materials planning and
production executives
• Monthly reviews of total inventory at plant/corporate level
• Dovetail inventory control to the total budgeting system
• Identify critical inventory items for closer scrutiny
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