INVENTORY

MANAGEMENT
 What are inventories?
 Inventory represent aggregate of those
items which are either held for sale
(finished goods) in the ordinary course of
business or are in the process of production
for sale (i.e. work in process) or are yet to
be utilized / consumed (raw material) in the
production of goods and services.
 Types of Inventories
 Raw Materials
 Finish Parts
 Work in Process
 Finished Goods
 Tools
 Machinery Spares
 Office stationary
 Why does a firm carry inventories?
 To cut down on buying / manufacturing cost.
 To keep pace with changing market
conditions.
 To satisfy demand during period of
replenishment.
 To take care of contingencies (i.e. stock
outs).
 To stabilize production.
 To prevent loss of sale.
 To satisfy other business constraints.
 Objectives of Scientific Inventory
Control System
 Continuity of productive operations
 Effective use of capital
 Reduction of administrative workload
 Service to the customers
 Economy in purchasing
 Reduction of risk of loss
 Practical system
 Zero discrepancy between physical stock and
book balance
 Administrative simplicity
Symptoms of Poor Inventory Management
Symptoms of Poor Inventory Management
 Symptoms of Poor Inventory Management

 Interrupted severe backlog of orders or

frequent failures in delivery commitments.
 Relocation of buyers at the vendor’s plants
to speed up supplies.
 Frequent complaints from suppliers
regarding revisions of schedules placed on
them.
 Large scale discrepancies observed in
physical counts.
Relevant Costs for Inventory Decisions

 Inventory carrying cost

 Procurement cost

 Set up cost

 Stock out cost

 Inventory Carrying Cost

 Capital cost

 Storage cost

 Deterioration or obsolescence cost

 Insurance cost
 Procurement Cost
 Paper work cost
 Postage cost
 Follow up cost
 Cost of visit to the vendor’s plant
 Expediting cost
 Operating cost of the vehicles
 Inspection and testing cost
 Administrative cost
 Set Up Cost
 Idle time cost

 Cost of idle wages

 Work order cost

 Foregone profit
 Stock Out Cost
 Cost of men and machine rendered idle
 Cost due to loss of profit
 Cost of emergency actions
 Cost due to premium price
 Cost due to penalty paid
 Cost due to overtime paid
 Cost due to customer’s dissatisfaction
 Cost due to loss of business
 Causes of Stock Out
 Unusual higher demand rate during the
procurement lead time

 Delay in delivery

 Delay in transportation

 Rejection in the incoming consignment

Any Questions?
Thank You…
Prepared by: Dr. K. M. Rahman
Associate Professor
Sinhgad Institute of Management,
Vadgaon, Pune