INVENTORY MANAGEMENT

3/11/22

By:
Antonio De Leon
 INVENTORY MANAGEMENT

• Inventory management involves the ff:

“Development and administration of policies

systems and procedures, which will minimize total
cost related to inventory decision and related
functions such as production, scheduling, purchasing
and traffic. “
 WHAT IS INVENTORY MANAGEMENT?

• Inventory management helps companies identify

which and how much stock to order at what time.
It tracks inventory from purchase to the sale of
goods. The practice identifies and responds to
trends to ensure there’s always enough stock to
fulfill customer orders and proper warning of a
shortage.
 INVENTORY CONTROL TECHNIQUES

• EOQ Technique
• ABC Technique
• HML Technique
• VED Technique
• SDE Technique
• FSN Technique
 BENEFITS OF INVENTORY
TECHNIQUES

analyzing inventory helps your business in the ff:

• establishing a proper warehouse layout
• reducing lead time in acquiring raw materials and sellable items
• implementing proper authorization
• correct item classification for better cost management
• adequate management of dormant inventory items
• improving utilization of the company’s capital
• improving cash flow and profit margins
• future identification of possible opportunities or losses
 Click icon to add picture

ABC ANALYSIS

 ABC analysis is an inventory

management technique that determines
the value of inventory items based on
their importance to the business. ABC
ranks items on demand, cost and risk
data, and inventory mangers group
items into classes based on those
criteria. This helps business leaders
understand which products or services
are most critical to the financial
success of their organization.
 CONDUCTING AN ABC ANALYSIS

• Conduct ABC inventory analysis by multiplying the

annual sales of a certain item by its cost. The results
tell you which goods are high priority and which
yield a low profit, so the business will know where to
focus human and capital resources.
• (Annual number of items sold) x (Cost per item) =
(Annual usage value per product)
 HML TECHNIQUE

• HML analysis method is another inventory analysis method that classifies

inventory according to a product’s unit price. As such, this method for inventory
writes or lists down products or items under the following classifications:
• The cost per item (per piece) is considered for this analysis. The items of
inventory should be listed in the descending order of unit value and it is up to
the management to fix limits for these categories. High cost items (H), Medium
Cost items (M) and Low Cost item (L) help in bringing controls over
consumption at the departmental level.
 HML ANALYSIS

• a. High Cost items (H):

Items whose unit value is very high
• b. Medium Cost items (M):
Items whose unit value is of medium value.
• c. Low Cost items (L):
Items whose unit value is low.
 HML ANALYSIS BENEFITS

HML analysis helps an organization to take decisions on the following:

• a) It helps to assess the security requirements and the type of storage for
high priced items. For example, expensive ball bearings can be kept under
lock and key in a cupboard.
• b) The frequency of stock checking is decided on the basis of the cost item.
In other words, more expensive the item, more frequent will be its stock-
checking.
• c) A control on purchases and buying policies can be exercised by the
company. This means H and M items will not be ordered in excess of the
required minimum quantity. However, in the case of L items, they may be
purchased in bulk in order to avail the benefits of bulk purchase.
 VED TECHNIQUE

VED analysis is an inventory management technique

that classifies inventory based on its functional
importance. It categorizes stock under three heads
based on its importance and necessity for an
organization for production or any of its other
activities. VED analysis stands for Vital, Essential,
and Desirable
 VED DEFINITION

• Vital items: These are ones without which business would come to a
stand-still. A business may not survive to not have stocks of Vital
items.
• Essential items: Essentials are those whose stock-out cost would be
very high. These items won’t affect your business, but your customers
will expect you to have them
• Desirable items: These are good to have and may not necessarily
affect your business. Even if some sales disruption occur it is very
nominal and easily recoverable.
 SDE TECHNIQUE

• It represents three levels of classification: Scarce, difficult and easy. The SDE
analysis looks at what inventory is available and classifies it according to the
scarcity of supply
• Why is SDE analysis used?
Using an SDE analysis to classify your inventory stock is a simple yet effective
method that can help improve your business policies for better inventory
control. By determining whether an item is scarce, difficult or easy will help
guide your business to overcome problems faced in procurement.
 SDE DEFINITION

• An example of a scarce product is one that might have to go through

government agencies. This slows down the process, whether it be in customs
or through regulatory bodies. Either way, these channels can make a product
scarce.
• Next is the difficult classification. This refers to items that could be available
domestically, but they are still harder to get hold of in the market. The lead
time to acquire these goods might be two weeks but is generally less than six
months.
• Lastly, easily identifies inventory that is readily available and easy to access.
These items are available locally and can be procured quickly.
 FSN TECHNIQUE

FSN Analysis is an inventory management technique

which is based on the rate of consumption of spares
and goods in an organization. This analysis divides
the inventory into three categories based on their
speed or rate of utilization, their consumption rate,
and average stay. FSN stands for Fast-moving,
Slow-moving, and Non-moving.
 FSN DEFINITION

• Fast-moving goods are the items in your stock that are utilized regularly. There
are usually basic day to day items that are used by customers on a regular basis.
There can fast moving and need to be produced on regular basis. Fast moving
goods usually have a low profit margin. They are non-durable and sell at
relatively low cost. Examples, include milk, eggs, fruit and vegetables and over-
the-counter drugs like paracetamol and aspirin.
• Fast-moving consumer goods have a high turnover rate and is also very
competitive. Some of the world's largest companies compete for market share in
this industry including Coca-Cola, Unilever, Procter & Gamble, Nestlé,
PepsiCo, etc.
 FSN DEFINITION

• On the other hand, slow-moving goods are only used for a particular
timeframe. Slow moving inventory is defined as stock keeping units
(SKUs) that have not shipped in a certain amount of time, such as 90 or
180 days, and merchandise that has a low turn rate relative to the
quantity on hand. Slow moving goods can be problematic and can
contribute to waste of capital and resources.
• Non-moving goods are not utilized at all over a specific timeframe and
has a turnover rate below one. These are goods that are stocked up over
a long period of time.
 WHAT IS EOQ:

• Economic order quantity is one of the techniques

of inventory control which minimizes total holding
and ordering costs for the year
• The economic order quantity is the technique
solves the problems of the materials manager
 PURPOSE OF EOQ:

• Economic order quantity is important because it helps companies

manage their inventory efficiently. Without inventory management
techniques such as these, companies will tend to hold too much
inventory during periods of low demand while also holding too little
inventory during periods of high demand.
• The goal of the EOQ formula is to identify the optimal number of
product units to order. If achieved, a company can minimize its costs
for buying, delivering, and storing units
 DETERMINING EOQ

• In determining EOQ, it is assumed that cost of managing inventory is made up

solely of two parts these are:
• A) Ordering Costs/ Buying Costs
• B) Carrying costs/ Holding Costs
EOQ FORMULA
 EXAMPLE PROBLEM

• The John Equipment Company estimates its carrying cost at 15% and its
ordering cost at $9 per order. The estimated annual requirement is 48,000 units
at a price of $4 per unit.
Required:
• What is the most economical number of units to order?
• How many orders should be placed in a year?
• How often should an order be placed?
 SOLUTION:

1. What is the most economical number of

units to order?
 Annual requirement = 48,000 units
 Ordering cost = $9 per order
 Carrying cost = 15% of per-unit cost
 Per unit cost = $4 per unit
Formula :
 SOLUTION

• 2. How many orders should be placed in a year?

• = Annual requirement / EOQ
= 48,000 units / 1,200 units
= 40 orders per year
• 3. How often should an order be placed?
• Frequency of orders = No. of days in one year / No. of orders
= 365 days / 40 orders
= every 9 days
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