Inventory Management

BY: Mehdi Abbas

Supply Chain Management

Inventory Management
 Inventory is one of the most
expensive assets of many
companies.

 It represents as much as 60% of

total invested capital.
 What are Inventories?
•Finished product held for sale
•Goods in warehouses
•Work in process
•Goods in transit
•Staff hired to meet service needs
•Any owned or financially controlled
raw material, work in process, and/or
finished good or service held in
anticipation of a sale but not yet sold
9-5

CR (2004) Prentice Hall, Inc.

 Where are Inventories?
Material Inbound Production Outbound Finished goods Customers
sources transportation transportation warehousing

Receiving
Production
materials

Inventories
in-process

Shipping
Finished goods

Inventory
locations

CR (2004) Prentice Hall, Inc. 9-4

Stock Cycles
 Reasons for Inventories
•Improve customer service
- Provides immediacy in product availability
•Encourage production, purchase, and transportation
economies
- Allows for long production runs
- Takes advantage of price-quantity discounts
- Allows for transport economies from larger shipment sizes
•Act as a hedge against price changes
- Allows purchasing to take place under most favorable price
terms
•Protect against uncertainties in demand and lead times
- Provides a measure of safety to keep operations
running when demand levels and lead times cannot be known
for sure
•Act as a hedge against contingencies
- Buffers against such events as strikes, fires, and
disruptions in supply 9-9

CR (2004) Prentice Hall, Inc.

 Reasons Against Inventories

•They consume capital resources that might be put to

better use elsewhere in the firm
•They too often mask quality problems that would more
immediately be solved without their presence
•They divert management’s attention away from careful
planning and control of the supply and distribution
channels by promoting an insular attitude about
channel management

9-10

CR (2004) Prentice Hall, Inc.

Supply Chain Management

 Inventory is any stored resource that is used to

satisfy a current or future need.

 Raw materials, work-in-process, and finished goods

are examples of inventory.
 Maintenance, repair, and operational supplies
(MRO) – item that do not become part of the
product
 …….TYPES OF INVENTORY
• Raw Materials – Basic inputs that are converted
into finished product through the manufacturing
process.
• Work-in-progress – Semi-manufactured products
that need some more work before they become
finished goods for sale.
• Finished Goods – Completely manufactured
products ready for sale.
• Supplies – Office and plant cleaning materials that
do not directly enter production but are necessary
for production process and do not involve
significant investments.
 Types of Inventories
•Pipeline
- Inventories in transit
•Speculative
- Goods purchased in anticipation of price increases
•Regular/Cyclical/Seasonal
- Inventories held to meet normal operating needs
•Safety
- Extra stocks held in anticipation of demand and
lead time uncertainties
•Obsolete/Dead Stock
- Inventories that are of little or no value due to being
out of date, spoiled, damaged, etc. 9-13
RAW MATERIAL
INVENTORIES:

There are raw materials and other supplies, parts and

components, which enter into the product during the
production process and generally form part of the product.

WORK IN PROCESS INVENTORIES:

These are semi finished, work in progress and partly

finished products formed at the various stages of
production.
M.R.O INVENTORIES/ SPARE PART INVENTORIES:
Maintenance, repairs and operating supplies which are consumed
during the production process and generally do not form part of
the product itself are referred to as spare part inventories.

FINISHED INVENTORIES:
These are complete finished products ready for sales. In a
manufacturing unit, they are the
final output of the production
process. They can also be classified
as:-
• Movement inventories
• Lot size inventories
• Anticipation inventories
• Fluctuation inventories
 CURRENT ASSETS

• Realised or consumed in the operating cycle.

• Held primarily for trading.

• Cash or cash-equivalent.

(An asset which is not a current asset is classified as a non current

asset)
 RELEVANCE: INVENTORY
• Constitute significant part of current assets.
• On an average, inventory forms approx 60%
of current assets in Public Limited Companies in India.
• Huge financial implications.
• Effective and efficient management is imperative to avoid
unnecessary investment.
• Improper inventory management affects long term
profitability and may cause failure ultimately.
• 10 to 20% of inventory can be reduced without any adverse
effect on production and sales by using simple inventory
planning and control techniques.
 INVENTORY MGT
 Theact or manner of managing, handling,
directing or controlling the flow of inventory.
 NEED :-
• Demand related:-
– Meet unexpected demands.
– Smooth seasonal or cyclical demands.
• Pricing related:-
– Hedge against price increases.
– Take advantage of quantity discounts.
• Process and supply surprises related:-
– Internal – upsets in parts of or our own processes.
– External – delays in incoming goods.
 OBJECTIVES: INVENTORY MGT

• To maintain an optimum size of inventory for

efficient and smooth production and sales
operations.

• To maintain a minimum investment in inventories to

maximize the profitability.

• Effort should be made to place an order at the right

time with right source to acquire the right
quantity at the right price and right quality.
Supply Chain Management

Why do we hold Inventory?

 Improve customer service
 Reduce certain costs such as
 ordering costs
 stockout costs

 Contribute to the efficient and effective operation of the

production system
Supply Chain Management

Why we do not hold Inventory?

 Certain costs increase such as
 Carrying costs, Handling cost
 Labor Cost
 Warehouse Cost
 Logistics Cost
 cost of return on investment
 reduced-capacity costs (Storage, warehouse)
 cost of production problems (Excess Inventory)
Supply Chain Management

Two Fundamental Inventory Decisions

 How much to order of each material when orders are placed with either
outside suppliers or production departments within organizations
 When to place the orders
INVENTORY VALUATION INVOLVES TWO PROCESS

Determination of quality of each type of inventory

held.

Assignment of the values of the

units items of inventory
FORMS OF INVENTORIES

There are many types of inventory. The

form of inventories depends upon the
type of concern. All types of inventory do
not require same treatment and
therefore policy with regard to each may
also differ.
 Success Technique
• 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.
• Control investment in inventories and keep it at an
optimum level.
Supply Chain Management

Inventory Systems
Supply Chain Management

Independent Demand Inventory Systems

 Demand for an item carried in inventory is independent of

the demand for any other item in inventory
 Finished goods inventory is an example
 Demands are estimated from forecasts and/or customer
orders
Supply Chain Management

Dependent Demand Inventory Systems

 Items whose demand depends on the demands for other

items
 For example, the demand for raw materials and components
can be calculated from the demand for finished goods
 The systems used to manage these inventories are different
from those used to manage independent demand items
Supply Chain Management

Independent vs. Dependent Demand

Independent Demand
(finished goods and spare parts)
A
Dependent Demand
(components)

B(4) C(2)

D(2) E(1) D(3) F(2)

Supply Chain Management

Inventory Costs
 Costs associated with ordering too much (represented by
carrying costs)
 Costs associated with ordering too little (represented by
ordering costs)
 These costs are opposing costs, i.e., as one increases the
other decreases
Supply Chain Management

Inventory Costs (continued)

 The sum of the two costs is the total stocking cost (TSC)
 This cost behavior is the basis for answering the first
fundamental question: how much to order
 It is known as the economic order quantity (EOQ)
 WHAT IF WE OVER REACT?

• Unnecessary tying down of firm’s funds and loss of

profit.
• Excessive carrying costs.
• Risk of liquidity- difficult to convert into cash.
• Physical deterioration of inventories while in
storage due to mishandling and improper
storage facilities.
 WHAT IF ONE IS TOO COOL!

• Production hold-ups – loss of labour hours.

• Failure to meet delivery commitments.
• Customers may shift to competitors which will
amount to a permanent loss to the firm.
• May affect the goodwill and image of the firm.
INVENTORY
CONTROL:

Inventory control is the means by which

materials of the correct quality and in correct
quantity are made available as and when
required with due regard to economic in
storage and ordering cost. Hear the desired
level of inventory can neither be high or low
because high level inventory will lead to
increase in carrying cost while low level of
inventory will
lead to increase in ordering cost
THE ACTIVITIES OF INVENTORY CONTROL
NORMALLY INCLUDE THE FOLLOWING:

• Determination of the limits of the inventories to be held.

• Determination of inventory policies.

•Selling out of investments pattern and its regulations as per

individual and collective requirements.

• Follow up to examine the work of inventory policy and

effect
change as and when needed.
 SCOPE OF INVENTORY CONTROL:

SCOPE OF INVENTORY CONTROL

Determination Determining Determining

of inventory economic order size lead time
policies. Examining
the work of
Determining inventory
various Safety or buffer
policy
stock levels stock
OBJECTIVES OF INVENTORY CONTROL:
• To ensure smooth flow of stock.

• To provide for required quality of materials.

•To control investments in stock.

• Protection against fluctuating demand.

• Protection against fluctuations in output.

• Minimization of risk and uncertainty.

• Risk of obsolescence.

•Minimization of material cost.

In a Nutshell
• Track inventory.
• How much to order?
• When to order?

• IF we know the
value, all these
functions will get
addressed!!
 EMERGING TRENDS IN INVENTORY
MANAGEMENT
• Entering into long term contracts at a fixed price
to reduce uncertainties.
• Just-in-time.
• Kanbans – Japanese technique (Only produce
when demand comes).
• Internet based ordering systems.
• Supply chain management.
• Vendor development.
• Investment in plant and machinery.
THANK YOU