N T

G E ME
MA NA
T O RY
VE N
IN
 MEANING OF INVENTORY
All the materials , parts, suppliers, expenses
and in process or finished products recorded
on the books by an organization and kept in
its stocks, warehouses or plant for some
period of time.
 DEFINITION OF INVENTORY
Inventory may be defined as tangible goods,
that are held for sale, to be used in the
process of production and available for ready
consumption.

Acc. to American Ins. Of

Certified Public Account (AICPA)
 Motives of Holding Inventory

MOTIVES

TRANSACTION
MOTIVE PRECAUTIONARY
MOTIVE

SPECULATIVE
MOTIVE
Types of Inventories

5
 Benefits of Holding Inventory
Avoiding Lost Sales

Gaining Quantity Discounts

Reducing Order Cost

Achieving Efficient Production Runs

Reducing risk of Production Shortages

Elements of Inventory Cost
 Inventory Cost

• Unit Cost: It is usually the purchase price of

the item under consideration.

• Procurement Costs: This includes the cost of

order preparation, tender placement, cost of
postages, telephone costs, receiving costs, set
up cost etc.
• Carrying Costs: This represents the cost of
maintaining inventories in the plant. It
includes the cost of insurance, security,
warehouse rent, taxes, interest on capital
engaged, spoilage, breakage etc.
• Stock out Costs: This represents the cost of
loss of demand due to shortage in supplies.
This includes cost of loss of profit, loss of
customer, loss of goodwill, penalty etc.
 INVENTORY MANAGEMENT
Inventory management may be defined as a
scientific method of finding out how much
stock should be maintained in order to meet
the production demand and be able to
provide right type of material at right time in
right quantity at competitive price.
INPUT INVENTORY
INPUT Goods in store OUTPUT
Material
Material work in process Production
management
management Finished product department
department
department
DEFINITION OF INVENTORY MGT
It refers to all the activities involved in
developing and managing the inventory
levels of raw materials, semi finished
materials (WIP), and finished goods so
that adequate supplies are available and
the cost of over or under stocks are low.

Acc. to Philip Kotler

 OBJECTIVE OF INVENTORY MGT.
• It ensures an adequate supply of materials, stores
etc.
• It eliminates duplication in ordering
• Permits better utilisation of available stock
• Provides a check against the loss of materials through
carelessness or pilferage
• It facilitates purchasing economies
AREAS OF INVENTORY MGT.

13
FUNCTIONS OF INVENTORY MGT.
 Operating Functions
Availability of Materials
Minimizing the Wastage
Better service to Customers
Promotion of Manufacturing Efficiency
(Right material at right time)
Control of Production Levels
Optimal level of Inventories
 FINANCIAL FUNCTIONS
 Economy in Purchasing (Bulk Qty.)

 Optimum Investments and Efficient use of

capital (Neither short nor surplus)

 Reasonable Price (Competitive prices)

 Minimising Total Inventory Cost

 Advantages of Inventory Mgt.

Allow full advantage of economics of bulk

purchases & transportation.

Reduce chances of going out of stock.

Leads to reduction in inventory levels.

Release more of capital for other operations.

 Advantages (Cont…)

Increase profitability of an organization.

Adequate customer services.

Price discount by bulk purchase.

 TECHNIQUES OF INVENTORY
CONTROL
 ABC analysis
 VED Analysis
 JIT Analysis
 Economic Order Quantity
 Setting up of various levels
 Use of material budgeting
 Establishment an effective purchase
procedure
 ABC Analysis (Always Better Control)
The inventory is categorised into A,B and C category
according to the potential amount to be controlled.

The items are then categorized as under

 Items functionally critical,no matter how small they

are,
 Items important because their usage value is very high,
 Items having average usage value,
 Items having low usage value.
 VED Analysis
 V stands for Vital: The shortage can not be
managed even for a minute.

 E stands for Essential. The shortage can be

managed for some hours or a day.

 D stands for Desirable. The shortage can be

managed for a few days or a week.
 JIT Analysis
 JIT refers to Just In Time inventory.

 In this technique inventory is managed in such a way

that delivery of purchased item is assured before
their use or demand.

Benefits:
 Investment in inventory is reduced.
 Carrying cost is reduced.
 Minimum possible wastage.
 FIFO Method

FIFO, which stands for "first-in-first-out,"

is an inventory costing method which
assumes that the first items placed in
inventory are the first sold. Thus, the
inventory at the end of a year consists of
the goods most recently placed in
inventory.
 LIFO Method

Last-In, First-Out, commonly known as

LIFO, is a method for costing inventory.
When LIFO is used, the last items added to
inventory are considered the first to be
sold. This generally reduces income taxes in
times of inflation, as the cost of goods for
the newer inventory items is higher
 ECONOMIC ORDER QUANTITY
(EOQ)
How much of inventory is ordered at a time.

• Economic order quantity (EOQ) is the order

quantity of inventory that minimizes the total
cost of inventory management.

• Two most important categories of inventory

costs are ordering costs and carrying costs.
Algebraic formula for determination
of EOQ

2AS
Q
IU

Q = economic lot size

S = Ordering cost
A = Annual inventory carrying cost
IU = cost of one unit.
Setting up Levels
 USE OF MATERIAL BUDGETING

It is a coordinated estimate of
consumption and purchase of material in
an organisation related to a specified
period.
 ESTABLISHING AN EFFECTIVE
PURCHASE PROCEDURE
Reorganization of items Written requisition form

Order placed Suppliers are selected

Goods received Checking & paying

Purchase transaction recorded.