Inventory Management

Introduction
• Working Capital finance which is a part of Trade finance or business finance.
Working capital which is required on a day to day basis is always given on the basis
of current assets.
• Inventory and debtors are the most important current assets on the basis of which
working capital is provided.
• Inventory and debtor management is the integral part of working capital
management.
• Inventory management is a part of supply chain management also.
• The term ‘Inventory’ refers to the stock of raw materials, spare parts and finished
products held by a business firm.
• It is the aggregate quality of materials, resources and goods that are idle at a given
point of time.
• Inventory management refers to the process of managing the stocks of finished
products, semi-finished products and raw materials by a firm.
• Proper Inventory management brings down cost and increases the revenue of a firm.
 Introduction
• It starts from the commercial production and includes raw materials, semi-finished
goods , WIP to finished goods. Generally there is a short period of time available to the
firm to put an inventory management plan in place before the final products are
delivered.
• Inventory management has to be done in advance and it can not be overlooked.
• It helps the firm to decide in advance where these supplies should be stored.
• In case of large quantity of goods, one has to be careful so that the warehousing space
is optimally utilised.
• Inventory is the main asset of a business & it should be ensured that investment in
inventory is not unnecessarily high and proper control is kept on the amount and
structure of inventory.
• Because among all the current assets of business, inventory is the least liquid, any
wrong in the management of inventory cannot be rectified easily and it can be very
costly for the firm.
• Funds of the firm which are procured from internal as well as external sources need
to be managed properly.
 Introduction
• The main objective of inventory management is to determine the level for each type of
inventory.
• For this purpose the purchasing and carrying costs should be compared with their
benefits.
• For example- when a firm purchases in bulk quantity, it’s out of stock costs and risk
decreases but in case it continues to purchase, it reaches a point where it’s carrying
costs exceed its benefits.
• Therefore, the management should maintain only a proper level of inventory.
• Not only the financial manager is concerned with inventory management, but it also
affects marketing and production managers.
• For determining an optimum level of inventory, proper coordination among all of them
is essential.
• Inventory is a current asset. Inventory means the goods which are kept for sale
during the general operation of business.
• In case of trading institution it includes only finished goods.
 Introduction
• But In manufacturing concerns inventory includes: Raw Material, Work-in-Progress,
Finished Goods, Stores and Supplies.
• Raw material is converted into finished goods with the help of the production process. As such
it is an important part of the cost of finished products.
• Semi-­finished goods are included in different stages of production processes and converted
into finished product.
• After manufacturing process, semi- finished goods are converted into finished products. Thus,
finished goods are available for sale.
• Stores and supplies include fuel, coal, cotton, lubricant oil, broom, chemicals, etc.
• The stores do not enter into the production process directly but are needed to run the
production process smoothly and constitute an average small part in the total investment.
Raw material and semi-finished goods help in the process of production and finished goods
inventory helps in fulfilling the demand of customers.
• In manufacturing activity, the level of all types of inventory will be high. But in a trading
business, the stock of finished products will be high but there will be no stock of work-in-
progress, raw material and stores and supplies.
• Inventory is financed from short term loans from banks & is subject to interest charges. Cost
of inventory and interest charges can be reduced by proper inventory planning and control.
 Inventory Management–Meaning and Definition of Inventory
• ‘Inventory’= raw materials + spare parts + finished products
• It is the aggregate quality of materials, resources and goods that are idle
at a given point of time.
• The resources include manpower, materials, machines or money.
Inventory refers to the ‘stocks’ that a firm keeps to meet its future
requirement of production and sales.
• In financial terms, Inventory is the sum of the value of raw materials,
fuels and lubricants, spare parts, maintenance consumables; semi
processed materials and finished goods stock at any given point of time.
• Inventories are maintained basically for the operational smoothness of
different stages of production, whereas the monetary value of inventory
serves as a guide to indicate the size of the investment required to
achieve this operational convenience.
 Inventory Management – Meaning

• It is the process of managing the stocks of finished products, semi-finished products

and raw materials by a firm. Inventory management, if done properly, can bring down
cost and increase the revenue of a firm.
• It starts from stage of commercial production. Generally there is a short period of
time available to the firm to put an inventory management plan in place before the
supplies are delivered.
• Inventory management helps the firm to decide in advance where these supplies
should be stored.
• For large amount of inventory utilization of the warehousing space is equally
important.
• The purchase manager has to do a lot of paperwork and documentation in inventory
management.
• Purchase manager is personally responsible to take care of inventory of the firm & the
finance manager has to play an active role in the management of inventory & is the
decision maker in the whole process of inventory management.
 Significance of Inventory Management
• A successful production cycle depends upon accurate inventory management.
• It gives you an insight into the appropriate and timely changes in the placement of
orders.
• Accuracy of stock:-
• It provides optimal support to your employees.
• It provides them with the correct details on the available stocks and which category of
stocks need to be replenished.
• It helps you understand which stocks have a good turnover and which stocks have
been lying unsold for a long.
• You get clarity on products that are overstocked and those in demand but need to be
replenished.
 Significance of Inventory Management
• Reduces unnecessary costs –
• Most businesses store their goods in rented warehouses.
• An excess of inventory or unsold inventory leads to increased storage costs as well as
losses as the goods are lying unsold.
• Inventory management provides you with organised details about the entire inventory.
• It helps you to understand when to replenish a certain variety of merchandise and by
what margin should the increment be made.
• You get clarity on slow-moving and unsold products.
• This makes you alert in placing orders, helps you to reduce unsold stocks, create
more storage space, reduce losses, and decrease redundant expenses.
• Moreover, an inventory management system helps lower insurance costs by informing
you about excess inventory.
• You can then dispose of it either through discounts or return it to the manufacturers
if they agree to the same.
 Significance of Inventory Management
• Transparent and detailed information of stocks, packaging and shipping of other
stocks and the exact date of deliveries.
• Increased automation enables less dependency on manual labour, little scope for
human error as automation makes the entire process flawless.
• More amicable relationships with manufacturers and wholesale dealers –You can
strike better deals with manufacturers as well as other suppliers and avail of bigger
discounts on the placement of large volumes of goods.
• Timely deliveries – An organised inventory management system helps you
understand merchandise which enjoys a consistent demand. This helps you place
timely orders and meet all your clients' demands without giving them an excuse to
complain. This helps retain existing customers and also helps increase the goodwill of
your business. Customer satisfaction increases their trust and this, in turn, leads to
an increase in your customer base.
• Insightful details on inventory - An inventory management system gives you a
realistic status of your entire business product cycle. These details play an important
role in scaling your business operations, improving the operations cycle and making
timely deliveries.
 Significance of Inventory Management
• Centralisation of warehouses, data. With features like barcode scanning, you will be
able to monitor all the operations easily, and this will help you plan your business
more efficiently.
• Timely fulfilment of orders
• Time-effective Helps you to maintain a healthy cash flow
• Increased profits
• Better sales strategies
• Competitive advantage
• Seasonal management of inventory
• Optimal efficiency of resources
• Facilitates fulfilment of changes in demand
• Secures inventory data
• Enables visibility across the product cycle
• Enables seamless tracking across storage facilities
• Cumulative inventory details across storage facilities
 Types of Inventories
• There are 4 types of inventories in manufacturing.
1) Raw Material are of two types:-
• Direct raw materials are used directly in the final product. These materials are easy to quantify
and account for per unit or per batch basis.
• Indirect raw materials are the components that are not part of the final products but are used
during the production process. Indirect raw materials are difficult to identify and account for
since they can’t be traced to specific batches or units. However, these are essential for the
production process.
2) Work-in-progress (WIP)
• It can comprise direct and indirect raw materials — the only thing to note here is that the
product is not complete and is a work in progress.
3) Finished goods:- All the items ready to be sold are considered part of your finished goods
inventory.
• In a make-to-order workflow, then the final product is made and can already be shipped to your
customers. Whereas, if you follow the make-to-stock workflow, the inventory will have to be
stored in a warehouse until an order comes through. In either case, your finished goods
inventory should be pretty clear and straightforward to account for and track.
4) Maintenance, Repair, Operations (MRO) inventory is essential to keep your factory
operational. MRO inventory is strictly for your consumption and is not available for customers to
 Inventory Controls & its significance
• Inventory control refers to an activity of checking stock, maintaining the desired
levels of inventories in the best economic interest of an entity. to keep the cost low
while meeting consumer demand to maximise profits.
• In simpler words, inventory control involves monitoring stock usage, movement, and
storage, the location of inventory & warehouses at different locations.
• An inventory control manager discovers a batch of products lying in stock that isn’t
selling. It becomes a deadstock and takes up considerable space in the organisation’s
warehouse. The manager must convert this into revenue by performing inventory
reduction. They can use the bundling or kitting option for tying it up with the sale of
an in-demand product. This is one of the inventory control methods.
• Inventory control is necessary to ensure an adequate stock quantity, quality control,
operational control and to ensure accounting accuracy.
• Businesses must track inventory levels regularly. It will help the business meet the
projected demand with the least inventory holding cost and plan purchases ahead of
time.
• It also helps businesses avoid any product obsolescence and spoilage.
 Inventory control functions and steps

• Inventory control is connected to the purchasing function of an organisation.

Functions of inventory control managers involve product ordering, storage, and
maintenance of stock or inventory in a cost-effective manner.
• Steps involved in inventory control are as follows-
• Step 1: To decide the minimum level of inventory:-A production team, the sales
and marketing teams work closely in tandem. It helps to decide the maximum and
minimum limits, understanding obsolence of raw material before production & also
helps to stock up scarcely available raw materials to produce finished goods without
delays.
• Step 2: Setting the re-order levels:-Tastes and preferences of customers are
changing & requires advanced preparation and decision to produce the ideal quantity
to meet the demand & requires planning to re-stock the raw materials within a
committed time to produce the finished products to the customer.
• Step 3: Opting for a sound inventory control method:-The method that a business
chooses must help it determine the re-order quantity at any given time. Businesses
can pick any popular inventory control methods such as ABC analysis, Just In Time
(JIT), FSN method known as Fast, slow, and non-moving classification, and the
Economic order quantity (EOQ).
 Popular inventory control methods in use
• Some of the popular inventory control methods are as follows-

• Economic order quantity-

• Economic order quantity, also called EOQ, is a formula.
• It is the ideal inventory quantity that a company must purchase considering various
variables such as total production costs, demand rate, etc.
• It helps to free up any tied cash in inventory for most entities and reduces the direct
costs. Inventory management softwares are used to manage inventory in a better
way.
ABC analysis-
• It involves categorising inventory into three buckets called A, B and C depending
upon the importance of the inventory to its profit.
• A category consists of expensive items, and hence a small inventory is held.
• B category has average-priced inventory with medium sales frequency.
• Category C inventories are low in value but with high sales frequency. It requires less
inventory control compared to A or B.
 Popular inventory control methods in use
• Just-in-time (JIT) inventory management-
• It is a technique to arrange raw material orders from suppliers as per the production
schedules to reduce inventory costs. There will be no excess inventory stored beyond
the production requirements, and hence it leaves no scope for deadstock in the
organisation.
Safety stock inventory-
• Businesses can order an extra quantity of inventory as buffer stock above the
projected demand. It acts as a correction for underestimating demand.
Fast, slow, and non-moving (FSN)-
• It involves the classification of inventories into fast-moving, slow-moving and non-
moving stock for deciding the pace at which a business can place orders.
Implementing Inventory control systems-
• Organisations can use technology-based inventory control systems which integrate
purchasing, shipping, receiving, warehousing or storage, tracking, and re-ordering. It
ensures the availability of the right inventory at the required locations when needed
to meet product demand. Two types of inventory control systems are available to
choose from. These are perpetual and periodic systems depending upon whether a
business wants to track inventory daily or not.
 Popular inventory control methods in use
• FIFO and LIFO:-LIFO and FIFO are methods to determine the cost of goods. FIFO, or
first-in, first-out, assumes the older inventory is sold first in order to keep inventory
fresh. LIFO, or last-in, first-out, assumes the newer inventory is typically sold first to
prevent inventory from going bad.
• Reorder point formula.
• The reorder point formula calculates the minimum amount of stock a business
should have before reordering. A reorder point is usually higher than a safety stock
number to factor in lead time.
• Batch tracking used in Pharmaceutical products
• Batch tracking is a quality control technique used to track inventory expiration or
trace defective items back to their original batch.
• Consignment inventory.
• Consignment inventory is when a consigner (vendor or wholesaler) agrees to give a
consignee (retailer) their goods without the consignee paying for the inventory
upfront. The consigner offering the inventory still owns the goods, and the consignee
pays for them only when they are sold.
 Popular inventory control methods in use
• Perpetual inventory management.
• Perpetual inventory management is simply counting inventory as soon as it arrives to
deliver real-time insights. It may be recorded manually Or, by using scanner to scan
product barcodes and RFID tags, it then automates inventory balances as soon as
stock is moved, sold, used or discarded.
• Dropshipping.
• Dropshipping is an order fulfillment method in which the supplier ships products
directly to the customer. When a store makes a sale, instead of picking the item from
their own inventory, they purchase the item from a third party and have it shipped to
the consumer.
• Six Sigma.
• Six Sigma is a method that gives companies tools to improve the performance of their
business (increase profits) and decrease excess inventory.
• Demand forecasting:-based on historical sales data to forecast customer demand.
Essentially, it’s an estimate of the goods and services a company expects customers
to purchase in the future.
1) One of the important basic objective of Inventory management is
a) to calculate EOQ for all materials in the organization.
b) to go in person to the market and purchase the materials
c) to employ the available capital efficiently so as to yield maximum results
d) once materials are issued to the departments, personally check how they are used
The answer is (c )
2) The stock of materials kept in the stores in anticipation of future demand is known as
e) Storage of Material
f) Stock of materials
g) Inventory
h) Raw Material
The answer is (c )
3) Materials management bring about increased productivity of capital by
i) Very strict control over use of materials
j) Increasing the efficiency of the workers
k) preventing large amounts of capital locked up for long periods in the form of inventory
l) to apply the principles of capital management
The answer is (c )
4)We can reduce the materials cost by
a) using systematic inventory control techniques
b) ordering the material as and when the need arises
c) By ordering in Bulk quantity
d) ordering the material at fixed interval irrespective of need
Answer is (a)
5) The basis for ABC analysis is
e) Interests for Material Management
f) Interests of the top Management
g) Pareto’s 80-20 Rule
h) None of the above
Answer is (c )
6) ABC analysis depends on the
i) Quality of Material
j) Cost of Material
k) Quantity of materials used
l) Annual Consumption value of materials
10) The rent for the stores where materials are stored falls under
a) Inventory Carrying cost
b) Ordering Cost
c) Procurement cost
d) Stocking Cost
Answer is (a)
11) Which of the following is a type of inventory system that is used to manage independent demand
items?
a) Order point system
b) Material Requirements Planning
c) Time Phased Order Point
d) Enterprise Resource Planning
The answer is (c )
12) Effective inventory management minimizes the investment in inventory by effectively meeting the ___.
A. Functional requirement
B. Customer requirement
C. Process reliability
D. Sales forecasting of a firm
Answer is (a)
13) To achieve ___ in purchasing and transportation, goods may be purchased in larger quantities than the
actual demand.
A. Continuation
B. Quality
C. Cost efficiency
D. Potential value
Answer is (c)
 Various Ratios in Inventory Management
• Inventory Turnover Ratio (ITR)
• Formula:-
• Inventory Turnover=Cost of Goods sold/Average Inventory
• Average Inventory Value = (Beginning Value + Ending Value) / 2
• ITR ratio between 5 to 10 is considered good for most of the companies.
• ITR is a measure of the number of times inventory is sold and replaced during a particular time
frame.
• The time period is typically one year but it can be shorter also.
• ITR is required to plan all levels of income statement.
• It is required for better forecasting.
• It is required to decide strategy for re-investing in inventory in the coming months based on past
performance.
• It is required to identify underperforming stock.
• It is also required to focus on the products which were previously neglected.
• It is required to improve inventory logistics & supplier relationship.
• Cost of transportation can be reduced if proper attention is paid to ITR
• It is also required
 Various Ratios in Inventory Management
• Gross Margin Return on Inventory:-
• Gross Margin Return on Inventory = Net Sales / Average
Inventory x Gross Margin
• where Gross Margin = (Net Sales - COGS ) / Net Sales
• GMROI, helps determine whether a company is able to make a
profit on its inventory. In other words, it shows how much you earn
on every Rupee you invest. While this ratio can be applied to your
entire inventory, it is most useful when calculated by product
category or product line.
• For e.g. you sold ceramic bowls and your net sales were Rs.75,000,
your average inventory was Rs.30,000, and your gross margin was
50%.
• Your GMROI would be Rs.1.25, and that is how much you would
 Various Ratios in Inventory Management
• Holding Inventory Ratio
• The Holding Inventory Ratio helps you assess the costs of carrying
inventory before selling it. Holding costs normally include storage,
labor, security, insurance, and associated equipment. Typically,
they represent 20% to 30% of inventory value, but this will vary by
industry and company.
• Holding Inventory Ratio = Holding Costs/Average Inventory
Value
• Calculating the Holding Inventory Ratio can help you choose
between different inventory system options, as well as strategize for
seasonal fluctuations to ensure that you are stocking the right
amount of products to optimize your cash flow.
 Various Ratios in Inventory Management
• Days Sales of Inventory Ratio
• Days Sales of Inventory Ratio, or DSI, calculates how many days a company
holds on to inventory before selling it.
• Days Sales of Inventory = Average Inventory / Net Sales x No.of days in a
year
• DSI results vary from industry to industry and can be misleading without
context.
• DSI is most useful when combined with other ratios, specifically the Inventory
Turnover Ratio and Holding Inventory Ratio.
• Knowing how many times you sell and replace inventory in a period, paired with
how many days on average you hold that inventory and its holding costs, can
provide a more comprehensive picture of your inventory cash requirements.
• Evaluating inventory regularly will help keep your inventory, one of your most
important assets, from becoming your largest liability.
 Logistics and Combined Transport Documents
• Proper transportation is the backbone of logistics.
• Safe, Efficient, Reliable & sustainable movement of goods over time and space is very
important.
• Transportation determines the efficiency of moving the product.
• The progress in techniques and management principles improves moving load,
delivery speed, service quality, operation costs, the usage of facilities and energy
saving.
• Transportation takes a crucial part in logistics operation.
• Therefore transportation is the base of efficiency and economy in business logistics
and expands the functions of logistics system.
• Logistics refers to the overall process of managing how resources are acquired, stored,
and transported to their final destination.
• Logistics management involves identifying prospective distributors and suppliers and
determining their effectiveness and accessibility.
• Logistics managers are referred to as logisticians.
• "Logistics" is a part of supply chain management.
 Logistics and Combined Transport Documents
• Three Types of Logistics : Inbound, Outbound, Reverse
• Inbound logistics is the first step in the logistics value chain.
• Inbound logistics is the movement of goods from suppliers to the production
which includes storage and transportation of various products from the suppliers to
manufacturers’ production facilities for processing and production.
• The types of goods or items that are transported through this logistics flow are raw
materials, tools for manufacturing, fuel, various spare parts and components for
production inputs.
• Better inbound logistics management makes the cycle more efficient and integrative.
 Logistics and Combined Transport Documents
• The best way to manage inbound logistics is to use automate ordering systems.
• Most car parts distributors use large trucks to transport these products, so choosing
the right partner for these logistics services is essential.
• What Is Outbound Logistics?
• Outbound logistics is the movement of finished products from production
facilities to the next supply chain link.
• These goods move through warehouses, further to the point of consumption (in the
hands of end-users).
• This is often referred to as the order fulfillment process.
• All the products are intended for the end-users to move through this outbound
logistics flow.
• In a nutshell, the outbound logistics movement refers to businesses shipping and
delivering their products from the warehouse to the customer (whereas inbound refers
to the change between companies and their suppliers).
 Logistics and Combined Transport Documents
• What Is Reverse Logistics?
• As you may have guessed, reverse logistics refers to moving items or
goods from the end users back through the supply chain to the appropriate
party concerned.
• This occurs in the event of returns or with products that may need servicing or
repairs, refurbishing, resale, recycling, recovering, or proper disposal (in the
fact a product cannot be recycled due to certain elements and must be broken
down safely and appropriately).
• This flow encompasses all activities carried out after the point of sale or the
end product life cycle.
• This process is most common in the automobile and electronics industry.
• For e.g. a specific car part may be faulty when fitted into a consumer’s vehicle.
This part must be returned to the manufacturer for replacement or repair—
this will move through the reverse logistics flow.
 Multimodal Transport
• Multimodalism refers to transportation of goods between two points by more
than one mode of transport. This could be by road-rail, road-rail-coastal or
any other combination.
• The distance over which the goods have to be transported is an important
consideration because the characteristics of haulage charges and terminal
charges vary widely from mode to mode.
• After the goods are loaded in a “multimodal equipment” at the commencement
of the journey, they travel across multiple transport modes without any
further handling of the goods until the goods reach the intended destination.
• The carrier responsible for the entire carriage is referred to as a multimodal
transport operator, or MTO.
• While choosing multi modal transport following cost factors have to be
considered.
• Cost, Speed, Cargo value, security & safety, Route, Equipment availability,
Cargo characteristics
 Advantages of Multimodal Transport
• Reliable, cost effective & safe
• Cargo safety assured: no shortage/theft /damage/pilferage- less insurance
cost
• Multiple pickup/deliveries: FCL/LCL
• Environmental friendly as it reduces pollution
• Fuel saving compared to road transportation
• Provides faster transit of goods
• Single window operation
• Reduces overall transaction costs
 Multimodalism & Containerization

• Multimodalism developed with “container revolution” of 1960s and 70s

• Containerization is the most vital factor of multimodal transportation as it
combines the consistency of rail, flexibility of road, the cost effectiveness of
shipping and speed of air transport
• It is important to remember that multimodal transport is not equivalent to
container transport
• Containerisation reduces transit time through quicker cargo handling & by
reducing the number of individual pieces of cargo that need to be handled
• Ensures substantial savings in packaging cost as compared to break bulk
shipment
• Obviates the need for covered warehouses, for containers can be stored in the
open, thereby reducing warehousing cost
• Eliminates the intermittent handling of cargo during transit- cargo arrives in
better condition at destination
 Stock Verification or Stock Audit
• A stocks virtually represent cash that is why it should be stored,
checked, and valued periodically, especially at the end of a given
period.
• The value of a stock is usually much greater than the cash held at
a particular time.
• It is, therefore, necessary to verify stock value from time to time to
ensure that the materials purchased and stored are, in fact, in the
storehouse and their quality and quantity have not deteriorated
during the storage process.
• That is why there is a need for physical verification of socks.
 Purposes of Stock Verification
• Physical stock verification is the process used to ascertain the correctness of goods (e.g., in
terms of quality and quantity) in the store on a given date.
• In physical stock verification, emphasis is laid on the verification of quantity by counting or
weighing (or adopting any other suitable means).
• The following are the main purposes of physical verification of materials lying in the stores:
• To examine the correctness of the stock records
• To examine the correctness of the values entered in the stock record
• To detect discrepancies, if any
• To find weaknesses, if any, and to suggest improvements
• To safeguard against staff abuses
 Methods of Stock Verification
• There are three methods of stock verification.
1. Continuous or Perpetual Verification
• In this method, stock verification is carried out during the course of the year instead
of a specific time.
• Firms follow this method should have a proper system and program in place to
ensure that it is performed smoothly.
• In this method, the physical evaluation of every inventory item happens at a
minimum, once in a year.
• This method causes minimum business disruption or daily transactions and postings
can be continued as usual.
• Neither employees nor the particular store in question have to pause their routine
activities
• Shortage or excess inventory that arises now and then can be properly evaluated
during this verification and written off.
• Continuous verification ensures that all physical stock verification happens in a
timely fashion.
 Methods of Stock Verification
2. Periodic Verification
• This is the method is used by small or new businesses.
• Under this method, all the stock is verified and processed at the end of the financial
year.
• Verification can be stopped for a day or two if need arises.
• This method is not suitable for large organizations as it could mean having to pause
business operations for several days.
• 3. Blind Verification
• This is not a very commonly followed procedure.
• This method focuses on only the location of stock and not the details of stock record
balance, description, quantity, etc.
• The individual conducting the verification only mentions the same figures as
recorded in the account books, without actually conducting physical verification of
the stock and giving their opinion on it.
• This method does not serve the purpose of physical verification of stock.
 Economic Order Quality of EOQ Model
• Economic order quantity (EOQ) is the ideal quantity of units a company should
purchase to meet demand while minimizing inventory costs such as holding costs,
shortage costs, and order costs.
• This production-scheduling model was developed in 1913 by Ford W. Harris and has
been refined over time.
• The economic order quantity formula assumes that demand, ordering, and holding
costs all remain constant.
• The formula for EOQ is:-
The EOQ formula is a mathematical equation that calculates
the optimal order quantity to minimize costs and meet
customer demand.
The formula is EOQ = square root of (2 x demand x ordering
cost / holding cost)
The formula requires the following inputs: demand, which is the
number of units sold per year; ordering cost, which is the cost
per order, including shipping and handling; and holding cost,
which is the cost per year, per unit, to store the product
 The Principles Behind EOQ: The Holding Costs
• The Principles Behind EOQ:
• The base for EOQ is Holding Costs
• How much inventory should be kept on hand
• What is Interest cost for holding Inventory.
• What is Insurance cost for holding Inventory.
• What are the different taxes for holding Inventory.
• There may Theft of inventory which adds to the holding cost.
• If inventory is stored for long time then there is a risk of Obsolescence
• And over and above there is Storage Cost for holding Inventory.
• When we purchase more inventory, we need to take out loans to pay for them.
• Loans carry interest.
• This interest is an cost that increases as we take out larger loans to afford more
inventory.
 The Principles Behind EOQ: The Holding Costs
• When we talk about obsolescence, we are talking about the natural, and inevitable
process of product redesign.
• Take the example of Porsche Car .
• Even though it was a great car 40 years ago, it has been redesigned so many times
that those old parts are now obsolete.
• Old parts stored unused in a warehouse somewhere is an additional cost that
increases the overall cost per unit of having inventory on hand.
• And lastly, storage is pretty straightforward.
• The more inventory you have on hand, the more room you need to store it.
• This space needs to be paid for, so we see again how the costs increase with quantity.
 SELECTIVE INVENTORY CONTROL
• ABC Analysis:-
• ABC analysis stands for Always Better Control Analysis and is
based on price of inventory & control level exercised over
inventory.
• It is an inventory management technique where inventory items
are classified into three categories namely: A, B, and C.
• The items in A category of inventory are closely controlled as it
consists of high-priced inventory which may be less in number but
are very expensive.
• The items in B category are relatively lesser expensive inventory as
compared to A category and the number of items in B category is
moderate so control level is also moderate.
• The C category consists of a high number of inventory items which
require lesser investments so the control level is minimum.
 SELECTIVE INVENTORY CONTROL
• VED Analysis
• VED stands for Vital Essential and Desirable.
• Organizations mainly use this technique for controlling spare parts of
inventory.
• Like, a higher level of inventory is required for vital parts that are very costly
and essential for production.
• Others are essential spare parts, whose absence may slow down the
production process, hence it is necessary to maintain such inventory.
• Similarly, an organization can maintain a low level of inventory for desirable
parts, which are not often required for production.
• It attempts to classify the items used into three broad categories, namely
Vital, Essential, and Desirable.
• The analysis classifies items on the basis of their criticality for the industry or
company.
 SELECTIVE INVENTORY CONTROL
• Vital: Vital category items are those items without which the production
activities or any other activity of the company, would come to a halt, or at least
be drastically affected.
• Essential: Essential items are those items whose stock–out cost is very high for
the company.
• Desirable: Desirable items are those items whose stock-out or shortage causes
only a minor disruption for a short duration in the production schedule.
•
 SELECTIVE INVENTORY CONTROL
• XYZ Analysis
• XYZ analysis is one of the basic supply chain techniques, often used to determine
the inventory valuation inside the stores.
• It is a strategy of the Inventory manager in exercising maximum control over the
highest stocked item, in terms of stock value.
• The XYZ analysis is a way to classify inventory items according to variability of their
demand.
• X class items which are critically important and require close monitoring and tight
control – while this may account for large value these will typically comprise a small
percentage of the overall inventory count.
• Y class are of lower criticality requiring standard controls and periodic reviews of
usage.
• Z class require the least controls, are sometimes issues as “free stock” or forward
holding.
 Manufacturing System
• A manufacturing system is a combination of actions and processes used
throughout the production of any goods.
• Manufacturing systems have become an increasingly important element of
any production environment.
• Developing the right system provides a medium through which commands
can be transmitted to the machines, orders can be distributed to the workers,
and they are an increasingly essential component of quality control.
• Some of the most common systems used for manufacturing include:
• Discrete Manufacturing
• Repetitive Manufacturing
• Job Shop Manufacturing (Mass Customization)
• Batch Manufacturing
• Continuous Manufacturing
• Additive Manufacturing
 Manufacturing System
• Discrete manufacturing is a assembly process that results in the finished
products, made up of number of individual parts or components. It applies to
businesses which create a variety of products with different sizes and features,
including most consumer goods, smartphones, medical devices, cars, and
clothing.
• Repetitive manufacturing It is similar to discrete manufacturing but with little or
no variation. There is no change between steps, resulting in greater production
efficiency. Repetitive manufacturing processes are often found in goods such as
furniture and appliances, as well as many types of consumer
electronics/electrical components.
• Job shop manufacturing, also known as mass customization, is a process that
produces customized products & uses defined production areas as opposed to
traditional assembly lines.
• However, this is difficult to automate depending on the level of personalization.
• Industries where mass customization. It is used in manufacturing in clothing and
furniture, specialty automobiles, and any consumer good that allows the
consumer to personalize the end product.
 Manufacturing System
• A batch manufacturing process involves a set of ingredients and a sequence of
one or more production steps that follow a pre-defined order.
• A set amount of product(s) are produced at the end of each sequence to make
up a single batch.
• The processing of subsequent batches will only begin once all of the set
amounts of products have been produced.
• Batch production processes are often found in the food and pharmaceutical
industries as they enable more control over quality, better traceability, and
shorter production times.
• A continuous manufacturing process :- In this method raw material is fed and
processed continuously to produce additional units of product.
• Continuous production processes are primarily found in industries where
facilities can run uninterrupted such as oil refining, paper production,
chemical and cosmetic manufacturing, and some types of foods and
beverages.
 Manufacturing System
• 3D printing or additive manufacturing processes:- It is the modern method of
production which popular nowadays.
• 3D printing provides several advantages when it comes to customization,
complexity, sustainability, and innovation.
• As a result, additive manufacturing processes is being used in aerospace,
defense, medical and dental device manufacturers.
• Digitizing manufacturing systems with software
• Number of software are now available which automate manufacturing systems
and solve countless different use cases and challenges experienced across
manufacturing environments every day.
 MRP, MRP-II, JIT
• MRP stands for Material Requirement Planning. It is a planning technique which converts master
production schedule of end products into detailed schedule for raw materials & parts used in those
end products.
• MRP is a means for determining the number of parts components and materials needed to produce a
product.
• The objective of MRP is inventory reduction & reduction in production and delivery times and to
improve customer satisfaction.
• MPP focuses on independent demand and dependent demands
• Master Production Schedule (MPS) is based on actual customer demand and predicted demand. MPS
indicates when ordered item will be produced & how much quantity.
• MPS inputs come from sales and marketing.
• MRP & MPS may result in mis-planning, overstock, understock or lack of appropriate resources due
to inaccurate information.
• It may be costly and time consuming.
• MRP-II is the extension of MRP and focuses on more efficient use of resources, reduced inventory,
less idle time, fewer bottlenecks, better priority planning, improved customer service, meet delivery
dates, improved quality, better MIS.
• JIT-Just in time is a philosophy of manufacturing based on planned elimination of waste &
continuous improvement of productivity.
• Basic aim of JIT is zero inventory, zero lead time & zero failure.
THANKS