INVENTORY AND ITS CONTROL

Inventory means “ stock of goods”. In

financial terms inventory is defined as the
sum of the value of
rm+wip+swp+fg+scrap+sme.
Inventory control is therefore “ a set of policies and
procedures by which an organisation determines which
material it will hold in stock and the quantity it will carry.
AMERICANS CALL IT “ INVENTORY CONTROL”
BRITISHERS CALL IT “ STOCK CONTROL”
 OBJECTIVES OF INVENTORY
TOCONTROL
MAKE AVALIABLE STOCKS WHEN REQUIRED.
 IN ORDER TO INCREASE THE EFFICIENCY OF MAKING
AVALIABLE THESE STOCKS IN TIME THERE IS A
TENDENCY TO HOLD MORE AND MORE STOCKS.
ONE HAS TO STRIKE A BALANCE BETWEEN THE ABOVE
TWO POINTS
WHY WHY WHY WHY WHY WHY WHY WHY
MONEY INVESTED IN STOCKS (IDLE)
EATS AWAY THE PROFITS AND BUSNIESS
EXISTS FOR PROFITS AND NOT JUST
SERVICE.
 ATTITUDES TOWARDS INVENTORY:
MARKETING WOULD LIKE TO HAVE ADEQUATE
INVENTORIES ALL OVER THE COUNTRY FOR MEETING
CUSTOMER DEMANDS.THE DEMAND COULD BE
AGAINST SFOP/SSR/DDI FROM ANY BRANCH.THEY
WOULD NOT LIKE TO LOOSE SALE AND HENCE
WOULD LIKE TO HAVE A FAIRLY GOOD STOCK OF
FANS.FOR THEM THE MARKET IS DYNAMIC AND THEY
WOULD NOT LIKE TO LOOSE SALES DUE TO NON
AVALIABILITY OF FANS.
PRODUCTION WILL ALSO AGREE WITH MARKETING .THEY
WOULD LIKE TO HAVE ECONOMIC BATCHES FOR
PRODUCTION AND HAVE ADEQUATE FANS IN BSR TO MEET
NEEDS OF MARKETING.THEIR CONTENTION IS FROM THE
ANGLE THAT IF SUDDEN SPURTS IN DEMAND ARISES
MATERIAL FOR COMPLETE FANS COULD NOT BE AVALIABLE.
 FINANCE WOULD LIKE TO HAVE VERY LOW STOCKS AS
THE DIVISIONS CASH FLOW GETS AFFECTED.THEY
WOULD LIKE TO HAVE LOW RM,STOCKS,WIP AND FG

PURCHASE WOULD LIKE TO HAVE MAX STOCKS AS THEIR

MAIN FUNCTION IS TO FEED MATERIAL TO PRODUCTION.
THEIR CONTENTION IS LARGER THE P.O. LESSER THE
ORDERING COST AT LARGER THE QUANTITY,HEFTIER THE
DISCOUNTS
HENCE IT IS ESSENTIAL TO HAVE AN INTERGRATED VEIW

HOW MUCH INVENTORY IS IDEAL INVENTORY?

 INVENTORY PROBLEM

FUTURE DEMAND

PROCUREMENT OF COMPONENTS
AND RAW MATERIAL
 FUTURE DEMAND
AT ANY GIVEN TIME A DEMAND EXISTS.
FUTURE DEMAND IS KNOWN(CERTAIN)
ONE KNOWS PROBABLE DISTRIBUTION OF FUTURE
DEMAND(RISK)
 ENTIRELY IGNORANT OF FUTURE DEMAND(UNCERTAIN)
4 BASIC FUNCTIONS THAT INVENTORY SERVES:
A)LOT SIZE INVENTORY:OUR DIVISION MANUFACTURES
USING “MTS” CONCEPT FOR INDIAN MARKETS INVENTORY
IN EXCESS WILL BE CARRIED.
B)FLUCTUATING INVENTORY: “MTO” FOR EXPORTS.
FLUCTUATING INVENTORY IS SAFETY STOCK WHICH IS A
“MUST” FOR EXPORTS.
C)ANTICIPATORY INVENTORY:INVENTORY BUILD UP IN
SLACK SEASON/B4 FESTIVE SEASON/B4ANTICIPATED
STRIKES
D)GIT :EXISTS BECAUSE OF DISTANCE OF BRANCHGODOWNS FROM
WORKS.
 FACTORS INFLUENCING INVENTORY
HOW MUCH TO ORDER AT ONE TIME?
WHEN TO ORDER THIS QUANTITY?
3 FUNDAS TO ANSWER THE ABOVE QUERYS
REQUIREMENT BROKEN DOWN TIME WISE BASED ON SSR AND
PRODUCTION PLAN SCHEDULE.
QUANTITY IN STOCK OR ON ORDER
PROCUREMENTLEAD TIME:IS TOTAL TIME TO OBTAIN MATERIAL
i.e ADM.LEAD.TIME+SUPPLIER LEAD TIME.
INVENTORIES AND RELEVANT FACTORS
RM AND PRODUCTION COMPONENTS FROM OUTSIDE GOA:
Size of inventory will depend on a)internal lead time(time to call for
Quotes,comparing ,making enquires,negotiations,mat coding,sap po,ob-
taining signatures on po,l/c and so forth.) b)supplier lead time(time from
Receipt of po to delivery of goods to production line.) c)good vendor
Relations for prompt supplies. d) avaliability of material e)govt. policies
f) Annual consumption and seasonal variations.
 WIP
Size of inventory will depend on a)production cycle time b)atpp line/cnc
/d/casting m/c utilisation c)make and buy decision(12pl bes) d)balancing
Of capacities of atpp lines.
FG
Size of inventory will depend on: a)accuracy of forecast b)production
In economic batches> sales c)available storage space

Generally speaking inventories must

Be sufficient to cater to demand till next supply arrives at atpp lines
Be sufficient to take care of probable delays in supplies
Be sufficient to take care of probable variations in demand.
To take care of above factors:
We need to determine level of inventory for placing a replenishment
Order and qty to be ordered.
Delay in supplies and extent in variations in demand which inventory
Should be able to withstand.
in v e n t o r y t u r n o v e r r a t e a n d it s r e la t i o

C O M P A CN YO M" AP" A NC YO "MB P" A N Y "

C O S T O F S A L E S1 (0I N0 0R0 s0 )01 0 0 0 0 0 01 0 0 0 0 0a 0
g r o s s p r o f it @ 1 2 .15 2%5 0 0 0 1 2 5 0 0 0 1 2 5 0 0 b0
m a t e r ia l c o n s u m e 3d 0 0 0 0 0 3 0 0 0 0 0 3 0 0 0 0 c0
i n v e n t o r ie s h e ld 1 m o n t h 6 m o n t h 1 2 m o nd t h
tu rn o v e r ra te 12 2 1 e
v a lu e o f in v e n t o r i e 2s 5f =0 ( 0c 0/ e ) 1 5 0 0 0 0 3 0 0 0 0 f0
I c c@ 18% 4 5 0 0 2 7 0 0 0 5 4 0 0 0g
n e t t p r o f it 1 2 0 5 0 0 9 8 0 0 0 7 1 0 0 0h
 Increase in Inventory turn over increases ROI

COMPANY X—SALES TURN OVER –1 CRORE(100 LAKHS)

PROFIT-10 LAKHS
CAPITAL EMPLOYED-50 LAKHS

Profit on sales= 10lakhs*100/100lakhs=10%

Capital employed=50lakhs
TURN OVER INVESTMENT = 100/50=2

% ON R O I= 10*2=20%