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Material IIBM Institute of Business Management

Ch-12 Inventory Management

Chapter
12
Inventory Management

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Material IIBM Institute of Business Management
Ch-12 Inventory Management

Introduction

Inventory management occupies the most significant position in the

structure of working capital.

Inventory management is an important area of working capital

management, which plays a crucial role in economic operation of the
firm.

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Material IIBM Institute of Business Management
Ch-12 Inventory Management

Meaning and Definition of Inventory

The term "Inventory" is originated from the French word "Inventaire" and

the Latin "Inventariom", which implies a list of things found.

The term inventory includes materials raw materials in process,

finished packaging, spares and others stocked in order to meet an

unexpected demand or distribution in the future.

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Material IIBM Institute of Business Management
Ch-12 Inventory Management

Components of Inventory

1. Raw Materials

2. Work in Process

3. Finished Products

4. Stores and Spares

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Material IIBM Institute of Business Management
Ch-12 Inventory Management

Inventory Management Motives

There are three general motives for holding inventories:

1. Transaction Motive

2. Precautionary Motive

3. Speculative Motive

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Material IIBM Institute of Business Management
Ch-12 Inventory Management

Inventory Management Objectives

The objectives of inventory management may be viewed in two ways

and they are operational and financial.

These two conflicting objectives of inventory management can also be

expressed in terms of costs and benefits associated with inventory.

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Material IIBM Institute of Business Management
Ch-12 Inventory Management

Need for Balanced Investment in Inventory

1. Dangers of Excessive (over) Investment in Inventory

2. Dangers of Inadequate Investment in Inventories

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Material IIBM Institute of Business Management
Ch-12 Inventory Management

Costs of Holding Inventories

Minimizing cost is one of the operating objectives of inventory management.

The costs (excluding merchandise cost), there are three costs involved in the
management of inventories.

1. Ordering Costs

2. Inventory Carrying Costs

3. Shortages Costs [Costs of stock out].

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Material IIBM Institute of Business Management
Ch-12 Inventory Management

Risks of Holding Inventory

1. Price Decline

2. Product Deterioration

3. Product Obsolescence

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Material IIBM Institute of Business Management
Ch-12 Inventory Management

Benefits of Holding Inventory

1. Inventory management ensures an adequate supply of materials and
stores, minimizes stock outs and shortages and avoids costly
interruptions in operations.

2. It keeps down investment in inventories; inventory carrying costs, and

obsolescence losses to the minimum.

3. It facilitates purchasing economies through the measurement of

requirements on the basis of recorded experience.

4. It eliminates duplication in ordering stocks by centralizing the source

from which purchase requisitions emanate.

5. It permits better utilisation of available stocks by facilitating inter-

department transfers within a firm.

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Material IIBM Institute of Business Management
Ch-12 Inventory Management

Tools and Techniques of Inventory Management /

Control
1. ABC Analysis
2. Economic Order Quantity (EOQ)
3. Order Point Problem
4. Two bin Technique
5. VED Classification
6. HML Classification
7. SDE Classification
8. FSN Classification
9. Order Cycling System
10. Just in Time (JIT)

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