INVENTORY MANAGEMENT

Varun arora
Jayati bhasin

Definitions
Inventory-A physical resource that a firm
holds in stock with the intent of selling it or
transforming it into a more valuable state.

Inventory System- A set of policies and
controls that monitors levels of inventory and
determines what levels should be maintained,
when stock should be replenished, and how
large orders should be
Inventory
Def.
Works-in-Process
Finished Goods
Maintenance, Repair and Operating (MRO)
Raw Materials
in order to meet an unexpected demand or
distribution in the future..

Inventory Positions in the
Supply Chain
Raw
Materials
Works
in
Process
Finished
Goods
Finished
Goods
in Field
Inventory Costs
Ordering costs
Carrying costs
Out-of-stock costs
Capacity Costs
Ordering Costs
Costs of placing an order with a vendor
of materials
Preparing a purchase order
Processing payments
Receiving and inspecting the material
Ordering from the plant
Machine set-up
Start up scrap getting a production run
started.
Carrying Costs
Costs connected directly with materials
Obsolescence
Deterioration
Financial Costs
Taxes
Insurance
Storage
Interest
Out-of-Stock Costs
Lost sales cost
Back-order cost

Capacity Costs
Overtime payments when capacity is
too small.
Lay-offs and idle time when capacity is
too large.
Objectives of Inventory
Control
Ensure a continuous supply raw
materials and supplies to facilitate
uninterrupted production
Maintain sufficient-finished goods for
smooth sales operation and efficient
customer service.

Inventories permit the procurement of
raw materials in economic lot size as
well as processing of these raw material
into finished goods is the most
economical quantity known as
economic lot size.

Reduce dependencies of one another
and enable, the organisation to schedule
its operations independently of another
Inventory management helps to reduce
material handling costs.
It helps to utilize people and equipment
reasonably.
It facilitates product display and service
to customers.

Process of Inventory
management and Control
Step 1- Determination of optimum
inventory levels and procedures of their
review and adjustment.

Step 2- Determination of the degree
of control that is required for the best
results.
Step 3- Planning and design of the
inventory control systems.

Step 4- Planning of the inventory control
organisation.


Inventory control techniques represent
the operational aspect of inventory
management.

Several techniques of inventory control
are in use & it depends on the
convenience of the firm to adopt any of
the techniques.
The techniques most commonly
used are the following:-
ABC analysis
EOQ
VED classification
HML classification
SDE
FSN
SOS

Always better control (ABC)

ABC approach is a means of categorizing
inventory items into three classes (A,B,C)
according to the potential amount to be
controlled.

ABC analysis often called the Selective
inventory technique.

Procedure of ABC analysis
1. List each item carried in inventory by
number.
2. Determine the annual value of usage
& rupee value of each item.
3. Multiply each items annual value of
usage by its rupee value.
4. Compute each item s percentage of
the total inventory.
5. Select the top 10% of all the items
which have the highest rupee %s &
classify them as A items.
6. Select the next 20% of all items with
the next highest rupee %s &
designate them B items.
7. The next 70 % of all items with the
lowest rupee %s are C items.
Economic Order Quantity (EOQ)

Economic order quantity is the level of
inventory order of which inventory cost
is minimum.
Optimum quantity is the order size at
which the total cost, comprising
ordering cost & plus carrying cost is
least.

Assumptions:-
Demand for the product is constant &
uniform throughout the period.
Lead time is constant.
Price per unit of the product is
constant.
Ordering costs are constant.
All demands of the product will be
satisfy.
Terms used in EOQ
Minimum level

Lead time

Reorder level

Maximum level
Formula:-

EOQ=2AB
S
Where A= annual consumption
B= Buying cost per order
S= storage & carrying cost per
unit
Example:-
A unit of material X costs Rs 100 &
yearly consumption is 25000 units.
Cost of placing an order is Rs. 10 &
storage cost is 10 % per annum. Find
EOQ?
Weaknesses of EOQ technique
Erratic usages
Faulty basic information
Costly calculations
EOQ ordering must be tempered with
judgment.
VED Classification
VED stands for vital, essential &
desirable.

VED analysis is used primarily to have
control of spare parts.

The spare parts can be divided into
three categories-vital, essential,
desirable.
In the first category such valuable parts
are included, the non availability of
which even for a short time can cause
stoppage of production for long time.

In the second category, those spare
parts are included,the absence of which
cant be tolerated for more than some
hours.
Those spare parts the absence of which
is bearable for a week & will not lead to
stoppage of production are known as
desirable parts.
HML classification
High medium low classification follow
the same procedure as in ABC
classification.

Only the difference is that in HML
classification , unit value is the criteria
& not annual consumption value.
SDE classification
SDE divide units based on availability i.e
Scares, Difficulty , Easy.
Scarce means items which are in
short supply.
Difficulty means items which are
difficult to procure or which are come
from distant places.
Easy refers to those items which are
easily to acquire.
FSN classification
FSN stands for Fast moving, Slow
moving, Not moving.

Here classification is based on pattern
of issues from stores & is useful in
controlling obselence.
SOS classification
SOS stands for Seasonal & Off Seasonal
classification.

It may be advantageous to buy
seasonal items at low prices & keep
inventory or buy at high price during off
season.
THANKYOU