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Supply chain management=Inventory Management by Ajay Singh Mertiya(rathore)

Supply chain management=Inventory Management by Ajay Singh Mertiya(rathore)

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Published by royalbykers
Inventory Management,Efficient system of inventory management will determine:,What are inventories?,The term ‘inventory’ includes:,Three motives for holding inventories,1. Economic Order Quantity (EOQ),2. ABC Analysis,3. VED Analysis,4. FNSD Analysis,Definition of ERP (Enterprise Resource Planning),value analysis and value enginerring,VALUE ENGINEERING JOB PLAN(process),Centralised Purchasing and decentralised purchasing,What are the various steps involved in purchases?,Stores Management
Inventory Management,Efficient system of inventory management will determine:,What are inventories?,The term ‘inventory’ includes:,Three motives for holding inventories,1. Economic Order Quantity (EOQ),2. ABC Analysis,3. VED Analysis,4. FNSD Analysis,Definition of ERP (Enterprise Resource Planning),value analysis and value enginerring,VALUE ENGINEERING JOB PLAN(process),Centralised Purchasing and decentralised purchasing,What are the various steps involved in purchases?,Stores Management

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Published by: royalbykers on Jan 01, 2010
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11/04/2010

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Inventory ManagementThe application of managerial function on the basis of management principles inthe field of inventory is termed as inventory management. Managerial functions areperformed with respect to inventory; it may be called inventory management.Efficient system of inventory management will determine:
What to purchase
How much to purchase
From where to purchase
Where to store, etc.What are inventories?
Inventories are assets:-Hold for sale in the ordinary course of business.In the process of production for such sale.In the form of materials or supplies to be consumed in the productionprocess or in rendering of servicesThe term ‘inventory’ includes:
Inventory of Raw Materials
Inventory of Stores and Spare Parts
Inventory of W.I.P.
Inventory of Finished GoodsThree motives for holding inventories
To facilitate smooth production and sales operation (transaction motive).
To guar time (precautionary motive) against the risk of unpredictablechanges in usage rate and delivery .
To take advantage of price fluctuation (speculative motive)Need for inventory management:Production management:large inventory of raw materials and of such a good qualityMarketing management:aims at satisfying ever increasing demands for improved customers’ serviceFinancial management:effort towards to keep investments in different types of inventory at a minimumpossible level .How are inventories valued under AS-2?
Inventories are valued at the lower cost and net realizable value. The costof inventories should comprise all costs of purchase, costs of conversion andother costs incurred in bringing the inventories to their present location1. Economic Order Quantity (EOQ)The prime objective of inventory management is to find out and maintain optimumlevel of investment in inventory to minimize the total costs associated with it.The EOQ is the optimum size of the order for a particular item of inventorycalculated at a point where the total inventory costs are at a minimum for thatparticular stock item. It is an optimum size of either a normal outside purchaseorder or an internal production order that minimizes total annual holding andordering costs of inventory. Stock-out costs are difficult to incorporate in thismodel, since they are based on qualitative and subjective judgment. The orderingcosts are the costs of placing a separate order multiplied by the number ofseparate orders placed in the period. The carrying costs can be calculated basedon the assumption that annual cost of carrying a particular stock item on average,half the stock is on hand all the time in addition to the safety or buffer stock.
 
The fewer the orders, the lower costs of ordering, but the greater the size of theorder the greater the costs of carrying. The safety or buffer stock has no bearingon the EOQ, only on the timing of orders. The economic order quantity (EOQ) is anoptimum quantity of materials to be ordered after consideration of the followingthree categories of costs:Ordering Costs: The costs of ordering inventory include the following:Preparation of purchase orderCosts of receiving goodsDocumentation processing costsTransport costsIntermittent costs of chasing orders, rejecting faulty goodsAdditional costs of frequent or small quantity ordersWhere goods are manufactured internally, the set-up and tooling costsassociated with each production run.Carrying Costs: The carrying costs of inventory include the following:Storage costs (rent, lighting, heating, refrigeration, air-conditioningetc.)Stores staffing, equipment maintenance and running costs.Handling costs.Audit, stock taking or perpetual inventory costs.Required rate of return on investment in current assets.Obsolescence and deterioration costs.Insurance and security costs.Costs of money tied up in inventory.Pilferage and damage costs.Stock-out Costs: The stock-out costs are associated with running out of stockwhich includes the following:Lost contribution through the lost sales caused by the stock-out.Loss of future sales because customers go elsewhere.Loss of customer goodwill.Cost of production stoppages caused by stock-outs of WIP or raw material.Labour frustration.Over stoppages.Extra costs associated with urgent replenishment purchases of smallquantities.Assumptions of EOQ:To be able to calculate a basic EOQ certain assumptions are necessary:That there is a known, constant stockholding cost.That there is a known, constant ordering cost.Those rates of demand are known and constant.That there is a known, constant price per unit, i.e., there are no pricediscounts.That replenishment is made instantaneously, i.e., the whole batch deliveredat once.The following formula is used in calculation of EOQ:EOQ = √2QOCSWhere,Q = Annual consumptionC = Cost per unitO = Cost of placing an orderS = Storage and other inventory carrying cost.EOQ WITH DISCOUNTSA particularly unrealistic assumption with the basic EOQ calculation is that theprice per item remains constant. Usually some form of discount can be obtained by
 
ordering increasing quantities. Such price discounts can be incorporated into theEOQ formula, but it becomes much more complicated. A similar approach is toconsider the costs associated with the normal EOQ and compare these costs withthe costs at each succeeding discount point and then ascertain the best quantityto order. Price discounts for quantity purchase have three financial effects, twoof which are beneficial and one adverse.Beneficial effects - Savings will come from:(a) Lower price per item, and(b) The large order quantity means that fewer orders need to be placed and hence,ordering costs are reduced.Adverse effects - Increased costs arise from the extra stockholding costs causedby the average stock level being higher due to the larger order quantity.2. ABC AnalysisIn this technique, the items of inventory are classified according to value ofusage. The higher value items have lower safety stocks, because the cost ofproduction is very high in respect of higher value items. The lower value itemscarry higher safety stocks. ABC analysis divides the total inventory list intothree classes A, B, and C using the rupee volume, as follows:Items in class 'A' constitute the most important class of inventories so faras the proportion in the total value of inventory. The 'A' items consists ofapproximately 15% of the total items, accounts for 80% of the total materialusage.Items in class B' constitute an intermediate position, which constituteapproximately 35%of the total items, accounts for approximately 15% of the totalmaterial consumption.Items in class 'C’ are quite negligible. It consists remaining 50% items,accounting only 5% of the monetary value of total material usage.The numbers are just indicative and actual break-up will vary from situation tosituation. The above categorization is represented in the table given below:Class of items%of items%of valueA1580B3515C505100100The ABC analysis of inventory class 'A' is made up of inventory items which areeither very expensive or used in massive quantities. Thus these items, though fewin number contribute a high proportion of the value of inventories. Class 'B'items are not so few in number, but also they are not too many either. Value wisealso, they are neither very expensive nor very cheap. Moreover, they are used inmoderate quantities. Class 'C contains a relatively large number of items. Butthey are either very inexpensive items or used in very small quantities so thatthey do not constitute more than a negligible fraction of the total value ofinventories. The control of inventory throughABC analysis is exercised as follows:'A' class items merit a tightly controlled inventory system with constantattention by the purchase and stores management. A larger effort per item on onlya few items w ill cost only moderately, but the effort can result in largesavings.'B' class items merit a formalized inventory system and periodic attentionby the purchase and stores management.For 'C class items still relaxed inventory procedures are used.The table given below shows how an organization treats the various classes of

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