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.