INVENTORY MANAGEMENT

Seminar taken by Jagan. P Suresh Rao vijayKumar. A Vinoth. G

INTRODUCTION
MEANING OF INVENTORY:
The meaning of inventory is stock of goods. In

accounting language it may include:

1.RAW MATERIAL: They are required to carry out

production activities uninterruptedly.

2.WORK-IN-PROGRESS: It is a stage of stocks between raw material & finished goods.

3.CONSUMABLES: These are needed to smoothen the process of production.

4.FINISHED GOODS: These are the goods which

are ready for the consumers. 5.SPARES: Form a part of inventory.

Purpose/ Benefits of Holding Inventories

Transaction Motive to facilitate Continuous
Production. Speculative Motive for taking advantage of price fluctuations, saving in re-ordering costs and quantity discounts, etc. Precaution Motive for meeting unpredictable changes in demand and supplies of materials

Inventory Management
An efficient system of inventory management

will determine
What to purchase How much to purchase From where to purchase Where to store

Objectives Of Inventory Management

To ensure continuous supply of raw material, spares

and finished goods.

To avoid both overstocking and under stocking of

inventory.
To maintain investments in inventories at optimum

level.

OBJECTIVES OF INVENTORY MANAGEMENT(cntd)

To eliminate duplications in orders

To keep material cost under control.

To minimize losses through wastage and

damages .

Tools of Inventory Management

1. Stock Levels 2. Safety Stocks 3. Ordering System of Inventory 4. Determination of EOQ 5. ABC Analysis

6.VED Analysis

7.Inventory Turnover Ratio

8.Aging Schedule of Inventories

9.Classification & Codification on Inventories

10.Inventory Reports

Techniques of inventory management

Determination of stock level: Minimum level=rerdering level-(normal consumption * normal reordering period )

Maximum level=reordering level+ reordering quantity (minimum consumption * minimum reordering period )
Danger level=consumption * maximum reorder period

Determination safety stocks:

Safety stock is a buffer to meet some unanticipated

increase in usage. TWO COST ARE INVOLVED IN THE DETERMINATION 1.OPPORTUNITY COST OF STOCK OUTS 2.CARRYING COST
INVENTORY TURNOVER RATIO:

INVENTORY TURNOVER RATIO=COST OF GOOD

SOLD /AVERAGE INVENTRY AT COST

Economic Order Quantity:

Economic order quantity is the size of the lot to be

purchased which is economically viable. EOQ IS MADE UP OF TWO PARTS : 1.ORDERING COST: These cost are associated with the purchasing or ordering of materials.

2.CARRYING COST: These are the costs for holding the

inventories.

A-B-C
,B &C Group-A:

ANALYSIS:

The materials are divided into three categories viz, A

Under this almost 10% of the items contribute to

70% of value of consumption.

Group-B:
Under this category 20% of the items contribute

about 20% of value of consumption. Group-C:

Under this category about 70% of items of

material contribute only 10% of value of

consumption.

VED ANALYSIS:
The VED analysis is used generally for spare parts. The

requirements and urgency of spare parts is different from that of materials. Spare parts are classified as

vital(V),essential(E),desirable(D).

 VITAL SPARE PARTS: These are must for running the concern smoothly. ESSENTIAL SPARE PARTS: Necessary but stock kept at low figures. DESIRABLE SPARE PARTS: May be avoided at times.

INVENTORY REPORTS:
The management is kept informed with the

latest stock position of different items by

preparing periodical inventory reports. on the

basis of these reports management takes corrective action wherever necessary.

 ORDERING SYSTEMS OF INVENTORY:

There are three prevalent systems of ordering and a

concern can choose any one of these:

1.Fixed order quantity system generally known as economic

order quantity system.

2.Fixed period order system or periodic re-ordering system or periodic review systems.

3.Single order and scheduled part delivery system.

LEAD TIME:
Lead time is the period that elapses between the

recognition of a need and its fulfillment. There is a direct relationship between lead time and inventories.
Lead time has two components:

1.administrative lead time 2.delivery lead time

 INVENTORY TURNOVER RATIO

Inventory turnover ratio=cost of good sold*average

inventory at cost or

=net sales*(average inventory)

Valuation of Inventory
FIFO
LIFO Average Price Method

Base Stock
Standard Price & Market Price