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TERM PAPER PESIT MBA 2011-2013

3RD SEMISTER

OPERATIONS MANAGEMENT TOPIC: INVENTORY MANAGEMENT

SUB CODE: 10MBA33 NAME: SPOORTHI.K USN: 1PB11MBA33

ABSTRACT WITH KEY WORDS INTRODUCTION THERORATICAL BACKGROUND DISCUSSION CONCLUSION REFERENCE . 6. 2. 5.CONTENTS 1. 3. 4.

and in the minds of its customers. Inventory Analysis has. Many Organizations are now directing their efforts towards retaining existing customers to increase profits. techniques and technologies. intended to help organizations achieve Increased Profits and an Enhanced Customer Service Experience. Every new entrant comes with new ideas. The market then witnesses competition in every function of the organization. Economic Order Quantity. the market share of existing organizations has reduced. Tools & Techniques . This paper focuses on these techniques. attained limelight considering the investments involved in maintaining and managing Inventories. It has been observed that an increase in the profits is possible through reduction of losses due to Stock Mismanagement. companies are chalking out strategies to reduce any instances of Customer dissatisfaction. therefore. To achieve this objective.ABSTRACT WITH KEYWORDS Today’s business environment is a competitive market with every organization aligning its resources towards achieving a niche position in the marketplace. The highlighting of Stock Management has opened numerous avenues of profits realization with negligible investment. With the entry of more and more companies in the market offering similar products. ABC Analysis. Growth and survival depends on microscopic analysis of Operational Process and Marketing Effectiveness. Keywords: Inventory Management.

It also involves systems and processes that identify inventory requirements. cycle counting support. Balancing these competing requirements leads to optimal inventory levels.INTRODUCTION In any business or organization. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. future inventory price forecasting. The scope of inventory management concerns the fine lines between replenishment lead time. Inventory management is primarily about specifying the shape and percentage of stocked goods. and demand forecasting. returns and defective goods. report actual and projected inventory status and handle all functions related to the tracking and management of material. logistics and inventory form the backbone of the business delivery function. available physical space for inventory. lot tracking. etc. and related costs are kept in check. provide replenishment techniques. asset management. Inventory management requires constant and careful evaluation of external and internal factors and control through planning and review. Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering. control and review inventory and interface with production. Therefore these functions are extremely important to marketing managers as well as finance controllers. Every organization constantly strives to maintain optimum inventory to be able to meet its requirements and avoid over or under inventory that can impact the financial figures. inventory visibility. functions to balance the need for product availability against the need for minimizing stock holding and handling costs. carrying costs of inventory. with the primary objective of determining/controlling stock levels within the physical distribution system. shipping. procurement and finance departments. . Some key aspects like supply chain management. Management of the inventories. It is required at different locations within a facility or within many locations of a supply network to precede the regular and planned course of production and stock of materials. physical inventory. It also may include ABC analysis. Most of the organizations have a separate department or job function called inventory planners who continuously monitor. quality management. inventory valuation. Inventory is always dynamic. set targets. inventory forecasting. replenishment. Inventory management is a very important function that determines the health of the supply chain as well as the impacts the financial health of the balance sheet. handling. which is an on-going process as the business needs shift and react to the wider environment. all functions are interlinked and connected to each other and are often overlapping.

inventory forecasting. Further both raw materials and finished goods those that are in transit at various locations also form a part of inventory depending upon who owns the inventory at the particular juncture. Finished goods inventory is held by the organization at various stocking points or with dealers and stockiest until it reaches the market and end customers. Optimum inventory management is the goal of every inventory planner. 6. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. Meet variation in Production Demand Cater to Cyclical and Seasonal Demand Economies of Scale in Procurement Take advantage of Price Increase and Quantity Discounts Reduce Transit Cost and Transit Times Long Lead and High demand items need to be held in Inventory . It also holds inventory of semi-finished goods at various stages in the plant with various departments. physical inventory. replenishment. FG Stores. Inventory holding is resorted to by organizations as hedge against various external and internal factors. Besides Raw materials and finished goods. 4. inventory valuation. inventory visibility. quality management. Defective products. returns and defective goods and demand forecasting.Definition Inventory management is primarily about specifying the size and placement of stocked goods. as opportunity. Need for Inventory Management Inventory is a necessary evil that every organization would have to maintain for various purposes. carrying costs of inventory. as a need and for speculative purposes. as precaution. Over inventory or under inventory both cause financial impact and health of the business as well as effect business opportunities. Different Types of Inventory Inventory of materials occurs at various stages and departments of an organization. 2. A manufacturing organization holds inventory of raw materials and consumables required for production. Reasons why organizations maintain Raw Material Inventory 1. The scope of inventory management also concerns the fine lines between replenishment lead time. Finished goods inventory is held at plant. defective parts and scrap also forms a part of inventory as long as these items are inventoried in the books of the company and have economic value. available physical space for inventory. 5. asset management. organizations also hold inventories of spare parts to service the products. future inventory price forecasting. distribution centers etc. 3.

The purpose of maintaining inventory is to ensure proper supply of goods to customers. The factories like the availability of raw materials and government regulations etc.  Spares: The stocking policies of spares differ from industry to industry. to affect the stock of raw materials. The quantum of work in progress depends up on the time taken in the manufacturing process.  Finished goods: These are the goods which are ready for he consumers.  Work in Progress: The work in progress is that stage of stocks which are in between raw materials and finished good. work-in-process and stores etc. the more will be the amount of work in progress. .THEORATICAL BACKGROUND In accounting language. consumable stores do not create any supply problem and firm a small part of production cost. All decisions about spare are base o the financial cost of inventory on such spares and the costs that may arise due to their non-availability. There can be instances where these materials may account for much value than the raw materials. These materials do not directly enter production but they act as catalysts. Consumables may be classified according to their consumption and critically. rather they are kept in ready position for further use. maintenance spares etc are not discarded after use. The fuel oil may form a substantial part of cost. The quantity of raw materials required will be determined by the rate of consumption and the time required for replenishing the supplies.  Consumables: These are the materials which are needed to smoother the process of production. The stock of finished goods provides a buffer between production and market.  Raw Material: Raw material form a major input into the organization. it may include raw materials. Together the time taken in manufacturing. Inventory includes the following things. In manufacturing concern. inventory may mean the stock of finished goods only. The costly spare parts like engines. They are required to carry out production activities uninterruptedly. Some industries like transport will require more spares than the other concerns. Generally.

The second formula then creates the new start point for the next period and gives a figure to be subtracted from the sales price to determine some form of sales-margin figure. they are also fraught with the danger of their own assumptions. as well as customer demand. The methodology applied is based on historical cost of goods sold.High-level financial inventory has these two basic formulas. in fact. Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily a management tool. storage and management is associated with huge costs associated with each these functions. VMI and CMI have gained considerable attention due to the success of thirdparty vendors who offer added expertise and knowledge that organizations may not possess. attempt to minimize on-hand inventory and increase inventory turns. Manufacturing management is more interested in inventory turnover ratio or average days to sell inventory since it tells them something about relative inventory levels. The ratio may not be able to reflect the usability of future production demand. so many things that can vary hidden under this appearance of simplicity that a variety of 'adjusting' assumptions may be used. . Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI). Inventory management should be forward looking. These include:     Specific Identification Weighted Average Cost Moving-Average Cost FIFO and LIFO. including Just in Time (JIT) Inventory. Inventory turnover ratio (also known as inventory turns) = cost of goods sold / Average Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2) and its inverse Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio = 365 days a year / Inventory Turnover Ratio While these accounting measures of inventory are very useful because of their simplicity. Business models. Inventory procurement. which relate to the accounting period: Cost of Beginning Inventory at the start of the period + inventory purchases within the period + cost of production within the period = cost of goods available Cost of goods available − cost of ending inventory at the end of the period = cost of goods sold The benefit of these formulas is that the first absorbs all overheads of production and raw material costs into a value of inventory for reporting. There are.

which is based on Pareto principle. 5. 3. which minimize total inventory costs that are the total ordering and carrying costs.System and Wager-Within (WW) System . 5. Its origin dated back to the early 1900s. 5. Ordering/Setup Cost Carrying Cost Storage Costs Stock out Costs Transportation Costs Inventory categories 1. Raw Material Work-In-Progress Finished Goods Distribution Inventory Maintenance Repair & Operating Supplies Inventory Model: The Economic Order Quantity (EOQ) Model Undoubtedly. Other Models are: Q-System. Ordering Cost Carrying Cost Shortage or stock out Cost & Cost of Replenishment Replenishment Costs System Control Costs Determining other Costs 1. 4. 3. 4. 2. 2. 4. 3. the best-known and most fundamental inventory decision model is the Economic Order Quantity Model. 2. P. In most of the organizations inventory is categorized according to ABC Classification Method.Inventory costs are basically categorized into three headings: 1. ABC Classification Inventory in any organization can run in thousands of part numbers or classifications and millions of part numbers in quantity. Therefore inventory is required to be classified with some logic to be able to manage the same. The purpose of using the EOQ model in this research is to find out the particular quantity.

Order times and costs must be reduced to facilitate that move. The number of orders placed per year varies inversely with order quantity. and stock out costs. a firm that ignores these costs will make the wrong inventory decisions. unless materials can be transported instantaneously. The only relevant costs considered in this chapter are ordering costs. Organizations will never get to the point where inventories are unneeded.DISCUSSION 1. 2. an additional inventory (safety stock). Finance—Smaller-cycle inventories implies that there is less capital tied up in inventory. Reducing cycle inventories has an effect on practically every functional area. there will always be pipeline inventories. In addition. Operations reducing cycle inventories imply that order quantities are to be reduced. Determination of stock levels: . Are there some other relevant costs of holding inventory that we have not considered in the EOQ model? If there are. In the lean systems chapter. thereby reducing the pressure for short-term operating capital and allowing for alternative investment options. As a result. Although responses will vary. Cycle inventories will exist unless we universally get to the point where production of single units is feasible. holding costs. not eliminated. TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT A proper inventory control not only helps in solving the actual problem of liquidity but also increase profits and causes substantial reduction in the working capital of the concern. The important point is that firms must have the ―right amount‖ of inventory to meet their competitive priorities. In the economic order quantity (EOQ) model. we see order quantities (lot sizes) that are much smaller than the ―ideal‖ suggested by the EOQ model. and sometimes be quite insightful. The short answer is that higher inventories do not provide an advantage in any of the nine competitive priority categories. Under the assumptions of the EOQ. lean systems average inventory is also much lower. average inventory is one-half of the order quantity. Inventories provide many functions and should be managed. costs of placing replenishment orders tradeoff against the costs of holding inventory. the following list contains some standard answers: Marketing—Reducing cycle inventories implies that there is less inventory on hand. When we consider stock out costs. 3. It is impossible to eliminate uncertainties in the provision of products or services. is held to trade-off costs of poor customer service or costs for expediting shipments from unreliable suppliers. These wrong decisions will make the firm less competitive. Smaller order quantities enable a shift toward a lean system and enhance a uniform flow of materials through the production process. which could increase stock outs if the inventories are not managed properly.

Re – ordering level is fixed between minimum level and maximum level. A) Minimum stock level: It represents the quantity below its stock of item should not be allowed to fall. C) Maximum Level: It is the quantity of materials beyond which a firm should not exceed its stocks. Maximum Stock Level = Reordering Level + Re-order Quantity – (Minimum consumption x Minimum Re-order period). D) Danger Stock Level: It is fixed below minimum stock level.order period. If the quantity exceeds minimum level limit then it will be overstocking. The danger stock level indicates emergence of stock position and urgency of obtaining. Therate of consumption will be decided on the basis of past experience and production plans. Nature of material: The nature of material also affects the minimum level if a material `is required for such material. Lead-time: A purchase firm requires some time to process the order time is alsorequired by the supplying firm to execute the order. Rate of consumption: It is the average consumption of materials in the factory. Re-ordering level = Maximum consumption x Maximum Re.Carrying of too much and too little of inventory is determined to the firm. more space for storing the materials. Danger stock level = Average Rate of consumption x emergency delivery time E) Average stock level: This stock level indicates the average stock held by the concern. the firm will face frequent stock outs involving heavy ordering cost and if the inventory level is too high it will be unnecessary tie up of capital. fresh supply at any cost. Average stock level = Minimum stock level + ½ x Re-order quantity.) B) Re ordering level: When the quantity of materials reaches at a certain figures then fresh order is sent to get material again. If the inventory level is too little. Over stocking will mean blocking of more working capital. . The order is sent before the materials reach minimum stock level. The time taken in processing theorder and then executing it is known as lead time. Minimum stock level = Re ordering level -(Normal consumption x normal reorder period. Minimum stock level can be calculated with the help of following formula. more wastage of materials and more chances of losses from obsolescence. An efficient inventory management requires should maintain an optimum level of inventory where inventory costs are the minimum and at the same time there is no stock out which may result in loss or shortage of production.

though. should be segregated and accumulated in such a way that EOQ can be easily determined. However. A caution is in order. which are associated with inventory. Determining order quantities is often referred to as a trade-off problem. Secondly. the level that minimizes total cost of investment in inventory. that is. and enhances prior to. improves quality and performance. A basis for inventory planning and control was also provided in this study. a major goal of most firms today is to reduce inventory. Objective should be something like ―making money‖—so be sure that reducing inventory cost does. It is not simply a case of selecting an inventory model off the shelf and plugging in some numbers. emphasis should be normally placed on the economic order quantity model because it was seen to be in the best interest of manufacturing companies to maintain an optimal level of materials in store. in the analysis we also mentioned that there was a positive relationship between inventory and sales and between inventory and production cost. In the first place. This does not imply that inventory automatically determines production costs or sales and vice-versa. support this. Usually. The simple fact is that firms have very large investments in inventory. materials management unit should also pay attention to sales growth over the years and thus take into consideration. The formulas in this chapter try to minimize cost. It is thus recommended that the sales and marketing department of the company should pay closer attention to the growth pattern of inventory usage and incorporate it in sales forecasting technique. Inventory reduction requires knowledge of the operating system. Though looking through the inventory policy of the company. correctly reducing inventory Lowers cost. To achieve this successfully. it does show that inventory levels can be a useful indication of what level of sales to expect. it can be said to be dynamic to some extent but the analysis and findings have revealed the need to remedy some situations in the company's management of inventory. a model might not even be appropriate. Therefore. Lastly. and the cost to carry this inventory runs from 25 to 35 percent of the inventories worth annually. First. different costs. trading off holding costs for setup costs.CONCLUSION Inventory management has become highly developed to meet the rising challenges in most corporate entities and this is in response to the fact that inventory is an asset of distinct feature. The numbers might be full of errors or even based on erroneous data. in fact. the apparent relevance of sales and production cost in making decision with regards to inventory. .

REFERENCE Inventory Management Prof. Ravichandran. Evan L. USA Basics Of Inventory Management: J. David Viale Best Practices in Inventory Management: K. Evaluating Inventory Management Performance: Ronald H. Ballou. . Porteus. P W C DE WIT: Inventory Management as a Determinant for Improvement of Customer Service. Case Western Reserve University. Wikipedia. Debjyoti Paul Three essays on Inventory Management: Jiang Zhang. University of Pretoria Review of literature Inventory Management Delivering Profits through Stock Management.Aarti Deveshwar and Dhawal Modi. Lawson. Multi Stage Inventory Management with Expediting: David G. Weatherhead School Of Management. Stanford Graduate School of Business.