INVENTORY MANAGEMENT

6.1) The word inventory is a noun and comes from the Latin, inventorium, meaning list
of things found. The verb for inventory is inventories or inventoried. An inventory is a formal
and complete list of goods or articles that can be found in a particular place such as things for
sale in a shop or furniture or belongings in a house.

An inventory will include the raw materials, work-in-process goods and completely
finished goods that are considered to be the portion of a business's assets that are ready or will be
ready for sale. An inventory represents one of the most important assets that most businesses
possess because the turnover of inventory represents one of the primary sources of revenue
generation and subsequent profits for the company's shareholders/owners.

Owning a large amount of inventory for long periods of time is not usually good for a
business because of inventory storage, obsolescence and spoilage costs. However, possessing too
little inventory isn't good either because the business runs the risk of losing out on potential sales
and potential market share as well.

Inventory management forecasts and strategies, such as a just-in-time inventory system,

can help minimize inventory costs because goods are created or received as inventory only when
needed.

OBJECTIVES OF INVENTORY MANAGEMENT

.To maintain continuity in production

. To reduce the cost of carrying the inventories
. To gain economy in purchasing
To fulfil the need for a particular material at the proper time to
To reduce.risk of loss to the firm
To .rninimise administrative expenses - and to reduce clerical work
To make.effective use of capital
6.2) A B C ANALYSIS

A B C analysis is one of the selective inventory controls. It is popularly refer to have Always
Better Control. Actually it is a new method of classifying materials according to their money
value. I.e. price. This technique of classification of materials or inventories helps to have better
control. Every organization small or big has to store the several kinds and quality of materials
with it in the store. Under this technique the quantity of materials and the safety stock very with
their usage value. The annual usage value can be determined by multiplying annual requirement
of material by cost per unit. Less attention is paid to those items which are large in quantity
having low costs. Such items include paper clips, pins, tags, rubber bands etc. No record of issue
of these items is kept. More attention is paid to those items whose quantity is low but cost is
more. These are the high cost items. So special care has to be taken. There are medium sized
items also where little more attention than, the first one be paid as they also absorbs more costs.

The ABC analysis makes three main categories of items based on their usage value:

Costly and more valuable items are put under category' A. The few items under this
category say 10% of the total inventory absorbs 75% of the total investment needing close
control these items are purchased frequently in smaller quantity. This results in saving.

The medium usage value items are grouped under B category or class. These items absorb
15 percent of the investment and are 15 percent of the total inventory. These items need a
moderate control. They cannot be neglected or overlooked. The degree of control exercised is
less compared to A class items.

The items under third category or class C have low usage value constituting 75 percent of
the total inventory and absorbing 10 percent of the total investment. It can be overlooked or
low degree of control is required. They are purchased in bulk. The large quantity as safety
stock is kept. It has low usage value. The usage value is the use of product over a period of
usually a year.

While making ABC analysis it is to see that substitutes items are treated as single item,
main thrust must be on usage value and not the unit price, all the items used by the
enterprise should be considered for classification into A, Band C, usage value of the item
should be calculated, usage values of items be arranged in descending order. Graphically
ABC analysis can be shown.
 In this analysis the class A item are 'vital few' and C are 'trivial many' and B 'are medium
items. This analysis is very useful tool with the materials manager to exercise effective control
over management of inventories. The ABC analysis may be useful in maintaining stock records,
making of value analysis, designing stores layout, making reordering strategy, deciding priorities
of the various items, fixing safety stock, reducing costs etc.

6.3) ECONOMIC ORDER QUANTITY

The economic order quantity refers to the quantity ordered to be purchased at the lowest total
cost. This is the most economical purchase quantity which maintains a balance between two
opposing costs of procurement and carrying. The economic order quantity is also known as
economic lot size. So the quantity to be ordered at a time is determined by the cost of
procurement and the cost of carrying the inventories. The economic order quantity will be the
one where the cost of procurement and the cost of carrying are equal. At this point the total cost
is minimum. It can be graphically illustrated in the following diagram.

In the above diagram AP is the inventory procurement cost curve which indicates that per
unit cost of procurement is lower for more quantity purchased and vice versa. IC is the inventory
carrying cost which shows that per unit cost of carrying rises with the increase in the quantity
purchased. BT is the total per unit cost which is minimum at point N where inventory
procurement cost equals with the inventory carrying cost. Hence OQ is the economic order
quantity or economic lot size. If more than OQ is purchased it will raise the total cost which is
uneconomical.
The mathematical formula for determining the economic order quantity or EOQ is,
2
EOQ=

Where u = total quantity used or consumed,

C = annual carrying cost and
P = procurement cost associated with one order.
6.4) PURCHASING
Purchasing is an important and basic business function. It is procurement of materials for
manufacturing certain goods in an undertaking and to ensure continuous operation.

Alford Beatty defined purchasing as, "the procuring of materials, supplies, machines tools
and services required for the equipment, maintenance, and operation of a manufacturing plant."
The purchasing of materials of various kind is a regular activity of any undertaking therefore it
should be efficient and economic. The purchase officer must see that right material, at right time,
from right source, at right place, in right quantity, on right terms and conditions and of right
quality at right price be purchased. So purchasing is an art. Selection of vendor must be made
carefully.

OBJECTIVES OF PURCHASING
I. Purchasing should be done in such a way that manufacturing operation should not suffer.
Many industrial organizations face critical situation for lack of continuity of supply of
materials.
Continuous supply of materials helps in minimizing disruption in production.
2. The investment in purchasing the materials inventory should as far as possible be kept at
minimum for the safety and economy points of view.
3. Materials of a given quality and quantity should be purchased at reasonable price. Quantity
means the suitable materials required for the intended purpose.
4. Wastage, duplication and obsolescence can be avoided by efficient purchasing.
5. The right quality and quantity of required materials is purchased at the lowest cost. The cost
of transportation and other services can be kept at minimum through purchasing.
6. Purchase officer should keep in mind the competitive position of the company while making
purchases.
7. While making purchases the harmony among different departments should be maintained.

FUNCTIONS OF PURCHASE DEPARTMENT

The following functions are to be performed by the purchasing department.
I. Before purchasing of the material the purchase department should know the total
requirements
of various materials of various departments.
2. To locate the sources of supplies and select the right vendors after necessary enquiries,
checking
terms and conditions of purchases, preparing comparative statements after analysis of
quotations.
3. After verifying quality and quantity etc. orders are to be placed with the suppliers.
4. After receipt of materials minimum stock and inventory balance is to be maintained,
improvement in inventory turnover looked after. Excess stock should be avoided and
materials
are kept in standard containers and packages.
5. An important function of this department is to make market and materials and their cost
studies. Also to search for alternative suppliers.
 6. Upto date record regarding purchases is to be maintained.

6.5) Modern Techniques of Material Management

JUST IN TIME
Just-in- Time (JIT) was developed in Japan. It is a philosophy of meeting customer needs when
required and with minimum waste. In the JIT environment any non-value-added activity is
deemed to be waste. These activities are costly to the company but do not increase the value of
the product, that is, the amount the customer will be prepared to pay. There are many non-value-
added activities to be found in a manufacturing organization using more traditional production
methods, and these will include inspection of parts and holding stock of parts and finished goods.
Elimination of the waste produced by these activities can be achieved by eliminating defects and
by not overproducing, i.e. by making to order.
The aim of a JIT system is to ensure that goods are available at the time that they are
required, whether these be parts, subassemblies, or products. The consequence of this is
increased productivity and flexibility. Increased productivity means that product can be made in
the shortest possible time, with minimum resources. Flexibility means the company's ability to
react to changing circumstances, whether this be a change in customer order or a modification to
the product design.
The main difference between a JIT system and an MRP one is that JIT is a 'pull' system
whereas MRP is a 'push' one. In the JIT system parts are ordered and work is done when there is
both a requirement for work and the facility for doing it. In the ideal JIT system there should be
no queuing of material at work centers and no stock of parts. When there is a real customer order
work will begin at a work center but no work from a preceding work centre will be passed on
until it is 'pulled' by operators because they are free to work on that job immediately. The system
can lead to perceived idleness of operators and work canters.
However, carrying out work that is not required just to keep people and machines busy is seen as
a waste and this time can be used for other productive activities such as maintenance, problem
solving, etc. JIT manufacture is typified by a make- to-order, single-unit flow line production
system in which there is a steady rate of production. Essentially product is made in batches of
one.

6.5. The principles of JIT

The JIT aim is achieved by a disciplined approach which involves three principles applied to the
organization:
1. The elimination of waste
2. Total quality control
3. Total employee involvement.
Waste in a system can perpetuate errors and problems and so the principle is to eliminate the
waste, highlight the problems and then resolve them. An example is the holding of stock. If
stock is held and a fault is identified in a component or something is not made correctly then the
stock can be used to replace the faulty item with very little difficulty. The fact that the
component was faulty can be overlooked, the fact that an operator is not working to specification
can go unnoticed. Take away the stock and immediately the problem becomes visible and action
can be identified and taken to ensure that the problem does not recur.
Total quality control leads to the elimination of waste by eliminating defects. However,
within the JIT environment the aim is not to detect defects but to prevent them occurring in the
first place by tracing any problems back to their source. This involves the whole organization
from product development, ensuring that new products can be manufactured to specification,
through to purchasing who must ensure that bought-in parts achieve the specifications required
for manufacture. The emphasis within the manufacturing area is on statistical process control and
in-process testing rather than on inspection after processing. This ensures that processes can
achieve specification instead of finding out if they have achieved it. Quality control and total
quality management
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