INTRODUCTION

The purpose of inventory management is to ensure availability

of materials in sufficient quantity as and when required and also
to minimize investment in inventories. An inventory is a stock
or store of goods. Firms typically stock hundreds or even
thousands of items in inventory, ranging from small things such
as pencils, paper clips, screws, nuts, and bolts to large items
such as machines, trucks, construction equipment, and airplanes.
Naturally, many of the items a firm carries in inventory relate to
the kind of business it engages in. Thus, manufacturing firms
carry supplies of raw materials, purchased parts, partially
finished items, and finished goods, as well as spare parts for
machines, tools, and other supplies. Department stores carry
clothing, furniture, carpeting, stationery, cosmetics, gifts, cards,
and toys. Some also stock sporting goods, paints, and tools.
Hospitals stock drugs, surgical supplies, life-monitoring
equipment, sheets and pillow cases, and more. Supermarkets
stock fresh and canned foods, packaged and frozen foods,
household supplies, magazines, baked goods, dairy products,
produce, and other items.
MEANING AND NATURE OF
INVENTORY
 The dictionary meaning of inventory is ‘stock of goods, or
a list of goods’. The work ‘Inventory’ is understood
differently by various authors, in accounting language it
may mean stock of finished goods only. In a manufacturing
concerns, it may include raw materials, work in process and
stores, etc.

A.Raw Material: The quantity of raw materials required will

be determined by the rate of consumption and the time
required for replenishing the supplies. The factors like the
availability of raw materials and government regulations,
etc. too affect the stock of raw materials.

B.Work-in-Progress: The work-in-progress is that stage of

stocks which are in between raw materials and finished
goods. The greater the time taken in manufacturing, the
more will be the amount of work in progress.

C.Consumables: These materials do not directly enter

production but they act as catalyst, etc. There can be
instances where these materials may account for much
value than the raw materials. The fuel oil may form a
substantial part of cost.
D.Finished Goods: These are the goods which are ready for
the consumers. The stock of finished goods provides a
buffer between production and market. The purpose of
maintaining inventory is to ensure proper supply of goods
to consumers. In some concerns the production is
undertaken on order basis, in these concerns there will not
be a need for finished goods. The need for finished goods
inventory will be more when production is undertaken in
general without waiting for specific orders.

E. Spares: Spares also form a part of inventory. Some

industries like transport will require more spares than the
other concerns. The costly spare parts like engines,
maintenance spares etc. are not discarded after use, rather
they are kept in ready position for further use. All decision
about spares are based on the financial cost of inventory on
such spares and the costs that may arise due to their no
availability.
 PURPOSE / BENEFITS OF HOLDING
INVENTORIES

 Although holding inventories involves blocking of a firm’s

funds and the cost of storage and handling, every business
enterprise has to maintain a certain level of inventories to
facilitate uninterrupted production and smooth running of
business. There are three main purpose or motives of
holding
Inventories.

i. The Transaction Motive which facilitates continuous

production and timely execution of sales orders.

ii. The Precaution Motive which necessitates the holding of

inventories for meeting the unpredictable changes in
demand and supplies of materials.

iii. The Speculative Motive which induces to keep inventories

for taking advantage of price fluctuations, saving in
reordering cost and quantity discount, etc.
 RISK AND COSTS OF HOLDING
INVENTORIES

 The various costs and risks involved I holding inventories

are as below:

I. Capital Costs: Maintaining of inventories results in

blocking of the firm’s financial resources. The funds may
be arranged from own resources or from outsides. In the
former case, there is an opportunity cost of investment
while in the latter case, the firm has to pay interest to the
outsides.

II. Storage and Handling costs: The storage costs include the
rental of the go down, insurance charges, etc.

III. Risk of Price Decline: This may be due to increased

market supplies, competition or general depression in the
market.

IV. Risk of Obsolescence: The inventories may become

obsolete due to improved technology, changes in
requirements, change in customer’s tastes, etc.

V. Risk Deterioration in Quality: The quality of the

materials may also deteriorate while the inventories are
kept in store.
 INVENTORY MANAGEMENT
 It is necessary for every management to give proper
attention to inventory management. A proper planning of
purchasing, handling, storing and accounting should form a
part of inventory management. An efficient system of
inventory management will determine

(a) What to purchase

(b) How much to purchase
(c) From where to purchase
(d) Where to store, etc.

There are conflicting interests of different departmental heads

over the issue of inventory. The finance manager, production
manager. The purpose of inventory management is to keep the
stocks in such a way that neither there is over-stocking nor
under-stocking. The investments in inventory should be kept in
reasonable limits.
 OBJECTS OF INVENTORY
MANAGEMENT
 The main objectives of inventory management are
operational and financial. The operational objective mean
that the materials and spares should be available in
sufficient quantity so that work is not disrupted for want of
inventory. The financial objective means that investments
in inventories should not remain idle and minimum
working capital should be locked in it.

1. To ensure continuous supply of materials, spares and

finished goods so that production should not suffer at any
time and the customers demand should also be met.
2. To avoid both over-stocking and under-stocking of
inventory.
3. To maintain investments in inventories at the optimum
level as required by the operational and sales activities.
4. To keep material cost under control so that they contribute
in reducing cost of production and overall costs.
5. To eliminate duplication in ordering or replenishing stocks.
6. To minimize losses through deterioration, pilferage,
wastages and damages.
7. To ensure perpetual inventory control so that materials
shown in stock ledgers should be actually laying in the
stores.
8. To ensure right quality goods at reasonable prices
9. To facilitate furnishing of date for short-term and long-term
Planning and control of inventory.
 TOOLS AND TECHNIQUES OF
INVENTORY
MANAGEMENT AND CONTROL

The following are the important tools and technique

of inventory management and control.

1. Determination of stock levels.

2. Determination of safety stocks.
3. Selecting a proper system of ordering for inventory.
4. Determination of economic order quantity.
5. A.B.C. Analysis.
6. V.E.D. Analysis.
7. Inventory turnover ratios.
8. Aging schedule of inventories
9. Classification and codification of inventories
10. Preparation of inventory reports.
 Functions of Inventory
1. To meet anticipated customer demand.
2. To smooth production requirements.
3. To decouple operations.
4. To protect against stock outs.
5. To take advantage of order cycles.
6. To hedge against price increases.
7. To permit operations.
8. To take advantage of quantity discounts.

REQUIREMENTS FOR EFFECTIVE

INVENTORY MANAGEMENT

1. A system to keep track of the inventory on hand and on

order.
2. A reliable forecast of demand that includes an indication
Of possible forecast error.
3. Knowledge of lead times and lead time variability.
4. Reasonable estimates of inventory holding costs,
ordering costs, and shortage costs.
5. A classification system for inventory items.
 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.
The level of inventory of an item depends upon the
length of its lead time. Suppose, lead time is one
month. Any action taken now will have an effect only
one month later. So inventory for the current month
must be in hand. During lead time there will be no
delivery of materials and consuming departments will
have to be served from the inventories held.
 Lead time has two components: Lead time for
company(administrative lead time and the lead time
for the producer know as delivery lead time from the
placing of an order until the delivery of the ordered
material.
 Administrative lead time is in the hands of those who
are dealing with material procurement. Delivery lead-
time has to be negotiated at the time of preparing
purchase contract.
 It is often seen that bulk of the lead times is taken up
by administrative lead time. This is the time over
which company has control but still too much time is
taken up in receiving and inspecting of goods. Stock
control o purchase section of the organization should
maintain lead time schedules for all groups of
materials
 PREPETUAL INVENTOYR
SYSTEM

 The stock taking may either be done annually or

continuously. In the latter method, the stock taking
continues throughout the year. A schedule is
prepared for stock taking of various bins (store
rooms). One bin is selected at random and the goods
are checked as per shown in the bin card. Then
some other bin is selected at random and so on. The
institute of cost and management Accountants,
London define perpetual inventory system as “a
system of records maintained by the controlling
departments, which reflects the physical movements
of stocks and their current balance.”
 Procedure of Perpetual
Inventory System

1. The up to date position in stores ledger and bin

cards should be made to know the current balance
of stores.
2. The programmer is planned in such a way that in a
Year every item is checked 3-4 times.
3. The stores which have not been inspected as yet
should not be mixed with other stores because no
entries are made for such items.
4. There is a surprise checking every time.
5. The physical stock available in the store after
counting, weighing etc. is recorded on sheets provided
for this purpose.
 Advantages of Perpetual
Inventory System

1. Quick Calculation of Closing Stock

2. Helpful in Formulating Purchase Polices
3. Check on Stores Personnel
4. Helpful in Production Planning
5. Investments Under Check
6. Errors and Shortages Easily Detected
7. Increasing Efficiency of Organization

JUST IN TIME (JIT) INVENTORY

CONTROL SYSTEM

The term JIT refers to a management tool that helps to produce

only the needed quantities at the needed time. According to the
official terminology of C.I.M.A., JIT is “a technique for the
organization of workflows, to allow rapid, high quality, flexible
production whilst minimizing manufacturing work and stock
level.” There are broadly two aspects of JIT (i) just in time
production, and (ii) just in time purchasing.
 Objective of JIt

The ultimate goal of JIT is to reduce wastage and

enhance productivity. The important objectives of JIT
include:
1. Minimum / zero inventory and its associated costs.
2. Elimination of non-value added activities and all wastes.
3. Minimum batch / lot size.
4. Zero breakdowns and continuous flow of production.
5. Ensure timely delivery schedules both inside and outside the
firm.
6. Manufacturing the right product at right time.

Features of JIT
a. It emphasizes that firms following traditions inventory control
system overestimate ordering cost an underestimate carrying
costs associated with holding of inventories.
b. It advocates maintaining good relations with suppliers so as to
enable purchase of right quantity of material at right time.
c. It involves frequent production / order runs because of smaller
batch/lot sizes.
d. It requires reduction in set up time as well as processing time.
e. Purchase of produce in response to need rather than as per the
plans and forecasts.
 Advantages of JIT Inventory
Control System

i. The right quantities of materials are purchased or produced at

the right time.
ii. Investment in inventory is reduces.
iii. Wastes are eliminated.
iv. Carrying or holding cost of inventory is also reduced because
of reduced inventory.
v. Reduction in costs of quality such as inspection, costs of
delayed delivery, early delivery, processing documents etc.
resulting into overall reduction in cost.
 References

1. Scribd.com
2. Text book