INVENTORY

MANAGEMEN
T
 INVENTORY :
• The assets that are:-
– Held for sale in the ordinary course of business; or
– In the process of production for such a sale; or
– In the form of materials or supplies to be
consumed in the production process; or
– In the rendering of services.
• Relevance : Trading concern & Manufacturing unit.
• Loose tools v/s spares.
 TYPES OF INVENTORY…

Work
in
process
Vendors Raw Work Finished Customers
Materials in goods
process
Work
in
process
 …….TYPES OF INVENTORY

•Raw Materials – Basic inputs that are converted into finished product through the manufacturing process.
•Work-in-progress – Semi-manufactured products that need some more work before they become finished
goods for sale.
•Finished Goods – Completely manufactured products ready for sale.
•Supplies – Office and plant cleaning materials that do not directly enter production but are necessary for
production process and do not involve significant investments.
REASONS TO HOLD
INVENTORY
 Meet variations in customer demand:
 Meet unexpected demand
Smooth seasonal demand
 Pricing related:
 Temporary price discounts Hedge against
price increases
Take advantage of quantity discounts

 Process & supply surprises

Internal – Shortage of parts of or our own processes
External – delays in incoming goods
OBJECTIVE OF INVENTORY
MANAGEMENT
 To maintain a optimum size of inventory for efficient and
smooth production and sales operations
 To maintain a minimum investment in inventories to maximize the
profitability
 Effort should be made to place an order at the right time with
right source to acquire the right quantity at the right price and
right quality
 AN EFFECTIVE INVENTORY MANAGEMENT
SHOULD
 Ensure a continuous supply of raw materials to facilitate
uninterrupted production
 Maintain sufficient stocks of raw materials in periods of short
supply and anticipate price changes
 Maintain sufficient finished goods inventory for smooth sales
operation, and efficient customer service
 Minimize the carrying cost and time
 Control investment in inventories and keep it at an optimum level
 AN OPTIMUM INVENTORY LEVEL INVOLVES
THREE TYPES OF COSTS
Ordering costs:- Carrying costs:-
 Quotation or tendering  Warehousing or storage
 Requisitioning  Handling
 Order placing  Clerical and staff
 Transportation  Insurance
 Receiving, inspecting and storing  Interest Deterioration,shrinkage,
Quality control Clerical  evaporation and
 and staff obsolescence

Taxes
Stock-out cost  Cost of capital
 Loss of sale
 Failure to meet delivery
commitments
DANGERS OF
OVER
INVESTMENT
 Unnecessary tie-up of firm’s fund and loss of profit –
involves opportunity cost
 Excessive carrying cost
 Risk of liquidity- difficult to convert into cash
 Physical deterioration of inventories while in storage due to
mishandling and improper storage facilities

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 DANGERS OF UNDER-
INVESTMENT
Production hold-ups – loss of labor hours
Failure to meet delivery commitments
Customers may shift to competitors which will amount to a
permanent loss to the firm
May affect the goodwill and image of the firm

12/10/09 11
 INVENTORY MGT
 The act or manner of managing,handling, directing or controlling the flow of
inventory.
 NEED :-
• Demand related:-
– Meet unexpected demands.
– Smooth seasonal or cyclical demands.
• Pricing related:-
– Hedge against price increases.
– Take advantage of quantity discounts.
• Process and supply surprises related:-
– Internal – upsets in parts of or our own processes.
– External – delays in incoming goods.
 OBJECTIVES: INVENTORY MGT

• To maintain an optimum size of inventory for efficient and smooth production and sales
operations.

• To maintain a minimum investment in inventories to maximize the profitability.

• Effort should be made to place an order at the right time with right source to acquire
the right quantity at the right price and right quality.
 INVENTORY SYSTEMS

Factor Periodic Inventory System Perpetual Inventory

System
BASIS OF ASCERTAINING INVENTORY BY ACTUAL PHYSICAL COUNT ON THE BASIS OF RECORDS

Calculationof inventory Directly by applying Closing Inventory=opening

the method of valuation inventory+purchases– costof goodssold
of
inventories

Calculationof costof goods Costof goodssold=opening Directlycalculatedbyapplying the

sold inventory+purchases– closing method of valuationof inventories
inventory

LostGoods Costof goodssoldincludes

costof lostgoods(if any) Costof closinginventory includes
costof lostgoods(if any)
 METHODS OF VALUATION

An inventory valuation allows a company to provide a monetary

value for items that make up its inventory.

Methods:-

• First In First Out (FIFO) Method.

• Last In First Out (LIFO) Method.

• Weighted Average Cost/price Method .

 FIFOMETHOD

• Based on the assumption that the goods that are received first are issued first.
• For purpose of assigning costs and not exactly for purpose of physical flow of
goods.
• Goods sold, thus, consist of earliest lots and are valued at the price paid for
such lots.
• The ending inventory consists of latest lots and is valued at the price paid for
such lots.
• Balance sheet shows ending inventory costed as per approx market price.
 LIFOMETHOD

• Based on assumption that goods that are received last are issued first.
• Assumption made for purposes of assigning costs and not for actual physical flow of
goods.
• Flows of goods and costs may not coincide.
• Goods sold, thus, consist of the latest lots and are valued at the price paid for such
lots.
• The ending inventory consists of the earliest lots and is valued as such.
• Balance sheet has an inventory costed at old prices.
 WEIGHTED AVERAGE PRICE METHOD
• Based on the assumption that each issue of goods consists of a due proportion of
the earlier lots and is valued at weighted average price.

• Weighted average price is calculated by dividing the total cost of goods in stock by the
total quantity of goods in stock.

• This weighted price is used for pricing the issues until a new lot is received
when a new weighted average price would be calculated.

• This method evens out the effect of widely varying prices of different lots that make
up stocks.
 CLASSIFICATION OF INVENTORY

• ABCClassification(consumption)(15/80+15/15+70/05)
• XYZClassification(valuestored)(Hi,Med,Low)
• HMLClassification(unit-valuestored) (Hi,Med,Low)
• VEDClassification(spareparts mainly) (Vital,Essential,Desirable)
• FSNClassification(consumption)(Fast,Slow, Non)
• SOSClassification(agriculture)(Seasonal,Non)
• SDFClassification(availability)(Scarce,Difficult,Easy)
• GOLFClassification (sourceof supply)Govt, Ordinarily
available, Local and Foreign)
ABC CLASSIFICATION

• In most of the cases 10 to 20 % of the inventory account

for 70 to 80% of the annual
activity.

A
•
15/80+ A typical manufacturing operation shows that top 15 % items in terms of annual
rupees usage represents the top 80 % usage

B
•
15/15+ Next 15% account for next 15% of annual rupees usage

C Final 70 % items account for 5%annual rupee Usage

70/05
•
XYZ CLASSIFICATION

On the basis of value of inventory stored

Whereas ABC was on the basis of value of consumption to value.
X – High Value
Y – Medium value
Z – Least value
Aimed to identify items which are extensively stocked.
HML CLASSIFICATION

 On the basis of unit value of item

Aimed to control the purchase of raw materials.
H – High, M- Medium, L - Low
 VED CLASSIFICATION

• Mainly for spare parts because their consumption

pattern is different from raw
materials.
• Raw materials on market demand
• Spare parts on performance of plant and
machinery.
• V – Vital, E – Essential, D – Desirable
ems has to be stocked more and D Items has to be less stocked
FSN CLASSIFICATION

 According to the consumption pattern

 To combat obsolete items
 F – Fast moving
 S – Slow moving
 N – Non Moving
SDF & GOLF CLASSIFICATION

 Based on source of procurement

 S – Scarce, D- Difficult, E- Easy.

 GOLF
 G – Government, O – Ordinary, L – Local, F
– Foreign.
SOS CLASSIFICATION

 Raw materials especially for agriculture units

 S – Seasonal
 OS – Off seasonal