INVENTORY

Inventory is the store of goods. An inventory is the stock of any idle item or
resource in a firm for future use. Inventory management is an important concern for
managers in all types of the business. Every business/ manufacturing organization
however, big or small has to maintain some inventory. Inventory helps the company
quickly responding to the customer demand, which is an important element of
competitive strategy. Inventories of finished goods of the correct items to meet
the market demand at the different point of the time within a reasonable response
time play an important role in a company�s ability to compete in the market.

Importance of the Inventory

� To provide and maintain good customer service.
� To enable the organization smooth flow of goods in the production process.
� To provide protection against the uncertainty of demand and supply.
� To perform various production operations economically and independently.
� To allow flexibility in schedule.
� To ensure a reasonable utilization of equipment and labor.
� To take advantage of economic purchase order

Inventory Costs:

Cost of inventory includes the price of raw material, transportation, insurance,

store charges etc. All these costs directly affect the cost and price of goods. To
maximize the profit of an organization, the management should try to minimize the
cost of inventory. The inventory cost can be classified in the following
categories:
1)Cost of Items: The price or cost paid by the supplier for the purchasing items of
inventory is called cost of items which directly affect the cost of production.
2)Ordering Cost: The cost for ordering goods or the cost to setup the production
system is called the ordering cost.
3) Holding Cost: The cost required for keeping stocks in the store is holding or
carrying cost. It includes the cost of rent, insurance, security, heat, light,
power, taxes, thefts, leakage, spoilage etc.
4) Shortage/Stock out Cost: Shortage or stock out refers the shortage of stock to
meet the demand of customers. Stock out cost includes the cost of back order, loss
of good will, loss of profit, expenses incurred for receiving the stock from
supplier and notifying the customers when goods have arrived.

Dependnt and Independent Demand

Independent demand �Independent demand is the demand for the product which is not
interrelated to each other. Independent demand inventory consist of items for which
demand is influenced by market conditions and is not related to the production
decisions for any other items held in stock. These are the finished goods and are
not used for further production system. Demand for a final product is influenced
only by market conditions, hence this demand should be forecasted by suitable
techniques. Finished goods, items that are ready to be sold � E.g. a computer
� Dependent demand: �It is the requirement for any of the parts or materials
necessary to make some other items. It includes all the items used internally to
produce a final product . Therefore instead of requiring forecasts , dependent
demand for an item will be derived or calculated from the independent demand i.e.
the demand of finished item. � E.g. parts that make up the computer

Inventory system:
An inventor system provides the organizational structure and operating policies for
maintaining and controlling goods to be stocked.this system is responsible for
ordering and receipt of goods i.e timing the order placemntand keeping track of
what has been ordered,how much to order and from whom.The system also must follow
up to answer such questions such questions as,has the supplier received the order?
has it been shipped?are the dates correct?and so on.

Types of Inventory System

There are two types of inventory system: These are

Continuous inventory system: This system first of all determines the fixed order
quantity(Q) and reorder stock level(R). In other words, the fixed order quantity
and reorder level should be predetermined. Therefore it is also called the fixed
order quantity/ perpetual inventory or economic order quantity(EOQ) or Q/R model.
Fixed order may be in units or amount but the reorder level should be in units.
This model is event triggered because fixed quantity of inventory is ordered when
it reaches at reorder point. The order has to placed at any point as soon as the
reorder point is achieved which depends upon the demand of the goods. The
continuous observation of stock is necessary to update and ensure the reorder
level. The assumptions of this model are
� Demand for the product(D) is constant throughout the period.
� Lead time(L) is constant.
� Price/cost(P) per unit is constant.
� Carrying/ holding cost(C) depends upon average inventory.
� Ordering or setup cost(S) is constant.
� There is no stock out or back order

Periodical inventory system:

In this system, inventory is counted in fixed interval of time(T) to determine the
quantity of inventory to place an order(Q). The order quantity(Q) depends upon the
actual quantity at the period and it may vary time to time. It is time triggered.
It requires high level of safety than Q/R model. It is also called fixed period
inventory system. Sometime stock out may occur during the inventory period

Economic order quantity(EOQ)

EOQ is the quantity of the goods to be ordered / produced which minimizes the
total annual cost of the inventory. Order quantity decisions affect the amount of
inventory to be maintained at various stocking points. Larger order quantity may
reduce the frequency of orders to be placed to procure inventory items and reduce
the total ordering cost. But this decision will increase the cycle stock
inventories and cost of carrying inventories. The determination of order
quantitative raises the questions of what order size provides the most economical
tradeoff between relevant inventory costs. i.e. ordering , carrying , and stock out
costs