ITM 4 (MATERIAL TECHNOLOGY MANAGEMENT AND QUALITY CONTROL) MODULE 2

MODULE 2
INVENTORY

Inventory is the stock of any resources (man, machine or material) of value kept for
future use. An inventory system is the set of operating policies controlling
the level of inventory. Inventory means the stock of the product of a company
and components thereof that makes up the product. It is the physical stock of
items a business or production organization kept in hand for the efficient
running of business or is production. Basically, it answers two questions: When do you
buy? How much do you buy? Inventories are either Items in stock or Usable but idle
resources.
In a manufacturing industry, inventory is typically classified into (1) raw materials,
(2) finished products, (3) components or parts, (4) work in progress, (5) maintenance, (6)
repair and operating (MRO) items. MRO items (e.g. lubricating oil, soap, spare parts etc.)
are consumed in the normal function operation. They are not part of the final product.

PURPOSE OF INVENTORY
a. Helps to maintain independence of processes.
There is uncertainty and variation in the supply of materials between the
production process and demand. Inventory takes care of this uncertainty and
isolates one stage of production distribution process from the next, permitting each
to operate more economically, resulting in maximum output form the system, on
the other hand, if there is no inventory between units, and if one unit shuts down,
the entire production line will come to a stop, resulting in minimum production
from the system.
b. Facilitates the sharing of a common facility.
In a production process, some facilities have a very high output rate and are
shared by multiple items sequentially. In this situation, there is need to have
inventory.
c. Helps to minimize total costs.
There is an economic order quantity at which total cost, consisting of
inventory carrying cost and ordering cost, is minimum. Below and above this
quantity, total cost is more
d. Takes care of time lag between demand and supply.
There is lead time between item demand and item made available. Also,
many a time the customer is not ready to wait for a long time. Inventory eliminates,
or drastically reduces the lead time.

INVENTORY CONTROL

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ITM 4 (MATERIAL TECHNOLOGY MANAGEMENT AND QUALITY CONTROL) MODULE 2

• Process of maintaining optimum needed quantity of inventories for the

smooth operation organization.
• Inventories constitute a significant part of the working capital
• Used in unit/physical control (purchase and production unit) and value
control (Accounts unit)
• When a firm feel storage of finance it should take more care in its
inventories rather than anything else

OBJECTIVES OF INVENTORY CONTROL

The basic managerial objectives are two folds
1. Avoid over/under investment in inventories
2. To provide right quantity and quality goods at right time at proper value

a. Operating Objectives
1. Availability of Materials – all type of material available at all time so
that production may not be held up for want of supply materials
2. Minimizing the Wastage – permit only uncontrollable wastage. Avoid
wastage by leakage theft, embezzlement, spoilage (rust, dust, dirt)
3. Promotion of Manufacturing Efficiency – when right type of raw
material is available at the right time.
4. Better Service to the Customers – maintain proper production flow to
produce sufficient finished goods to meet the demand of the customers.
5. Control of Production Level – to increase or decrease the production
as per the demand as well as to maintain proper buffer stock to meet any
eventually difficult times.
6. Optimal Level of Inventories – it is done in as per the operational
requirements, it also avoids the out of stock danger.

b. Financial Objectives
1. Economy in Purchasing – management makes every attempt to
purchase the raw materials in bulk quantity and to take advantage of
favorable market condition
2. Optimum Investment and Efficient Use of Capital – the finance
management should set up maximum and minimum levels of stocks to
avoid deficiency or surplus of stock position.

3. Reasonable Price – management should ensure supply of raw

materials at a reasonable low price without sacrificing the quality of it
thereby helping the cost of the production and quality of finished goods.
COSTS ASSOCIATED WITH INVENTORY

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ITM 4 (MATERIAL TECHNOLOGY MANAGEMENT AND QUALITY CONTROL) MODULE 2

a. Holding (or carrying) cost.

This includes the costs for storage facilities, handling, insurance, pilferage,
breakage, obsolescence, depreciation and taxes
b. Ordering Cost.
This includes managerial and clerical costs to prepare, place and follow up
the purchase order
c. Set up cost.
This is analogous to ordering cost. It is the cost of changing over of process
to produce the other product and includes idle cost of equipment or process, clerical
cost in preparing production order, labor cost in cleaning, changing tools/fixtures
etc.
d. Shortage and surplus cost.
This is the opportunity cost of lost sale, when production is less than the
demand. Surplus cost includes reduction in revenue due to marking down the price
of unsold products.

UNDER STOCKING OR SHORTAGES

It is the cost of not having an item when its needed, thus, affecting the sales of
the company
This may lead to 2 situations:
1. Back logging - work is delayed beyond its schedule and eats away the schedule
time of next order thereby delaying the next door
2. Cancellation of orders – when a buyer is not the position to wait.
Both the above results in:
1. Penalty cost – purchase order will have an in built provision for penalty eg. 20%
payment reduced for two (2) days delay, etc.
2. Emergency replenishment – in an urgent situation if you want good quality we
may have to spend extra amount eg. Emergency transportation cost, etc.
3. Loss of good will
SOVER STOCKING COST
This results wen stock is left on hand when the demand for the items has ended.
The left over inventory may be
Utilized at a later stage
Thrown out as a crap

Advantages of Inventory
1. Delivery in time – as inventory stored aids smooth production the
manufacturing company can earn reputation as a reliable supply

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ITM 4 (MATERIAL TECHNOLOGY MANAGEMENT AND QUALITY CONTROL) MODULE 2

- Our finished goods can be raw materials for buyers

- Reputation can get more customers
2. Possibility of discount on bulk purchase
3. Efficiently handle unforeseen circumstances –other transportation difficulties
do not hinder production
4. No idling of workers and machineries

Disadvantages of Inventory
1. Working Capital tied up – can’t utilize the amount for other purposes nor it
yield any interest
2. More space required – the more the inventories the more space needed and
space accounts for rent
3. Increase insurance changes – increased cost of handling and manufacturing
4. Increase overhead expenses – security personnel required to guard
inventory
5. Chances of damage – pilferage, replacement,
6. Increase chance of obsolesce

COMMON CAUSES FOR SURPLUS AND OBSOLETE MATERIALS

1. Over ordering
2. Faulty planning, purchasing and forecasting
3. Reduced production
4. Drastic reduction in wastage
5. Modification of processes
6. Faults in store keeping and record keeping

They need to be disposed

1. Keeping them is a costly affair
2. They need space
3. More security personnel
4. Separate store for maintaining them
5. More chances of pilferage, damage etc.

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ITM 4 (MATERIAL TECHNOLOGY MANAGEMENT AND QUALITY CONTROL) MODULE 2

ASSESSMENT 1
Republic of the Philippines
ILOILO SCIENCE AND TECHNOLOGY UNIVERSITY

Bachelor of Industrial Technology /Bachelor of Technical Vocational Teacher

Education Program

ELT 109
(Electro-Pneumatic Controller)

Name: _____ _ Course/Year/Sec: _______Date:

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