Inventory and Inventory Management

Inventory is the raw materials including assemblies, semi-

finished goods, parts etc. used to manufacture/produce goods
as well as the finished goods that are available for sale.
Spare Parts of the Equipment, Machinery etc. for Operation
and Maintenance purposes
It is classified as a current asset on a company's balance
sheet.
The three types of inventory include
• Raw Materials,
• Work-in-progress and
• Finished Goods.
Inventory Management is to minimize inventory costs .
Possessing a high amount of inventory for a long time is
usually not a good idea for a business because of the
additional costs
.
Possessing too little inventory also has its disadvantages and
brings the stock out cost
 INVENTORY
Protective cushion
An Idle resource
Economic Value
A necessary evil
Facilitates continuity in operation
Shows an impact on Profitability
Subjected to damage, deterioration,
obsolescence etc.
More the Merrier is not in favor of
the organisation
Why do we need Inventory ?
Salient Aspects
To bridge the gap between
• Demand and supply
• Variation in demand and supply
• Variation in rate of consumption and rate of
supply
• Uncertainty in supply and demand

Note: Theoretically, if supply of materials can be

so arranged to meet the day to day operational
needs, Inventory may not be required
FORM OF INVENTORY

Inventory can be in the form of

Raw Material ,
Work in Progress ,
In Transportation ,
Spares, consumables, components,
assemblies, Finished product etc.
Factors Influencing Inventory
depends upon the questions

How Much to order?

When to order?

and/or on the

Components requirement , Quantity in stock or

in order , Procurement time or lead time,
vendor relations, annual consumption, Govt.
Policy, work in progress, finished goods etc.
 Inventory Cost

• Inventory Carrying Cost(ICC)

Capital/Interest/Opportunity Cost
Inventory Management cost i.e
maintenance cost
Service Cost such as warehousing,
Insurance, Taxes etc.
• Inventory Risk Cost
Damage , deterioration etc.
• Ordering Cost
• Setup Cost
during manufacturing
• Stock Out Cost
 Economic Order Quantity (EOQ)
The Economic Order Quantity is the expected annual
requirements divided by the number of purchase orders per year,
which proves to be the most economical quantity based on the

Ordering cost ,
Inventory Carrying Cost and
Total Cost

The most economical order quantity is the point at which the

acquisition cost equals the inventory carrying cost, and this
represents the lowest total cost.

Generally speaking, it may be difficult to accurately calculate the

acquisition cost and the inventory carrying cost and therefore a
logical prudence should to be used for a decision on EOQ

Few Organisations generally stipulate their own EOQs depending

on the cost and the consumption pattern of inventory.
Graphical Repr
Observations (Objections) on EOQ

i) The EOQ as calculated is often an

inconvenient number
ii) EOQ applied without due regard to
possibility of falling demand can lead to
high value of obsolescent inventory.
iii) EOQ may not be applicable when the
requirements are irregular
 Economic Purchase Quantity
For operational convenience it would be worthwhile rounding off the
number of orders and therefore prefer Economic Purchase Quantity.
Reasons are as follows:

i) Ordering to the nearest trade quantity or packing quantity. In this

context, it must be mentioned that EOQ for Items with low annual
demand and high unit price will be small and the suppliers will find it
uneconomic to produce and hence not quote for this quantity.

ii) The order quantity could be altered to get benefits of transport

i.e. getting a truck-load or a wagon-load.

Iii) In the case of perishable goods the quantity has to be adjusted to

shelf life of the item.
contd.
iv) When prices fluctuate widely, a different approach
(dynamic-programming) has to be used to determine the
quantity to be purchased.
v) Seasonal supply factors force organisations to buy in large
quantities.
vi) In the case of imported items, companies are forced to buy
at least six months requirements at a time.
vii) Discounts offered for bulk purchases suggest larger-
quantities than EOQ.

Discount is the major factor to decide on the quantity to be

purchased which may be different from the EOQ to avail the
discount. This is also known as bulk discount or the quantity
discount
Decision depends upon environmental conditions, economic
climate, competition, Govt. policies, type of goods etc. keeping
in mind the transportation, packing & operational convenience
and discount offered.
 Inventory Replacement
• Fixed Order Quantity or Maximum Minimum approach
• Fixed Period Review approach
• Just in Time
• Vendor Management Inventory
• Two Bin (Exhaust Bin)
• Material Requirement Planning (MRP)
as guided by Master Production Schedule for availability of inventory
at optimum level to comply with service objectives, planning in
purchase, manufacturing and delivery activities

• Manufacturing Resource Planning (MRP II) includes MRP integrated

with financial planning and logistics

• Fixed Level Approach (for emergency spares)

Re order Level
Re Order Level Contd.
 Determination of Stock Levels
Following are generally the various stock levels
Deficiency Level(stock are inadequate)
ii)Exhaust Bin Level(stocks are exhausted)
iii)Buffer /Minimum stock Level( Any further demand
necessitates withdrawal from reserve stock)
iv)Danger warning Level(warning that
stock out level is inevitable)
v)Maximum stock level( Inventory beyond this
level should never increase)
vi)Re order level( point at which the order must be
placed to avoid any danger level or stock out
condition
Inventory Management
Broad functions are:
Inventory control covers planning, ordering, scheduling the release of
material used in the operations, maintenance, manufacturing etc.

Inventory accounting covers the book keeping aspect of inventory

management such as the entry, processing, transaction/ distribution
etc. maintenance of ledger, book balance. Unless strict accounting is
established and maintained, the concept of entire inventory
management will be of no value.

Inaccurate, incomplete or delayed reporting of inventory transaction

can’t be the basis for correct inventory planning or order release.
Therefore inventory should be appropriately reported and recorded.
 Objectives of Inventory Control
To maintain a stock of items/materials/goods etc. when needed
by production, operation, maintenance etc.
ii) To keep capital investment at the lowest/optimum level
possible.
Iii) To institute controls for the protection and distribution of
inventory.
iv) To maintain the inventory at the optimum level since the
excessive inventory as well as the inadequate inventory has a
cost e.g. investment cost in the case of excessive inventory and
stock out cost when inventory is out of stock.

Effective Inventory control needs the cooperation of all the

concerned department viz. planning, purchasing, O&M etc.
followed by proper co-ordination and periodical review.
Inventory Control System
One of the first steps in organizing an effective inventory control system is
to know something about each item stocked. An analysis and tabulation, of
all items,materials etc. is made and listed in a catalog. The catalog listing
and cumulative total of these tabulated items will indicate to the inventory
manager which items account for the bulk of capital investment.

In most organisation/manufacturing firms, it has been generally observed

that 10 percent of the items consumed account for about 75 percent of
the capital investment. At the other end we find that 75 percent of the
items account for only about 10 percent of invested capital, leaving about
15 percent of the items to account for about 15 percent of capital
investment.

While the figures may vary from industry to industry, company to

company, size of the company etc. the magnitude of the variation may not
be substantial. This type of inventory analysis is known by several names,
the most common being the ABC analysis system also known as “Always
Better Control”
ABC SYSTEM
 Selective Inventory Control
There are generally eight(8) different ways inventory can be classified.
Inventory can be controlled through one of these classification or a
combination of these.

Synonym Sometimes nick Based on the

named...
A-B-C Always Better Control consumption of
inventory
H-M-L High Medium, Low unit inventory value

V-E-D Vital, Essential and Criticality

Desirable
S-D-E Scarce, Difficult to obtain availability
Easy to obtain
G-O-L-F Government controlled, Source based
Ordinary, Local, Foreign
F-S-N Fast moving, Slow Issuance from stores
moving and Non-
moving
S-O-S Seasonal, Off-seasonal Seasonal Based

X-Y-Z No specififc name and is Based on value of Stored

known as XYZ inventory
 Inventory control thru
combination
XYZ and ABC can be used in conjunction as follows:

Class of X item Y Item Z Item

Items
A Item A critical Attempts Items are
analysis must must be within control
be done in an made to
effort to convert Z
reduce stocks category
B Item Consumption Further Can be
and stock action in reviewed
should be control may twice a year
reviewed not be
frequently necessary
C Item Steps should Controls Can be
be taken to should be reviewed
dispose of tightened annually
surplus stock
Inventory control thru combination
Similarly FSN and XYZ classifications can also be merged as given below:

Class of F item S Item N Item

Items
X Item Tight Reduction of Quick disposal of
Inventory stock to very items at optimum
Control low level price
Y Item Normal Low level of Should be disposed
Inventory stocks as early as possible
Control
Z Item Can reduce Low level of Can afford to
clerical labor stocks dispose even at
by increasing lower prices.
stock