Inventory management

UNIT 1

Meaning/Concept of inventory management

Inventory management refers to the process of storing, ordering, and selling of goods and
services. The discipline also involves the management of various supplies and processes.

One of the most critical aspects of inventory management is managing the flow of raw
materials from their procurement to finished products. The goal is to minimize overstocks
and improve efficiency so that projects can stay on time and within budget.

The proper inventory management technique for a particular industry can vary depending
on the size of the company and the number of products needed.

Objectives of Inventory Management

1. Material Availability

The primary goal of inventory management is to ensure that all kinds of materials are
accessible whenever the production department needs them, ensuring that production is
not stopped or slowed down due to a lack of resources.

2. Better Level of Customer Service

It is impossible to fulfil a received order if you do not have an accurate count of the items in
your possession. In order to meet requests, you must have accessible the appropriate
goods at the right time. Otherwise, you may end yourself in a state of confusion.
3. Keeping Wastage and Losses to a Minimum
Inventory management is very successful in mitigating losses. When there is no monitoring
system in place, it is very normal for an item to be squandered or misplaced.

4. Maintaining Sufficient Stock

Supplies should be easily available for all stages of production, from raw materials to
completed goods. You need to make sure you have enough of the necessary material on
hand to meet client demand without having to cut corners.

5. Cost-Effective Storage
It eliminates the possibility of keeping extra stock, since the needs are predetermined, thus
eliminating needless storage expenses.

6. Cost Value of Inventories Can Be Reduced

When purchasing products or stock on a regular basis, an organisation may negotiate
discounts and other incentives to lower the overall cost.

Process of Inventory Management

1. Receive and inspect products
The first step in the inventory management process includes receiving your order from the
supplier. Getting this part right is crucial for the following steps to function as efficiently as
possible. The first thing that should be done after the order arrives it to inspect the
products. It's important to check that the quantity product code and serial code are all
correct. You should also ensure handling conditions such as temperature are accurate for
perishables and that all products are in good condition.

2. Sort and stock products

After inspecting the products they must be properly stored in the warehouse and inputted
into your leave management system. At this stage it is a good idea to be strategic about
how products are stored. Warehouse slotting techniques such as organising products
based on SKU and product type can be beneficial. It is also important to minimize the
distance to bestselling products by storing them where they are most accessible.

3. Accept customer order

The next step in the inventory management process involves accepting customer orders.
The orders will typically go through a point of sale system (POS) which processes the orders
and accepts payments. The POS system will either have a built-in inventory management
feature or be integrated with an inventory management software that will enable the order
details to be viewed by the warehouse staff.

4. Fulfill package and ship order

Once a customer has placed an order the next step is to accurately and expediently fulfill
package and ship the order. If the second step in the process was optimized searching for
and selecting the products in the warehouse should be relatively straightforward. Some
important aspects to consider when packaging the product are the customer
experience durability and sustainability. When shipping the product be sure to send the
customer a confirmation email with tracking information.

5. Reorder new stock

When reordering new stock it is crucial to ensure the timing of new orders and amount of
goods are correct. By leveraging the reorder point formula you can minimize the risk of
both stock outs and dead stock - two problems that negatively impact your bottom line.
Certain inventory management systems automate the process of reordering which saves
time and prevents any mistakes from human error.
 Importance of Inventory Management
Increases market competitiveness

Builds company or brand reputation

Generates customer loyalty

Improves customer service

Lowers customer costs

Improves productivity

Optimizes product fulfilment

Raises product awareness

Enhances demand forecasting

Organizes multiple inventories

Principals of Inventory Management

1. Demand Forecasting
Establishing appropriate max-min management at the unique inventory line level, based on
lead times and safety stock level help ensure that you have what you needs when you need
it. This also avoids costly overstocks.

Idle inventory increases incremental costs due to handling and lost storage space for fast-
movers.

2. Warehouse Flow
The old concept of warehouses being dirty and unorganized is out dated and costly. Lean
manufacturing concepts, including 5S have found a place in warehousing. Sorting, setting
order, systemic cleaning, standardizing, and sustaining the discipline ensure that no dollars
are lost to poor processes.

The principles of inventory management are not any different from other industrial
processes. Disorganization costs money. Each process, from housekeeping to inventory
transactions needs a formal, standardized process to ensure consistently outstanding
results.

3. Inventory Turns/Stock Rotation

In certain industries, such as pharmaceuticals, foodstuffs and even in chemical
warehousing, managing inventory down to lot numbers can be critical to minimizing
business costs. Inventory turns is one of the key metrics used in evaluating how effective
your execution is of the principles of inventory management.

Defining the success level for stock rotation is critical to analyzing your demand forecasting
and warehouse flow.

4. Cycle Counting
One of the key methods of maintaining accurate inventory is cycle counting. This helps
measures the success of your existing processes and maintain accountability of potential
error sources. There are financial implications to cycle counting. Some industries require
periodic 100% counts. These are done through perpetual inventory count maintenance or
though full-building counts.

5. Process Auditing
Proactive error source identification starts with process audits. One of the cornerstone
principles of inventory management is to audit early and often. Process audits should occur
at each transactional step, from receiving to shipping and all inventory transactions in
between.

Inventory Control

Inventory control is concerned with managing stock that is in storage. Whereas inventory
management is a broader term that encompasses the entire process of managing stock -
from ordering to shipping.

Inventory control is about storing stock effectively and minimising warehouse costs. It aims
to achieve balanced stock levels that prevent deadstock while also avoiding stockouts.
When done correctly this saves money and improves cash flow without negatively
impacting customers.

Perpetual Inventory Management

A perpetual inventory system is a program that continuously estimates your inventory
based on your electronic records, not a physical inventory. This system starts with the
baseline from a physical count and updates based on purchases made in and shipments
made out.

Perpetual inventory is a continuous accounting practice that records inventory changes in

real-time, without the need for physical inventory, so the book inventory accurately shows
the real stock. Warehouses register perpetual inventory using input devices such as point
of sale (POS) systems and scanners.

Inventory Cost
Inventory costs encompass all the expenses associated with ordering, holding, and
managing the inventory or stock levels of a product-based business. Total inventory costs
are frequently broken down into three distinct categories: ordering costs, carrying costs,
and stockout costs.

3 Types of Inventory Cost

Ordering costs

Every time your company purchases from a supplier, you’ll have to consider the relevant
ordering costs; even if the order in question is fairly small, there will always be ordering
costs involved. To estimate how much an order is going to cost, you’ll need to track
purchase requisition, purchase orders and invoicing, labor costs, as well as fees for
transportation and processing.

Carrying costs

Inventory carrying costs (also referred to as ‘inventory holding costs’) are those fees a
business pays for keeping its inventory items in stock. Carrying costs can be quite varied, in
fact, and include anything from taxes and insurance, to employee costs and the price for
replacing perishable goods.

Stockout costs

Stockout costs represent any lost (potential) sales from not having enough of a product —
that is, the lost income and expense due to an inventory shortage. For instance, this can
happen if a customer orders the last unit of a SKU you have in stock, but that item turns
out to be defective. Since you can’t ship a defective product (and you don’t have available
inventory to fulfill the order), it will be counted as a loss. Alternatively, stockout costs can
occur if a customer sees the product they want is out of stock on your website, so they end
up purchasing it elsewhere.

Role of Inventory Management

The main purpose of inventory management is to help businesses easily and efficiently manage
the ordering, stocking, storing, and using of inventory. By effectively managing your inventory,
you’ll always know what items are in stock, how many of them there are, and where they are
located.
Plus, practicing strong inventory management allows you to understand how you use your
inventory–and how demand changes for it–over time. You can zero in on exactly what you need,
what’s not so important, and what’s just a waste of money. That’s using inventory management to
practice inventory control. By the way, inventory control is the balancing act of always having
enough stock to meet demand, while spending as little as possible on ordering and carrying
inventory.

Methods of Inventory Management

Depending on the type of business or product being analyzed, a company will use
various inventory management methods. Some of these management methods include
just-in-time (JIT) manufacturing, materials requirement planning (MRP), economic order
quantity (EOQ), and days sales of inventory (DSI).
1. Just-in-Time Management (JIT)

This manufacturing model originated in Japan in the 1960s and 1970s. Toyota Motor (TM)
contributed the most to its development. The method allows companies to save significant
amounts of money and reduce waste by keeping only the inventory they need to produce
and sell products. This approach reduces storage and insurance costs, as well as the cost
of liquidating or discarding excess inventory.

JIT inventory management can be risky. If demand unexpectedly spikes, the manufacturer
may not be able to source the inventory it needs to meet that demand, damaging its
reputation with customers and driving business toward competitors

2. Materials Requirement Planning (MRP)

This inventory management method is sales-forecast dependent, meaning that

manufacturers must have accurate sales records to enable accurate planning of inventory
needs and to communicate those needs with materials suppliers in a timely manner.

3. Economic Order Quantity (EOQ)

This model is used in inventory management by calculating the number of units a company
should add to its inventory with each batch order to reduce the total costs of its inventory
while assuming constant consumer demand. The costs of inventory in the model
include holding and setup costs.

The EOQ model seeks to ensure that the right amount of inventory is ordered per batch so
a company does not have to make orders too frequently and there is not an excess of
inventory sitting on hand.

4. Days Sales of Inventory (DSI)

This financial ratio indicates the average time in days that a company takes to turn its
inventory, including goods that are a work in progress, into sales. DSI is also known as the
average age of inventory, days inventory outstanding (DIO), days in inventory (DII), days
sales in inventory or days inventory and is interpreted in multiple ways.
 Benefits of Inventory Management

The main benefit of inventory management is resource efficiency. The goal of inventory
control is to prevent the accumulation of dead stocks that are not being used. Doing so can
help prevent the company from wasting its resources and space.

Inventory management is also known to help:

 Order and time supply shipments correctly

 Prevent theft or loss of product
 Manage seasonal items throughout the year
 Deal with sudden demand or market changes
 Ensure maximum resource efficiency through cycle counting
 Improve sales strategies using real-life data

UNIT 2

CONCEPT OF INVENTORY

Most common definition

Inventory refers to all the items, goods, merchandise, and materials held by a business for

selling in the market to earn a profit.

Manufacturing industry
In a manufacturing business, inventory is not only the final product manufactured and

ready to sell, but also the raw materials used in production and the semi-finished goods in

the warehouse or on the factory floor.

Service industry
In a service industry, since there is no exchange of physical stock, the inventory is mostly

intangible in nature. So the service industry inventory mostly includes the steps involved

before completing a sale.

Meaning of inventory: Breaking down the definitions

If we break down all the definitions, we can see that there are certain similarities:

Inventory is:

i) An asset, tangible or intangible,

ii) An asset that can be realized for revenue generation or has a value for exchange, or

iii) An asset which is in process but is meant for sale in the market

What are the different types of inventory?

Now, let’s focus on some of the types. To make it easier to understand, let’s continue with

the example of a cookie manufacturer :

Raw materials
Raw materials consist of all the items that are processed to make the final product. In

a cookie manufacturing company, the raw materials are items like milk, sugar, and flour

that are used in the different stages of production.

Work in progress
When raw materials have been sent for processing but have not yet been approved as

finished goods, this stage is known as work in progress.

Finished goods
Finished goods are the final items that are ready for sale in the market. These goods have

passed through all stages of production and quality checking.

MRO inventory
MRO stands for Maintenance Repairing and Operating supplies, this type of inventory is

mostly relevant for manufacturing industries. MRO items are not accounted as inventory

items in books of accounts, however, they play a crucial role in the day-to-day working of an

organization. MRO supplies are used for maintenance, repair, and upkeep of the machines,

tools, and other equipment used in the production process. Some examples of MRO items

are lubricants, coolants, uniforms and gloves, nuts, bolts, and screws.

Buffer inventory
In a manufacturing or a trading business, fluctuations

and market movements cannot always be predicted. Such changes can have a negative

impact on the sales or production process, which can lead to out-of-stock situations. Buffer

inventory attempts to compensate for this by following the adage that prevention is better

than cure. Buffer inventory (also known as safety stock), consists of the items stored in the

warehouse of a store or a factory to cushion the impact of unexpected shocks. A sudden

spike in demand, delay in transport, or labor strike can be managed if sufficient buffer

inventory is maintained.
Cycle inventory
Cycle inventory is a term used to describe the items that are ordered in lot sizes and on a

regular basis. Cycle inventories are usually materials which are directly used in the

production or they are part of some regular process.

Transit inventory
Transit inventory refers to items that are being moved from one location to another, such

as raw materials being transported to the factory by railway or finished goods being

transported to the store by truck.

INVENTORY VALUATION

Inventory valuation is an accounting practice that is followed by companies to find out the
value of unsold inventory stock at the time they are preparing their financial statements.
Inventory stock is an asset for an organization, and to record it in the balance sheet, it
needs to have a financial value. This value can help you determine your inventory turnover
ratio, which in turn will help you to plan your purchasing decisions.

What are the different inventory valuation methods?

There are three methods for inventory valuation: FIFO (First In, First Out), LIFO (Last In, First

Out), and WAC (Weighted Average Cost).

In FIFO, you assume that the first items purchased are the first to leave the warehouse. In

other words, whenever you make a sale, under FIFO, the items will be subtracted from the

first list of products which entered your store or warehouse.

In LIFO, you make the opposite assumption: that the last items that enter your store are

the first ones to leave.

The WAC method uses the item’s average cost throughout the year. The average cost per

unit is calculated by dividing the total cost by the total number of units purchased during

the year.
 NEED FOR HOLDING INVENTORY

1. Meet variation in Production Demand

Production plan changes in response to the sales, estimates, orders and stocking
patterns. Accordingly the demand for raw material supply for production varies with
the product plan in terms of specific SKU as well as batch quantities.
Holding inventories at a nearby warehouse helps issue the required quantity and
item to production just in time.

2. Cater to Cyclical and Seasonal Demand

Market demand and supplies are seasonal depending upon various factors like
seasons; festivals etc and past sales data help companies to anticipate a huge surge
of demand in the market well in advance. Accordingly they stock up raw materials
and hold inventories to be able to increase production and rush supplies to the
market to meet the increased demand.

3. Economies of Scale in Procurement

Buying raw materials in larger lot and holding inventory is found to be cheaper for the
company than buying frequent small lots. In such cases one buys in bulk and holds
inventories at the plant warehouse.

4. Take advantage of Price Increase and Quantity Discounts

If there is a price increase expected few months down the line due to changes in
demand and supply in the national or international market, impact of taxes and
budgets etc, the company’s tend to buy raw materials in advance and hold stocks as
a hedge against increased costs.
Companies resort to buying in bulk and holding raw material inventories to take
advantage of the quantity discounts offered by the supplier. In such cases the
savings on account of the discount enjoyed would be substantially higher that of
inventory carrying cost.

5. Reduce Transit Cost and Transit Times

In case of raw materials being imported from a foreign country or from a far away
vendor within the country, one can save a lot in terms of transportation cost buy
buying in bulk and transporting as a container load or a full truck load. Part
shipments can be costlier.
 In terms of transit time too, transit time for full container shipment or a full truck load
is direct and faster unlike part shipment load where the freight forwarder waits for
other loads to fill the container which can take several weeks.
There could be a lot of factors resulting in shipping delays and transportation too,
which can hamper the supply chain forcing companies to hold safety stock of raw
material inventories.

6. Long Lead and High demand items need to be held in Inventory

Often raw material supplies from vendors have long lead running into several
months. Coupled with this if the particular item is in high demand and short supply
one can expect disruption of supplies. In such cases it is safer to hold inventories
and have control.

What Is Inventory Control and Planning?

Inventory control and planning is any organization's process to choose the best quantity
and timing to manage its inventory. This process aims to align inventory plans with the
company's ability to produce goods and earn revenue. The process of inventory planning
mainly has an impact on the business and its profit.

The Importance of Inventory Control and Planning

Almost all businesses maintain inventory since it is one of their most valuable assets. The
following are other factors for why managing and planning your inventory is essential:

1. Increased Sales
Sales can be increased by organizing and managing inventory levels. The selling of
inventory is the only method to make a profit. Therefore, managing and organizing your
inventory is essential to be ready for that scenario.
2. Improved Cash Flow
Inventory planning and control inventories are two of the best ways to improve cash flow
and profitability. The cash flow statement will show a decrease in inventory stock as a
negative amount, meaning a financial outlay or that a business bought more goods than it
could sell.
3. Storage Optimization
Using well-designed storage facilities and continuously improving their layout and design
can have a positive impact on the revenues, which is one of the most important
advantages of inventory control. Planning for products that are in high demand is also
essential for cutting down on travel time.
4. Boost Client Satisfaction
You can raise the reliability of the inventory control process by creating more creative rules
and procedures, which will shorten lead times, save money, boost customer happiness,
and keep customers coming back.

The Goals of Inventory Control and Planning

By managing and organizing your inventory, you can also achieve additional objectives,
such as:

1. Forecasting
Inventory forecasting is a technique that employs a marketing strategy to predict future
sales and, thus, future inventory needs. It is sometimes referred to as inventory estimation.

2. Cost Control
Inventory expenses, also called holding and storage expenditures, can comprise 20-30% of
your overall business expenses. Reducing all of these expenses is the goal of inventory
planning.

3. Optimal Utilization of Space

By improving the layout and design over time, well-designed storage facilities can favor the
bottom line. How inventory is used in manufacturing, production, or fulfillment will influence
the arrangement and overall space utilization.

Benefits of Inventory Control and Planning

Inventory management includes inventory planning and controlling stock. As inventory is
often a business's second-largest expense, business owners monitor it closely. Check out
the list of advantages of inventory management and planning that follows:
1. Free Up Cash Flow
Small firms don't typically have enough funds on hand to buy a lot of goods. The amount of
money spent on inventory is restricted by regulations and processes that business owners
set. Inventory planning and control can help businesses manage their cash flow.

2. Increased Profits
Planning and managing inventory can help business owners make more money. Higher
business profits are frequently obtained by buying the proper kind of inventory to satisfy
consumer demand. Limiting the business's old-fashioned inventory is another benefit of
inventory planning and control techniques.

3. Limits Misuse
Policies and procedures for inventory stop employees from misusing it. Employees may
take inventory goods for their use in informal work settings. The company suffers a
financial loss as a result of stolen inventory.

Challenges of Inventory Control and Planning

Managing so many different procedures and variables at once leads to some difficulties.
Even minor hiccups might lead to major problems. Common challenges of inventory control
are:

1. Varying data
Planning an inventory effectively means the use of numerous sources of data. Additionally,
it is a complex process to combine all of this data. Retail reports and historical data, which
may be scattered across various legacy systems, will need to be gathered by inventory
planners.

2. Guesswork
Predictions are more complex to make. Even with analytics technologies, guessing will
always exist if the proper KPIs (key performance indicators) aren't in place to direct your
inventory strategy. Additionally, predicting may become more difficult due to constantly
shifting market conditions.

3. Multiple Locations
It can be difficult to distribute goods that are kept in different places. Knowing where to
distribute your inventory can be tough without a good inventory tracking system.
 EFFECTS OF EXCESS INVENTORY ON BUSINESS

1. Excess inventory can create storage issues

If you’re holding onto an inventory of products, you’ll soon discover that excess stock takes
up valuable storage space. Be wary of how much space it takes up — and find a solution for
dealing with it quickly.

Solution: Refresh your marketing efforts. Move slow-moving or old inventory to a different
area in your shop. If the product is listed online, take new photos and write a blog about the
benefits and uses of the product.

2. Excess inventory can cost you more

If you’re not able to move your excess inventory, it may accumulate and become a storage
issue — and storage space isn’t free. Even worse, you must also consider the costs to keep
up with your inventory:

 Storage costs such as rent, maintenance, utilities and insurance

 Employee wages to manage, audit and maintain the extra goods
 Depreciation costs as your inventory’s value depreciates over time

Solution: The goal here is to reduce storage space. To do that, move some of your excess
products to your store floor. Create new displays, identify cross-merchandising
opportunities or consider lowering the item price.

3. Excess inventory can hurt the environment

Too much product impacts more than your bottom line. It can hurt the environment, too.
Think about this: The inventory has a carbon footprint because it took energy and water to
produce. When demand is over-estimated, carbon emissions go up and manufacturers
waste resources — not to mention the excess that may end up in a landfill.

Solution: Carefully plan and forecast your inventory and product needs. Review past sales
reports and look for seasonal trends and other patterns before ordering new items.

4. Excess inventory can tie up cash flow

Cash flow is the lifeblood of any business. It is important to keep cash flowing to invest in
the future. Too much inventory ties up cash flow and can hurt your business.
Solution: When cash flow is an issue, a sales event can attract customers — and their cash
— to your store. A flash sale can create a sense of urgency, while a store-wide event can
draw large crowds to your store.

5. Excess inventory can lead to stock obsolescence

The idea of having too much inventory is nothing new. It's a problem that has existed for as
long as there have been businesses. But you need to act fast so it doesn’t sit too long and
become obsolete.

Solution: You need to act fast — but how to sell excess inventory? You might liquidate it
online at places like eBay or Amazon Marketplace to make room for new products and to
capture as much profit as you can.

6. Excess inventory can cause stock degradation and waste

Too much stock usually means you have low inventory turnover — your products aren’t
selling as quickly as you forecasted. Why are large amounts of inventory considered
wasteful? Excess inventory doesn’t last forever. Items will degrade and lose their value over
time. In fact, it’s a common retail business insurance claim.

Solution: To avoid stock degradation, you must be very careful about forecasting inventory
needs. Too much can lead to waste as the products deteriorate and lose their value.

7. Excess inventory can reduce profits

Excess inventory can cut into your profitability. If you’re sitting on a ton of product, you may
be tempted to cut prices to sell off that excess stock. You may move some products, but
you’ll also likely reduce your margins and make less profit overall.

Solution: Rather than offer steep discounts, introduce product bundling. Group
complementary products together and sell them for a slightly lower price than what they’d
cost separately. You’ll start to move merchandise without a huge drop in profit.
 Product Classification

13 Types of Inventory

There are four different top-level inventory types: raw materials, work-in-progress (WIP),
merchandise and supplies, and finished goods. These four main categories help
businesses classify and track items that are in stock or that they might need in the future.
However, the main categories can be broken down even further to help companies manage
their inventory more accurately and efficiently.

1. Raw Materials: Raw materials are the materials a company uses to create and finish
products. When the product is completed, the raw materials are typically
unrecognizable from their original form, such as oil used to create shampoo.

2. Components: Components are like raw materials in that they are the materials a
company uses to create and finish products, except that they remain recognizable
when the product is completed, such as a screw.

3. Work In Progress (WIP): WIP inventory refers to items in production and includes raw
materials or components, labor, overhead and even packing materials.

4. Finished Goods: Finished goods are items that are ready to sell.

5. Maintenance, Repair and Operations (MRO) Goods: MRO is inventory — often in the
form of supplies — that supports making a product or the maintenance of a business.

6. Packing and Packaging Materials: There are three types of packing materials. Primary
packing protects the product and makes it usable. Secondary packing is the
packaging of the finished good and can include labels or SKU information. Tertiary
packing is bulk packaging for transport.

7. Safety Stock and Anticipation Stock: Safety stock is the extra inventory a company
buys and stores to cover unexpected events. Safety stock has carrying costs, but it
supports customer satisfaction. Similarly, anticipation stock comprises of raw
materials or finished items that a business purchases based on sales and production
trends. If a raw material’s price is rising or peak sales time is approaching, a
business may purchase safety stock.
 8. Decoupling Inventory: Decoupling inventory is the term used for extra items or WIP
kept at each production line station to prevent work stoppages. Whereas all
companies may have safety stock, decoupling inventory is useful if parts of the line
work at different speeds and only applies to companies that manufacture goods.

9. Cycle Inventory: Companies order cycle inventory in lots to get the right amount of
stock for the lowest storage cost.

10. Service Inventory: Service inventory is a management accounting concept that

refers to how much service a business can provide in a given period. A hotel with 10
rooms, for example, has a service inventory of 70 one-night stays in each week.

11. Transit Inventory: Also known as pipeline inventory, transit inventory is stock
that’s moving between the manufacturer, warehouses and distribution centers.
Transit inventory may take weeks to move between facilities.

12. Theoretical Inventory: Also called book inventory, theoretical inventory is the
least amount of stock a company needs to complete a process without waiting.
Theoretical inventory is used mostly in production and the food industry. It’s
measured using the actual versus theoretical formula.

13. Excess Inventory: Also known as obsolete inventory, excess inventory is unsold
or unused goods or raw materials that a company doesn’t expect to use or sell but
must still pay to store.

PRODUCT CODING
Product codes are unique identifiers that are an important part of tracking sales and
inventory. In our globalized world of mass production, these codes are an integral way to
communicate what a product is and to keep track of it from production floor all the way to
store shelf.

1. Product Codes Help You Compete in the Marketplace

Product codes make it easy to identify product features, including the brand name,
type of item, size, weight, and color of a product when it’s scanned at checkout. This
helps speed up the process. The codes also help retailers track and manage their
inventories, and they create a better experience for consumers.

2. There Are Different Types of Product Codes

 UPC Codes: 12-digit numbers found on most retail products in the U.S. UPC codes are
issued by a non-profit called GS1 US, which sets standards for international
commerce.
EAN Codes: European Article Numbers (EANs) are 13-digit numbers used in Europe
on retail products. Like UPC codes, EANs help product sellers track their products.
ASIN: In 2019, Amazon surpassed Walmart as the world’s largest online retailer. The
company is now so enormous it has its own product ID numbers, called Amazon
Standard Identification Numbers (ASINs).
ISBN: International Standard Book Numbers, or ISBNs, are special identifying codes
for books, magazines, e-books, and other published media. ISBNs help publishers
track how many books they’re selling and where.
QR Codes: Quick Response or QR codes are scannable matrix-style barcodes that
often contain data for a locator, identifier, or tracker that points to a website or
application. They’re used in everything from consumer advertising to entertainment
ticketing.
FDA Product Codes: The Food and Drug Administration (FDA) has its own set of
product codes for food, beverages, drugs, and medical devices.

LEAD TIME

Lead time is the amount of time that passes from the start of a process until its
conclusion. Companies review lead time in manufacturing, supply chain
management, and project management during pre-processing, processing, and post-
processing stages

 Lead time measures how long it takes to complete a process from beginning to end.
 In manufacturing, lead time often represents the time it takes to create a product
and deliver it to a consumer.
 Lead time is calculated by adding any combination of the number of days to procure
materials, manufacture goods, and deliver finished products.
 Factors that can impact lead time include lack of raw materials, breakdown of
transportation, labor shortages, natural disasters, and human errors.
 In some cases, companies can improve lead times by implementing automated
stock replenishment and just-in-time (JIT) strategies.

Lead time can be broken in several different components: the pre-processing, the
processing, and the post-processing. These may be defined or stated differently, but the
general formula to calculate lead time is:
Lead Time = Pre-Processing Time + Processing Time + Post-Processing Time

Lead Time for Manufacturing Company = Procurement Time (for raw materials) +
Manufacturing Time + Shipping Time

INVENTORY REPLENISHMENT METHODS

Effective inventory replenishment requires careful planning using demand forecasting,

inventory analysis (i.e., loss due to damage or going bad) and other supply chain
metrics such as in-stock status and product velocity (the rate at which an SKU sells).

The key is to find the sweet spot where you have enough inventory to meet demand
(without the risk of stockouts), while also avoiding overstocking items that either won’t sell
at all or won’t sell fast enough to maximize your profits.

Four inventory replenishment strategies

 Reorder point strategy

 Periodic strategy

 Top-off strategy

 Demand strategy

Lot-sizing methods

 Fixed order quantity: A specific number of items ordered each time you reorder.
 Lot-for-lot: A set number of products are ordered to cover the demand within a specific
time frame, taking lead time for orders into consideration. Lot-for-lot is also known as
discrete order quantity.
 Economic order quantity (EOQ): Amount ordered based on the costs of carrying and
ordering the product.
 Period order quantity: Based on EOQ, you can determine the fixed number of future
periods the inventory will cover.
 Periods of supply: An amount of inventory that covers the demand for a product for a
specific number of future periods (i.e., the next six months).
 Least unit cost: Ordering and inventory carrying costs are added to the cost for each lot
size and the total is divided by the number of units. The lot size with the lowest per-unit
cost is the quantity ordered.
 Least total cost: The order quantity is calculated by comparing the carrying costs and
ordering costs for various lot sizes. The lot size with the closest (nearly equal) carrying
costs and ordering costs is the quantity ordered.
 Part period balancing: The amount of inventory ordered is based on the total demand
up to a time when the costs of carrying and ordering the item are most balanced. It
involves calculating the Economic Part-Period, a standard value used for lot-sizing
purposes, to determine when the cost of carrying accumulated inventory exceeds the
cost of ordering. The order quantity is based on avoiding these excess carrying costs by
ordering the quantity needed to meet demand until that point is reached.

UNIT 3
Working Capital Management
Working capital management is a business strategy designed to ensure that a company
operates efficiently by monitoring and using its current assets and liabilities to their most
effective use.

 Working capital management requires monitoring a company's assets and liabilities

to maintain sufficient cash flow to meet its short-term operating costs and short-
term debt obligations.
 Managing working capital primarily revolves around managing accounts receivable,
accounts payable, inventory, and cash.
 Working capital management involves tracking various ratios, including the working
capital ratio, the collection ratio, and the inventory ratio.
 Working capital management can improve a company's cash flow management and
earnings quality by using its resources efficiently.
 Working capital management strategies may not materialize due to market
fluctuations or may sacrifice long-term successes for short-term benefits.
The primary purpose of working capital management is to enable the company to maintain
sufficient cash flow to meet its short-term operating costs and short-term debt obligations.
A company's working capital is made up of its current assets minus its current liabilities.
 Main Components of Working Capital Management
Cash
The core of working capital management is tracking cash and cash needs. This involves
managing the company's cash flow by forecasting needs, monitoring cash balances, and
optimizing cash inflows and outflows to ensure that the company has enough cash to meet
its obligations.

Receivables
To manage capital, companies must be mindful of their receives. This is especially
important in the short-term as they wait for credit sales to be completed.

Payables
Payables in one aspect of working capital management that companies can take
advantage of that they often have greater control over.

Inventory
Companies primary consider inventory during working capital management as it may be
most risky aspect of managing capital.

Types of Working Capital

 Permanent Working Capital: Permanent working capital is the amount of resources
the company will always need to operate its business without interruption.
 Regular Working Capital: Regular working capital is a component of permanent
working capital. It is the part of the permanent working capital that is actually
required for day-to-day operations and makes up the "most important" part of
permanent working capital.
 Reserve Working Capital: Reserve working capital is the other component of
permanent working capital. Companies may require an additional amount of working
capital on hand for emergencies, seasonality, or unpredictable events.
 Fluctuating Working Capital: Companies may be interested in only knowing what
their variable working capital is. Fluctuating working capital only considers the
variable liabilities the company has complete control over.
 Gross Working Capital: Gross working capital is simply the total amount of current
assets of a business before considering any short-term liabilities.
 Net Working Capital: Net working capital is the difference between current assets
and current liabilities.

Factors determining Working Capital requirements

1. Sales
2. Length of Operating Cycles
3. Nature of Business
4. Terms of Credit
5. Seasonal Variations:
6. Turnover of Inventories
7. Nature of Production Technology
8. Contingencies

SOURCES OF WORKING CAPITAL:

A company has various sources of working capital. Depending upon its condition and
requirements, a company may use any of these sources of working capital. These sources
may be spontaneous, short-term, or long-term.

 Spontaneous Sources: The sources of capital created during normal business activity
are called spontaneous sources of working capital. The primary sources of
spontaneous working capital are trade credit and outstanding expenses.
 Short-term Sources: The sources of capital available to a business for less than one
year are called short-term sources of working capital.
 Long-term Sources: The sources of capital available to a business for a longer period,
usually more than one year, are called long-term sources of working capital.

SHORT-TERM SOURCES OF WORKING CAPITAL

 Loans from Commercial Banks
 Public Deposits.
 Trade Credit
 Bill Discounting
 Bank Overdraft
 Advances from Customers

LONG-TERM SOURCES OF WORKING CAPITAL

 Share Capital
 Long-term Loans
  Debentures

Why Manage Working Capital?

Working capital management can improve a company's cash flow management and
earnings quality through the efficient use of its resources. Management of working capital
includes inventory management as well as management of accounts receivable
and accounts payable.

Working capital management also involves the timing of accounts payable (i.e., paying
suppliers). A company can conserve cash by choosing to stretch the payment of suppliers
and to make the most of available credit or may spend cash by purchasing using cash—
these choices also affect working capital management.

How to Calculate Working Capital

Working capital is calculated as current assets minus current liabilities, as detailed on the
balance sheet.

Formula for Working Capital

Working capital = current assets - current liabilities

What is working capital ratio?

Working capital ratio is a measurement that shows a business’s current assets as a

proportion of its liabilities. It’s a metric that provides an overview of financial health and
liquidity, indicating whether current liabilities can be paid by existing assets.

How to calculate working capital ratio

Working capital ratio is calculated by dividing all current assets by current liabilities. The
formula is:

Working capital ratio = Current assets / current liabilities

Working capital management is the process of managing these short-term assets and
liabilities to ensure the company has adequate liquidity to operate smoothly.

Relevance of Working Capital

The working capital ratio is crucial to creditors as it shows the liquidity of the company. The
liabilities of current nature are paid with current assets like marketable securities, cash,
and cash equivalents. The faster an asset can be converted into liquid cash, more likely
that the company will be able to pay off its debts. When the current liabilities are exceeded
by the current assets, the business will have ample capital for its daily operations.

In other words, it will have enough capital to work with. This ratio is a measure of a
company’s short-term financial health and its efficiency. Anything that is below 1 is
indicative of a negative W/C (working capital). While anything that is over 2 indicates that
the company is not investing the excess assets. Most ideally this ratio should be between
1.2 and 2.0. Another name for working capital is net working capital.

Working Capital = Current Assets – Current Liabilities

Measure the efficiency of working capital

Working capital efficiency can be measured by certain ratios. The working capital cycle and
other working capital ratios are compared to other industry benchmarks or the company’s
peers. Some of the measures used in estimating the efficiency of working capital
management include current ratio, quick ratio, absolute liquid ratio, cash ratio and working
capital turnover ratio.
 Importance of Gross Working Capital

Investments in current assets must not be either excessive or inadequate as it can

threaten the production capacity and the solvency of the company. It also undermines the
profit of the business.

Techniques to analysis working capital

Ratio Formula Description

Also known as the Working Capital Ratio and

Current Assets/ Current
Current ratio measures the short-term financial health of a
Liabilities
company.

Measures if an asset can be liquidated to cash

Acid Test Ratio/ Liquid Assets/Current
in a short period of time without the loss of
Quick Ratio Liabilities
value.

Includes cash in hand and that in the bank and

Cash Position
[(cash & Bank) + short-term the temporary investments including
Ratio/ Absolute
securities]/Current Liabilities marketable securities. This ratio must ideally be
Liquid Ratio
50 percent.
 What Is Working Capital Turnover?

Working capital turnover is a ratio that measures how efficiently a company is using
its working capital to support sales and growth.

 Working capital turnover measures how effective a business is at generating sales

for every dollar of working capital put to use.
 A higher working capital turnover ratio is better, and indicates that a company is able
to generate a larger amount of sales.
 However, if working capital turnover rises too high, it could suggest that a company
needs to raise additional capital to support future growth.

Working Capital Turnover Formula

Working Capital Turnover = Net Annual Sales / Average Working Capital

What Does Working Capital Turnover Tell You?

A high turnover ratio shows that management is being very efficient in using a company’s
short-term assets and liabilities for supporting sales. In other words, it is generating a
higher dollar amount of sales for every dollar of working capital used.

In contrast, a low ratio may indicate that a business is investing in too many accounts
receivable and inventory to support its sales, which could lead to an excessive amount of
bad debts or obsolete inventory.

UNIT 4

*UNIT 4 IS MOSTLY ALL ABOUT INVENTORY CONTROL AND METHODS OF INVENTORY

CONTROL SUCH AS EOQ,ABC, JIT…..SO JUST READ ABOUT THOSE IN DETAIL*