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PRESENTED BY:- SARITA

MALVIYA
BHARAT BALDUA
MONIKA GHODKI
ANAMIKA BHARGAV
INTRODUCTION

Inventories constitute a major component in current


assets. It constitutes around 60% in the public limited
companies, in India. For the smooth running, every
enterprises needs inventory. Inventory serve as a link
between production processes. Due to its major
composition in current assets, the management of
inventories occupies a key role in working capital
management.

So, inventory management is essential to allow the firm


to avail the opportunities to improve and at the time does
not impair its liquidity, with excessive or unproductive
investment.
Inventory Management
 Inventory is any stored resource that is
used to satisfy a current or future need.
 Raw materials, work-in-process, and
finished goods are examples of inventory.
 Two basic questions in inventory
management are (1) how much to order
(or produce), and (2) when to order (or
produce).
Inventory Management

 Inventory is one of
the most expensive
assets of many
companies.

 It represents as
much as 40% of
total invested
capital.
SOME IMAGES
MEANING AND NATURE OF INVENTORY

Inventory means stock of finished goods, in accounting


language. However, it includes raw materials, work in
process, finished goods and stores in a manufacturing
organization.
Customer Decision
relationship support/
Sales &
Business
marketing
analysis

Production
Planning Resource
Inventory management
control management
system

Warehouse
management Accounting
management

Inventory Purchase
management management
TYPES OF INVENTORY

 RAW MATERIALS

 WORK IN PROCESS

 FINISHED GOODS

 CASH AND MARKETABLE SECURITIES


MOTIVES FOR HOLDING INVENTORIES
Holding of inventories is expensive in the form of storage
costs, interest charges, deterioration of quality in holding
stocks, theft and pilferage. Firms hold inventories,
basically, for the following reasons

 TRANSACTION MOTIVES

 PRECAUTION MOTIVES

 SPECULATIVE MOTIVE
ORDERING COST
Every time an order is placed stock replenishment,
certain costs are involved. The ordering cost may vary,
dependent upon the type of item. However, an estimated
of ordering cost can be obtained for a given range of
item.

THIS COST OF ORDERING INCLUDES:-

1.PAPER WORK COST


2.FOLLOW UP COST
3.COST INVOLVED IN RECEIVING THE ORDER INSPECTION
4.ANY SET UP COST OF MACHINES
5.SALARIES AND WAGES TO THE PURCHASE DEPARTMENT
CARRYING COST
Carrying cost constitute all the costs of holding items in
inventory for a given period of time. They are expressed
either in rupees per unit per period or as a percentage of
the inventory value per period. components of this cost
include the following…
 STORAGE AND HANDLING COST

 OBSOLESCENCE AND DETERIOTION COSTS

 INSURANCE

 TAXES THE COST OF THE FUNDS INVESTED


IN INVENTORIES
STOCK OUT COSTS

stock out costs are incurred whenever a business


is unable to fill orders because the demand for an
item is greater than the amount currently
available in inventory.

EXAMPLE:-stock out costs include the expenses of


placing special orders and expediting incoming
orders.
OTHER CHARACTERSTICS OF
INVENTORY SITUATIONS

 LEAD TIMES

 SOURCE AND LEVELS OF RISK

 STATIC VERSUS DYNAMIC PROBLEMS

 REPLESHMENT RATE
MANAGEMENT
The primary objective of inventory management
is to maintain the quantity of stocks, in right
location, at right time to ensure the uninterrupted
and, at the same time, minimize the investment
in stock holding. Every firm is faced with two
conflicting issues:

1.Maximize investment, by maintaining excessive


quantity so that production is not affected and
business opportunities are not lost, for want of
stocks.

2.Minimize investment in inventories as they


involve costs and affect profitability, adversely.
TO SUM.THE OBJECTIVE OF
INVENTORY MANAGEMENT CAN BE
SUMMARIZED:-

 Minimize the carrying costs and lead time in


supplies
 Maintain the sufficient stocks of finished goods
for smooth sales operations.
 Ensure perpetual inventory control so that
physical stocks are always in agreement, with
stocks shown in records
 Facilitate furnishing of data for short term and
long term planning and inventory control.
TOOLS AND TECHNIQUES OF
INVENTORY MANAGEMENT

A. Determination of stock levels


B. Determination of economic order quantity
C. A.B.C analysis
D. V E D Analysis
E. Perpetual inventory system
F. JIT control system
G. Inventory turnover ratios
DETERMINATION OF STOCK LEVELS
Minimum level
Minimum level quantity that must be maintained,
at all times if the stock holding falls below this
level, production stops due to shortage of
materials. This level is fixed, considering the
following factors
1.Lead time
2.Rate of consumption. Nature of materials
•FORMULA FOR COMPUTATION OF MINIMUM STOCK IS:-minimum stock level-
•Re ordering level-(normal consumption*Maximum re order period)
B)REORDER LEVEL:-When the stock level
reaches the re ordering level, the order is placed
for replenishment of stocks. This level is fixed
between the maximum stock and minimum stock.

THE FORMULA FOR CALCULATION IS:-

REORDERING STOCK LEVEL: Maximum consumption per day * Maximum re order


period
MAXIMUM LEVEL: It is the level, beyond which
the stock level should not exceed. If this level is
exceeded, there would be blockage of working
capital, loss due to wastage, risk of obsolescence
and more rent for storage space etc

FORMULA IS:

Maximum stock level= Re ordering level+ Reordering quantity-(minimum consumption*


Minimum reordering period)
SAFETY STOCK

There should be safety stock to take care of


fluctuations in consumptions pattern of raw
materials. safety stock is to meet unforeseen
contingencies.
DETERMINATION OF ECONOMIC ORDER
QUANTITY

1.Ordering cost: The costs that are associated


with purchasing and placing an order is called
ordering costs.

2.Carrying costs: These are the costs for


holding inventories. Higher the stock holding,
larger would be carrying costs and they would be
lower if the stocks are lower.
The economic order size of inventory
brings a trade off between carrying costs
and ordering costs.
FORMULA:

EOQ=(2AO/C)

WHERE A= Annual consumption of unit ,in rupees


O= Cost of placing order
C= Inventory carrying costs, per one unit
GRAPHICAL PRESENTATION OF EOQ

The EOQ model can be presented graphically. To


explain it, there is example of placing an order of
mangoes. if annual consumption of an item is
1000 units and order is placed for 200 units, each
time, orders have to be placed five times in a
year. If we increase the size of the order from 200
to 500 units, the number of orders has to be
reduced from 5 to 2. The ordering costs would be
lower for two orders, compared to five orders. In
other words, with the increase in size of the
order, total ordering cost would reduce..
total cost

carrying cost

carrying cost

size of order

•Graphical presentation of EOQ


THE ABC ANALYSIS IS BASED ON THE
FOLLOWING PRESUMPTIONS:

1.Managerial time and efforts is scare and


limited and limited
2. Some items of inventory are more
important than others
ABC ANALYSIS

Under ABC analysis, the item is allocated to the


group, depending on the amount of attention it
deserves. ‘A’ group requires the maximum
concentrations of the finance manager. This
group constitutes a higher % in terms of value,
while it occupies lesser significance, in terms of
number of units. ‘B’ group requires lesser
attention, compared to ‘A’ group. The last group
“C” has to be given the least attention, as it
constitutes less value in the total annual
consumptions.
Item Annual Rate (per Total value of
No.
consumption unit)rs. consumptions(Rs.)
In terms of units
1 6000 100 600000
2 10000 65 650000
3 5000 50 250000
4 25000 2 50000
5 4000 25 100000
6 15000 10 150000
7 25000 6 150000
8 10000 5 50000
Tot 100000 20 00 000
al
PriorityItem % each item Total value % of each item cumulative
order no. in total no. of of consump in total value
units

1 10% 650000 33% 33%


2 6% 600000 30% 63%
3 5% 250000 12% 75%
4 15% 150000 8% 83%
5 25% 150000 8% 91%
6 4% 100000 5% 96%
7 25% 50000 2% 98%
8 10% 50000 2% 100%
Total 100% 2000000
GROUP ITEM NO. % ITEMS % ITEMS
(IN UNITS) (In value)

A.) 2,1,3 21% 75%

B) 6,7 40% 16%

C) 5,4,8 39% 9%
VED ANALYSIS

The VED analysis is used for control of spare


parts. A-B-C analysis is concerned with materials
and is not totally and properly suitable for
spares. So, the spares are divided are into three
categories. Vital, desirable and essentials.
PERPETUAL INVENTORY SYSTEM
THE PROCEDURE IS AS UNDER
A). Stock taking team selects the storerooms,
where stock taking is to be done, on a random
basis.
B). All the bins in that storeroom are checked.
C). The physical balances in the bins is countered
or measured , dependent on the type of the
material.
D). The actual stock is recorded in the sheets
provided for this purposes.
E). There is no prior intimation to the stores
department to maintain surprise element.
F) .All the stores are checked, at least, three or
JUST IN TIME INVENTORY CONTROL
SYSTEM

The basic philosophy of JIT is to keep only


enough quantity of stock on hand to meet the
immediate production requirements. This
concepts relies on the suppliers to furnish ‘stock’
‘just in time’, as and when needed.
Just in Time inventory control system aims at
eliminating wastages, from every aspect of
manufacturing. This was first introduced in Japan
in 1950. Toyota was the first company to
practice this technique.
OBJECTIVES OF JIT
Minimum/Zero inventory and associated costs.

Zero breakdown and continuous productions.

Manufacturing the right quantity, at right time

Ensure timely delivery of inputs as well as


outputs.
MAJOR ADVANTAGES OF JIT
Right quantities are purchased and produced, in
right time

Wastage are eliminated, totally

Investment in inventory is controlled

Carrying cost is reduced.


INVENTORY TURNOVER RATIOS

Inventory turnover ratio indicate the efficiency in


using the inventory. Inventory turnover ratio
indicates the number of times the stock has
turned, over a period of one year. More the
number of times. More efficient the organization
is.
The inventory conversion period shows the
number of days the stock is blocked.