INVENTORY

MANAGEMENT
Seminar taken by

Jagan. P
Sresh Rao
vijayKumar. A
Vinoth. G
 IN TRO D U CTIO N

MEANING OF INVENTORY:
The meaning of inventory is stock of goods. In

accounting language it may include:

1.RAW MATERIAL: They are required to carry out
production activities uninterruptedly.

2.WORK-IN-PROGRESS: It is a stage of stocks between

raw material & finished goods.
3.CONSUMABLES: These are needed to smoothen
the process of production.

4.FINISHED GOODS: These are the goods which

are ready for the consumers.

5.SPARES: Form a part of inventory.

 Purpose/Benefi
ts ofH olding Inventories

Transaction Motive to facilitate

Continuous Production.
Speculative Motive for taking advantage
of price fluctuations, saving in re-ordering
costs and quantity discounts, etc.
Precaution Motive for meeting
unpredictable changes in demand and
supplies of materials
 Inventory M anagem ent
An efficient system of inventory
management will determine

What to purchase
How much to purchase
From where to purchase
Where to store
 Objectives Of Inventory Management
To ensure continuous supply of raw material, spares

and finished goods.

To avoid both overstocking and under stocking of

inventory.
To maintain investments in inventories at optimum

level.
OBJECTIVES OF INVENTORY
MANAGEMENT(cntd)

To eliminate duplications in orders

To keep material cost under control.

To minimize losses through wastage and

damages .
 C O ST O F IN V EN TO R IES
The determination of inventory cost is
essentially an income measurement
problem. Relevant inventory costs which
change with the level of inventory are listed
below:

a) Ordering cost: Every time an order is

placed for stock replenishment, certain cost
are involved. This cost of ordering includes:
- Paper work costs, typing &
dispatching.
- order inspection cost, checking &
b) Carrying costs or cost of
holding inventories Carrying costs
constitute all the cost of holding
items in inventory for a given period
of time. This cost involves:
Capital Cost
-Storage & handling costs.
-obsolescence &
deterioration costs.
-Insurance.
-Taxes.
-The cost of funds invested
in inventory.
c) 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. This
cost involves:
-Expenses of placing special
orders.
-Expediting income orders.
-Cost of production delays.
Tools ofInventory M anagem ent

1. Stock Levels

2. Safety Stocks

3. Ordering System of Inventory

4. Determination of EOQ

5. ABC Analysis
6.VED Analysis

7.Inventory Turnover Ratio

8.Aging Schedule of Inventories

9.Classification & Codification on

Inventories

10.Inventory Reports
 SAFETY STOCKS:
To meet the uncertainty arising from fluctuating demands, fluctuating lead-time or
unforeseen situations etcAn extra stock is invariably maintained for each
item in the inventory.

The extra stock is termed as Buffer stock and Safety stock.

Safety stock arises due to variation in consumption rates and variation in lead
time.
The Factor Influencing The Determination Of Safety Stock
Nature of the Item
Annual usage
Lead time of manufacturing
Stock out cost
Season ability
Risk of obsolesce
Macro/environmental issues
LEAD TIME REDUCTION:
A lead time is the latency (delay) between the initiation
and execution of a process. For example, the lead time for
ordering a new car from a manufacturer may be anywhere
from 2 weeks to 6 months.

Supply Chain Management:

A more conventional definition of lead time in the supply
chain management realm is the time from the moment the
customer places an order (the moment you learn of the
requirement) to the moment it is received by the customer.
Supply chain management
Economic Order Quantity:
Economic order quantity is the size of the lot to be

purchased which is economically viable.

EOQ IS MADE UP OF TWO PARTS :

1.ORDERING COST: These cost are associated with the

purchasing or ordering of materials.

2.CARRYING COST: These are the costs for holding the

inventories.
A-B-C AN ALYSIS:
The materials are divided into three categories viz,

A ,B &C

Group-A:
Under this almost 10% of the items contribute to

70% of value of consumption.

Group-B:
Under this category 20% of the items

contribute about 20% of value of consumption.

Group-C:
Under this category about 70% of items of

material contribute only 10% of value of

consumption.
VED ANALYSIS:
The VED analysis is used generally for spare parts. The

requirements and urgency of spare parts is different

from that of materials. Spare parts are classified as
vital(V),essential(E),desirable(D).
 VITAL SPARE PARTS:

These are must for running the concern smoothly.

ESSENTIAL SPARE PARTS:

Necessary but stock kept at low figures.

DESIRABLE SPARE PARTS:

May be avoided at times.

INVENTORY REPORTS:
The management is kept informed with

the latest stock position of different

items by preparing periodical inventory
reports. on the basis of these reports
management takes corrective action
wherever necessary.
 ORDERING SYSTEMS OF INVENTORY:

There are three prevalent systems of ordering

and a concern can choose any one of these:

1.Fixed order quantity system generally known as
economic order quantity system.

2.Fixed period order system or periodic re-ordering

system or periodic review systems.

3.Single order and scheduled part delivery system.

LEAD TIME:
Lead time is the period that elapses between the

recognition of a need and its fulfillment. There is a

direct relationship between lead time and inventories.
Lead time has two components:

1.administrative lead time

2.delivery lead time

 INVENTORY TURNOVER RATIO

Inventory turnover ratio=cost of good

sold*average inventory at cost or

=net sales*(average inventory)

Valuation ofInventory

FIFO Determination of stock level:

Minimum level=rerdering level-(normal
LIFO consumption * normal reordering period )

Average Price Method

Maximum level=reordering level+
reordering quantity (minimum
Base Stock
consumption * minimum reordering period )

Standard Danger
Price & Market Price
level=consumption * maximum
reorder period