INVENTORY

MANAGEMENT
Presented By
Akshat Goyal D-34
Ankit Singh Yadav D-40
Ahmad Shariq Jamal D-42
Introduction

Inventory is defined as a usable resource which is physical and tangible

such as materials. In this sense our stock is our inventory.
Inventory could be of:-
 Raw Materials
 Work in Progress
 Finished Products
 Spare Parts
 Other Indirect Materials
Inventory Turnover Ratio

It is an index of business performance.

Better the Management Higher the ratio.

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Importance Of Inventory

 Inventories consist of largest component of current assets in many

organisations. Poor management of inventories may result in business
failures

 In an organisation , the inability to supply an item from inventory

could bring the production process to halt. Conversely , if a firm
carries excessive inventory the added carrying cost may represent the
difference between profit and loss
Functions Performed By Inventory

 Regularising supply and demand.

 Economising purchases or productions by Lot Buying or Batch Buying.
 Allowing organisation to cope with perishable materials.
 Inventory can store labour.
Inventory Decision

Two decisions are made for every item in the inventory

 How much of an item to order when the inventory of that item is to be

replenished?

 When to replenish of the item?

Classification of Inventory

There can be many classification of an inventory system. We can classify them as

 Lot size Reorder point policy

 Fixed order interval Scheduling policy
 Optional replenishment policy
 Other types of inventory
Selective Inventory Management

ABC Analysis(Always Better Control) works according to the principle of

“Vital Few – Trivial Many”(20-80).
Statistics reveal that just a handful of items account for bulk of annual
expenditure. These few items, called “A” items, therefore hold key to
the business. The other items known as B,C are numerous in number but
have less contribution. Hence, this analysis segregates all items into
three categories A,B and C
The annual consumption analysis tells that 10% of the item constitute
about 75% of the Total consumption and is called A items whereas
bottom 70% only 10% hence it is called C. In between of these two lies B
items.
Application of ABC Analysis

 Degree of control
 Ordering procedure
 Stock records
 Priority Treatment
 Safety stock
 Stores layout
 Value analysis
Making ABC Analysis

 Calculate rupee annual issues for each item in inventory by multiplying the
unit cost by number of units used during the year
 Sort all the items by rupee annual issues in Descending order
 Prepare a table showing Item no, Unit Cost, Annual Units Issued and Annual
Rupee Value of units issued.
 Starting at the top of the list compute a running total item by item issue
value and the rupee value of consumption.
 Compute the cumulative percentage for the item count and cumulative
annual issue value
Typical Graph on Cumulative percent
value and Unit

90%
Cumulative Percent Value

75%

A B

15% 30%
Cumulative Percent Unit
Limitations of ABC Analysis

 Some items though negligible in inventory in monetary value may be

vital for running the plant and constant attention is needed.

 The result of the analysis have to be periodically reviewed and

updated
Other Analysis Models

FSN
This analysis classifies inventory based on quantity consumption and
frequency of issues and uses .
F stands for Fast Moving
S stands for Slow Moving
N stands for Non-moving items
Other Analysis Models

VED
This is an analysis whose classification is dependent on the user’s
experience and perception. This analysis classifies inventory according to
the relative importance of certain items to the other items, like in spare
parts
In this products are classified into three categories-:
Vital- Inventory that consistently needs to be kept in stock
Essential- keeping a minimum stock of this is enough
Desirable- operations can run with or without this.
Inventory Control

According to Production Handbook , “inventory control refers to the

process hereby the investment in materials and parts carried in stock s
regulated in predetermined limits set in accordance with the inventory
policy stablished by management.”
 Inventory management is concerned with the raw materials and
purchased parts
 It regulates the investment in inventories.
 The investments are decided on the basis of predetermined limits.
 These limits are prescribed by inventory policy followed by the
management
Major Activities of Inventory Control

 Planning the inventories

 Procurement of inventories
 Receiving and inspection of inventories
 Storing and issuing of inventories
 Recording the receipts and issues of inventories
 Physical verification of inventories
 Follow up function
 Material standardisation and substitutes
Inventory Control Technique

Re Order Level
 Lead Time
 Average Periodic Consumption
 Safety Stock

𝑅𝑒𝑜𝑟𝑑𝑒𝑟 𝐿𝑒𝑣𝑒𝑙 = 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 × 𝐴𝑣𝑔 𝑑𝑎𝑖𝑙𝑦 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 + 𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘

𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘 + 𝑅𝑒𝑜𝑟𝑑𝑒𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

Reorder Level (contd.)
Economic Order Quantity

Ordering Level is controlled through following systems

 Two Bin System
 Mini Mix System
 Imprest System
 EOQ
1. When to order ?
2. How much to order?
Economic Order Quantity

Ordering cost is more less fixed but inventory carrying cost are high
 Interest cost due to locking up of funds.
 Cost of insurance and taxes.
 Cost of storage space.
Order Cost Carrying Cost
Few order , Large Size Low High

More Order, Small Size High Low

EOQ(Contd.)
The Total-Cost Curve is U-Shaped
𝑹𝑫 𝑸𝑪𝑺
Annual Cost

𝑻𝑪 = +
𝑸 𝟐
Carrying Cost

Ordering Costs

Order Quantity
QO (economic order quantity)
(Q)
EOQ(Contd.)
Ordering Cost(OC)
OC=Annual Requirement(R) χ Cost Per Order(D)/ Size of Order
At EOQ
𝑅
OC= *D
𝐸𝑂𝑄
Carrying Cost/Storing Cost(SC)
SC=Value of units stored χ Storing Cost(%age)(S)
Value of units stored=Average units stored χ Cost per unit(C)
Average units Stored= Size of order/2
At EOQ
𝐸𝑂𝑄
SC= *C*S
2
EOQ(Contd.)

Now , the two characteristics of EOQ

 EOQ is the ordering level at which he total ordering cost plus
total storing cost is at minimum
 EOQ is the ordering level at which total ordering cost will at
total storing cost
OC=SC
R*D/EOQ= EOQ*C*S/2
2𝑅𝐷
EOQ=
𝐶𝑆