Inventory

Management
Presented by,
Anchu P R
Research Scholar
SMBS
 Inventory
• Inventory is the term for the goods available
for sale and raw materials used to produce
goods available for sale

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Types of inventory

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• Raw materials are any items used to
manufacture components or finished
products. These can be items produced
directly by your business or purchased from a
supplier. For example, a candle-making
business could purchase raw materials such as
wax, wicks, and decorative ribbons.

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• Raw materials are divided into two categories:
direct and indirect.
– Direct raw materials are materials that companies
directly use in the finished product, such as wood
for a chair.
– Indirect raw materials are not part of the final
product but are instead consumed as part of the
production process, like a manufacturing facility's
oils, rags, and light bulbs.

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• Works-in-progress inventory
refers to unfinished items
moving through production but
not yet ready for sale. In the
case of a candle-making
business, work-in-progress
inventory might be candles that
are drying and unpackaged.

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• Finished goods are products that have
completed the production process and are
ready to be sold: the candles themselves.

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• Maintenance, repair, and operations (MRO)
goods are items used to support and facilitate
the production of finished goods. These items
are usually consumed as a result of the
production process but aren’t a direct part of
the finished product. For instance, disposable
molds used to manufacture candles would be
considered MRO inventory.

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• MRO items may include:
– Gloves
– Safety equipment
– Computers
– Industrial equipment (valves, compressors,
pumps)
– Consumables (cleaning, laboratory, and office
supplies)
– Plant upkeep supplies (lubricants, gaskets, repair
tools)
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• Packing Material
– Packing material is the inventory used for packing
of goods. It can be primary packing and secondary
packing. Primary packing is the packing without
which the goods are not usable. Secondary
packing is the packing done for convenient
transportation of goods.

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 Goods in Transit

• Under normal conditions, a business transports raw materials,

WIP, finished goods etc from one site to other for various
purpose like sales, purchase, further processing etc. Due to
long distances, the inventory stays on the way for days, weeks
and even months depending on distances. These are called
Inventory / Goods in Transit. Goods in transit may consist of
any type of basic inventories.

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 BUFFER INVENTORY
• Buffer inventory is the inventory kept or purchased for
the purpose of meeting future uncertainties. Also known
as safety stock, it is the amount of inventory besides the
current inventory requirement.
• The benefit is smooth business flow and customer
satisfaction and disadvantage is the carrying cost of
inventory. Raw material as buffer stock is kept for
achieving nonstop production and finished goods for
delivering any size, any type of order by the customer.

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 Anticipatory Stock
• Based on the past experiences, a businessman
is able to foresee the future trends of the
market and takes certain decisions based on
that. Expecting a price rise, a spurt in demand
etc some businessman invests money in
stocking those goods. Such kind of inventory is
known as anticipatory stock.

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 DECOUPLING INVENTORY
• In a production line, one machine/process
uses the output of other machines/process.
The speed of different machines may not
always integrate with each other. For that
reason, the stock of input for all the machines
should be sufficient to keep the factory
running. Such WIP inventory is called
decoupling inventory.

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 Cycle Inventory
• It is a type of inventory accumulated due to
ordering in lots/sizes to avoid carrying the cost of
inventory. In other words, it is the inventory to
balance the carrying cost and holding cost for
optimizing the inventory ordering cost as
suggested by Economic Order Quantity (EOQ).
• The cycle stock is the inventory expected to be
sold based on demand forecasts, while safety
stock is extra or buffer stock to meet excess
demand or protect against delayed shipments
from your suppliers.

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 Inventory management
• Inventory management refers to the process
of ordering, storing, and using a company's
inventory. These include the management of
raw materials, components, and finished
products as well as warehousing and
processing such items.

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 Need for inventory manangement
• Meet variation in Production Demand
• Cater to Cyclical and Seasonal Demand
• Economies of Scale in Procurement
• Take advantage of Price Increase and
Quantity Discounts
• Reduce Transit Cost and Transit Times
• Long Lead and High demand items need to be
held in Inventory
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 Inventory Control techniques
• There are various types of inventory
management techniques which can help in
efficient inventory management.

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 ABC analysis
• A items: 10-20% of the items account for
70-80% of total inventory consumption value
(Qty consumed X unit rate)
• B items: 15-25% of the items account for
10-20% of the consumption value
• C-Items: 65-75% of the items account for
5-10% of the consumption value

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SKU Description Classification of
Inventory
Processor Chips A Class

Memory Chips A Class

Hard Disk / Storage A Class

Media
Software License A Class

Disk Drives A Class

Cabinet / Case B Class
Battery Pack B Class
Monitor A Class
Keyboard B Class
Training Manuals C Class
Mouse B Class
Stickers C Class
Screws & Nuts C Class
Power Cord C Class
Starter Assembly Pack- C Class
Instructions
The case of a Computer
Manufacturing Plant;
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 FSN Analysis
• This analysis classifies inventory based on
quantity, the rate of consumption and
frequency of issues and uses.
• Fast Moving (F) – Items that are frequently
issued/used
• Slow Moving (S) – Items that are issued/used
less for a certain period
• Non-Moving (N) – Items that are not
issued/used for more than a certain duration
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 VED Analysis
• Classifies inventory according to the relative
importance of certain items to other items
• Vital – inventory that consistently needs to be
kept in stock.
• Essential – keeping a minimum stock of this
inventory is enough.
• Desirable – operations can run with or without
this, optional.

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 HML Analysis
• Classifies inventory based on how much a
product costs/its unit price.
• High Cost (H) – Item with a high unit value.
• Medium Cost (M) – Item with a medium unit
value.
• Low Cost (L) – Item with a low unit value.

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 SDE Analysis
• Classifies inventory based on how freely available
an item or scarce an item is, or the length of its
lead time.(time between the beginning of a process or project and the appearance of
its results)

• Scarce (S) – Imported items and require longer

lead time.
• Difficult (D) – Items which require more than a
fortnight to be available, but less than 6 months
lead time.
• Easily available (E) – Items which are easily
available

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 XYZ analysis
• classify inventory items according to variability of their demand.
• X – Very little variation: X items are characterized by steady turnover over
time. Future demand can be reliably forecast.
• Y – Some variation: Although demand for Y items is not steady, variability
in demand can be predicted to an extent. This is usually because demand
fluctuations are caused by known factors, such as seasonality, product
lifecycles, competitor action or economic factors. It's more difficult to
forecast demand accurately.
• Z – The most variation: Demand for Z items can fluctuate strongly or occur
sporadically. There is no trend or predictable causal factors, making
reliable demand forecasting impossible.

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 SOS analysis
• Based on the nature of suppliers and period of
their availability
• S = Seasonal items
• OS = off seasonal items i.e., items available throughout
the year.

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 GOLF analysis
• Considering the nature of suppliers
• G = Government controlled supplies
• O = Open market supplies
• L = Local supplies
• F = Foreign market supplies.

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 JIT
• In Just in Time method of inventory control, the
company keeps only as much inventory as it needs
during the production process. With no excess
inventory in hand, the company saves the cost of
storage and insurance.
• The company orders further inventory when the old
stock of inventory is close to replenishment. This is a
little risky method of inventory management because a
little delay in ordering new inventory can lead to stock
out situation. Thus this method requires proper
planning so that new orders can be timely placed.

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 EOQ
• Cost Minimizing “Q”
• The economic order quantity is the optimum quantity
of goods to be purchased at one time in order to
minimize the annual total costs of ordering and
carrying or holding items in inventory.

• Formulae: EOQ=

• A = Demand for the year

• Cp = Cost to place a single order
• Ch = Cost to hold one unit inventory for a year

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