Topic 8

INVENTORY MANAGEMENT

Presented

BY

Hassan Aim Musoke

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 Presentation Lay Out
• Definitions
• Types / classes of inventory
• Reasons for holding inventory
• Aims of inventory management
• Costs associated with inventory
• Inventory management techniques

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 DEFINITION OF INVENTORY

• The term inventory can be defined as ‘parts and

materials on hand’. From accounting terms it is
defined as ‘the value or quantity of raw materials,
components, Assemblies, Consumables, Work In
Progress (WIP), and finished goods stock that are
kept or stored for use as the need arises’ (Kenneth
Lysons [2000; p218]).

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 Inventory/Stock Management

• Inventory/stock management / control refers

to the techniques used to ensure that stocks
of raw materials and other supplies, WIP and
finished goods are kept at levels, which
provide maximum service at minimum
costs.

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 Cont.
• Inventory management covers a variety
of activities which may vary from firm to
firm. It involves activities like demand
management, forecasting future demand
requirements, developing cost – effective
systems and procedures, stock checking,
e.t.c

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 Aims of Inventory Management
The main aims of inventory management are to:
• Provide both internal and external customers with
the required service levels in terms of quantity
and order fulfilment
• Establish present and future requirements for all
types of inventory to avoid over stocking while
avoiding bottlenecks in production
• Keep inventory costs at a minimum

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 CLASSIFICATION OF INVENTORY
• Raw materials e.g. timber, cloth etc in unprocessed state awaiting
conversion into a product
• Components and sub-assemblies e.g. gear boxes to be incorporated into
an end product
• Consumables – supplies classified as indirect and do not form part of a
saleable product.
• Consumables may be sub-classified into:
- Production e.g. detergents
- Maintenance e.g. lubricating oil
- Office e.g. stationery
- Welfare e.g. first aid supplies
• Consumables are also referred to as maintenance, repair and operating
(MRO) items.
• Finished goods – products manufactured to resale that are ready for
dispatch.
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 NOTE
• Inventory may also be classified into:
– Primary inventory – raw materials,
components and sub-assemblies, WIP and
finished goods
• Support inventory – MRO, and consumables of
various categories

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NEED/REASONS FOR HOLDING INVENTORY BY
ORGANIZATIONS

 Mismatch.
 Economies of scale
 Price fluctuations / Protection against anticipated shortages and price
increases especially in times of high inflation
 Appreciation in value
 Demand fluctuation
 Location of the buying organization (from its supply market)
 To reduce the risk and uncertainties of supplier failure or uncertainty
 Protection against lead time uncertainties
 Need to meet unexpected customer demands
 Need to ensure constant demand of supplies in the firm

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 COSTS ASSOCIATED WITH INVENTORY MANAGEMENT

Acquisition Costs
These basically relate to ordering costs. Costs incurred in
placing an order are normally irrespective of the order
size. Ordering costs include;
• Preliminary costs; e.g. Preparing the requisition, vendor
selection, negotiation,
• Placement costs; e.g. order preparation, stationery, and
postage e.t.c.
• Post-placement; e.g. progressing/follow-up, receipt of
goods, materials handling, inspection, certification and
payment of invoices.
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 Holding Costs
These are of two types.
• Costs proportional to the value of inventory;
e.g. financial costs (e.g. interest on capital tied up
in inventory- this may be Bank rate or more
realistically, the target return on capital required
by the enterprise), Cost of insurance, Losses in
Value through deterioration, obsolescence and
pilferage.

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 Cont.
• Costs proportional to the physical
characteristics of inventory; Storage costs
(storage space, stores rates, light, heat, and
power), labour costs relating to handling and
inspection, clerical costs relating to stores
records and documentation.

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Costs of Stock Outs (i.e. stocks of being out of inventory)

These comprise of.

• Loss of production output
• Costs of idle time and of fixed overhead s spread
over a reduced output.
• Costs of action taken to deal with the stock out e.g.
buying from a stockiest at an enhanced price,
switching production, obtaining substitute materials.
• Loss of customer goodwill through the inability to
supply or late delivery.

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 THE IMPORTANCE OF INVENTORY MANAGEMENT TO ORGANIZATIONS

• Management is in position to plan and perform more

effectively the stores and inventory management
operations.
• If managed effectively and efficiently, stores and
inventory would be a basis for improving the
company performance (it is a value-adding activity).
• Effective and efficient stores and inventory
management helps in the planning process by
matching the store (space) requirements with the
inventory requirements.
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 THE IMPORTANCE OF INVENTORY MANAGEMENT TO ORGANIZATIONS CONTINUED

• Through effective inventory management, the ‘fill rate’ of

an item on a managed inventory list must be maintained to
avoid shortages of frequently used items.
• To provide both internal and external customers with the
required service levels especially with quantity.
• To ascertain present and future requirements for all types of
inventories to avoid both overstocking and under-stocking.
• To keep costs at a minimum, variety reduction, economic lot
sizes and analysis of costs incurred in obtaining and
carrying inventories.

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