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Inventory Management Less emphasis on inventories Less emphasis on inventories

may tend to dampen business may tend to dampen business cycles ,, because business cycles because business cycles are typically in the cycles are typically in the grasp of inventory cycles grasp of inventory cycles

Presentation by Group 3

What Is Inventory?

w Stockpile of products for sale w Components which make up the products w Stock of items kept to meet future demand

Inventory includes
w Raw materials w Purchased parts, spares and supplies w Work-in-process (partially completed) products (WIP) w Finished goods w Items being transported w Tools and equipment

Factors influencing inventory

w Lead time w Reorder Point w Variety Reduction w Service Level w Quantity Discount

wCost of Holding Inventory wStock wMaterials Planning wObsolete inventory and Scrap

Why Inventory Management

To minimize investments in inventory To meet demand by efficiently organizing production & sales

w Purpose of inventory management n When to order n How much to order

Stores record

The record of stores may be maintained in three forms

w i. Bin Cards w ii. Stock Control Cards w iii. Stores Ledger

Bin Cards and Stock Control cards

These are essentially similar, being only quantitative records of stores. Bin cards are kept attached to the bins or receptacles or quite near thereto so that these also assist in the identification of the stock. stock control cards, on the other hand, are kept in cabinets or trays or loose binders.

i There would be less chances of mistakes . being made as entries would be made at the same time as goods are received or issued by the person actually handling the materials i Control over stock can be more effective, i . in as much as comparison of the actual quantity in hand at any time with the book balance is possible.

Stores Ledger
stores ledger is a collection of cards or loose leaves specially ruled for maintaining a record of both quantity and cost of stores received, issued and those in stock. It being a subsidiary ledger to maintain the main cost ledger, it is maintained by a Cost Accountant. It is posted form the Goods Received Note and the Materials requisition.

i It enables the stock records to be . centralized in case of an organization having a number of depots. i The records are clearer and neater. Also the i . recurring cost of maintaining them is much less than those kept manually. i. If up to date records are available the i i management will be able to exercise a greater control over quantities held in stock from time to time which may result in a great deal of saving in both the amount of investment in stock and their cost.

Store keeping
Store-keeping means the activities relating to purchasing, issuing, protecting, storing and recording of the materials. Store-keeping includes the receipts and issues of materials, their recording, movements in and out of the store and safeguarding of materials.

i To avoid over and under-stocking of . materials. i To maintain systematic records of i . materials. i. To protect materials from losses i i and damages. i . To minimize the storage costs of v materials w

Codification of material
The process of giving distinct names and symbols to different items of materials is called codification of materials.

Numerical Codification System Alpha-numeric Codification System Decimal Codification System

ABC Technique
The ABC approach is a means of categorizing inventory items into 3 classes A,B AND C according to the potential amount to be controlled. For this annual consumption value is calculated by

Annual usage value=annual requirement x per

unit cost.

The following procedure is selected for developing an ABC analysis: List each item carried in inventory by number or some other designation, Determine the annual volume of usage and rupee value of each item, Multiple each items annual volume of usage by its rupee value, compute each items percentage of the total inventory in terms of annual usage in rupees.

select the top 10% of all items which have the highest rupee percentages and classify them as A items. select the next 20% of all items with the next highest rupee value percentages and designate them as B items. The next 70% of all items with the lowest rupee percentages are C items

VED Classification
VED: Vital, Essential & Desirable classification VED classification is based on the criticality of the inventories. Vital items Its shortage may cause havoc & stop the work in organization. They are stocked adequately to ensure smooth operation.

Essential items - Here, reasonable risk can be taken. If not available, the plant does not stop; but the efficiency of operations is adversely affected due to expediting expenses. They should be sufficiently stocked to ensure regular flow of work. Desirable items Its non availability does not stop the work because they can be easily purchased from the market as & when needed. They may be stocked very low or not stocked.

FSN Analysis
FSN: Fast moving, slow moving & non moving Classification is based on the pattern of issues from stores & is useful in controlling obsolescence. Date of receipt or last date of issue, whichever is later, is taken to determine the no. of months which have lapsed since the last transaction. The items are usually grouped in periods of 12 months. It helps to avoid investments in non moving or slow items. It is also useful in facilitating timely control.

Inventory Turnover Ratio

A business needs inventory, similar to cash and receivable. Inventory is often inevitable given purchasing lead time &unexpected delay in arrival of materials. Investment in inventories are ideal funds on which a business does not earn any profit, so need to optimise investment in inventories.

w Inventory turnover ratio is a measure of the efficiency in inventory management

COGS is taken as sum of all excluding interest charges and income tax.

A ratio showing how many timesa company'sinventory is sold and replaced over a period Assume ITR is X, it means inventories have been turned over or rotated X times during the period.

Av. Inventories Holding Period= (1/ITR)*360 days A high ITR implies rapid movement of merchandise leading to lower investment in inventory and vice - versa.

Just in Time (JIT) Purchases Centralised Purchasing Decentralised Purchasing

Purchase Requisition Selection of Supplier Purchase Order Receipt of Materials Inspection of Materials Return to Supplier Approval of Invoices and Payment


Quantity discount Trade Discount Cash Discount Sales Tax and Other Levies Transport Charges Cost of Containers


First-in First-out (FIFO) Last-in First-out (LIFO) Simple Average Price Weighted Average Price Replacement Price Standard Price Base Stock Method

Store/Material Ledger card in FIFO format

Store/Material Ledger card in LIFO format

Store/Material Ledger card in Weighted Average

w Fixation of various stock levels is an important part of material control. w It is the duty of the storekeeper to give order for material if the stock reaches Minimum stock level, the stock level never exceeds the Maximum stock level. w In addition at a particular level Re-order for material is needed.

w It is the level at which a fresh order for supply of material is placed. w It is usually between minimum and maximum stock level. w Order is placed in such a way that the fresh material reaches before the stock level reaches a minimum point. Re-order level = Min level + Consumption during the time required for fresh delivery Re-order level = Max consumption Maximum Reorder period


w This represents the minimum quantity of material which must be maintained at all times. w It is to avoid the stoppage in production due to delay in obtaining fresh delivery of material. w This level is fixed by considering the time required for fresh supply and the rate of consumption during the lead time. Minimum stock level = Reorder level (Normal consumption Normal re-order period)


w It represents the maximum quantity of material that can be stocked. w Stock should not exceed this quantity. w This stock is fixed for avoiding over stocking of material. Maximum stock level = Re-ordering level + Reordering quantity (Minimum consumption Minimum reorder period)

How is Maximum stock level fixed

Maximum stock level is fixed by considering the following aspects

1. Amount of capital available 2. Go-down space available 3. Time for fresh supply of material after placing the order 4. Rate of consumption during the period 5. Cost of maintaining stores 6. Likely fluctuation in prices 7. Seasonal nature of supply of material 8. Possibility change in fashion 9.

Disadvantages of Over stocking

1. 2. 3. 4.

Over stocking blocks working capital It needs more go-down space There may be a loss due to obsolescence There may be a chance of deterioration in quantity 5. There may be a fear of depreciation in the market value

There are 2 questions related to inventory management:

What should be the size of order? At what level should the order be placed?


Carrying Cost Shortage Cost

Graphical representation of EOQ

Tc (Total Cost) Carrying Cost (Q/2)H

Cost (Rs.)

DS/Q (Ordering Cost)

Order Quantity Size (Q)


The demand for a given period, usually 1 year, is known The demand is even throughout the period Inventory orders can be replenished immediately(there is no delay in placing and receiving orders) There are 2 distinguishable costs associated with inventories: costs of ordering and costs of carrying The cost per order is constant regardless of the size of order The cost of carrying is a fixed percentage of the average value of inventory

TC=U/Q*F+Q/2*P*C Where TC=total costs

of ordering and carrying

U=annual demand Q=quantity ordered F=cost per order C=percentage carrying cost P=price per unit


Inventory Systems

An inventory system is a system used to keep track of abusinessesproducts and supplies.

Function : An inventory system must balance having enough inventories on hand to meet the demand of customers while investing as little money as possible in inventory.

Benefits : Everybusinesswith inventory can benefit from the use of an inventory system. These systems help keep personnel from wasting their time counting supplies and trying to manually determine which products to buy and sell.

Types Of Inventory Systems

Inventory systems are broadly classified into 2 types respectively, they are:Periodic Inventory System Perpetual Inventory System

w w

Periodic Inventory Systems

In this system stock - taking is undertaken at the end of accounting year .

Advantages : w Suits businesses where it is difficult or not feasible to determine the cost of individual items owing to the low value of items and the high volume of turnover. w Simple to record when goods are sold, only the sale is recorded. No entry is made for cost of sales. w Cost of sales need not be brought into account for each sales transaction. w Suits businesses which sell large quantities of goods of low value.

Periodic inventory system

Disadvantages : w w The value of stock on hand at any time cannot be verified. w Not possible to calculate trading stock deficit without physical stock-take and calculation of cost of sales. w Less control over stock. w Not suited to businesses dealing in valuable items. w Record of movement is not kept of specific stock items into and out of the Examples of companies using this system are like clothing stores , grocery stores , convenience stores , etc .

Perpetual Inventory System

The method of recording stores balances after each receipt & issue to facilitate regular checking & anticipate closing down for stock-taking.

-Wheldon It is generally carried out by the following 2 steps, they are:w Reconciliation of bin cards & stores ledger accounts . w Continuous stock - taking .

The system helps in long & costly work of physical checking of all the stocks each year It also avoids dislocation in production which arises in the case of periodic stock-taking at the end. As stock figures are readily available at all times, the profit & loss account & balance sheet can be prepared easily prepared at interim periods. A system of internal check remains in operation all the time. A detailed & reliable check on stores is


High set-up cost. Training on equipment False reliability Increased monitoring

Bill of Materials (BOM)

Def: Basically, a bill of material (BOM) is a complete list of the components making up an object or assembly. w It is also part of material requirements planning (MRP)

Processes that utilize a BOM

Production Materials planning Product costing Plant maintenance w w

How can a BOM be used in an organization

Several software programs are available that store item information and prepare bill of materials automatically w w

What information is on a BOM?

1. Quantity 2. Item ID# 3. Description of Item 4. Cost of Item 5. Total Project Cost

Benefits of a BOM
Improve material management by responding to changes in production. Reduce inventory levels. Reduce manufacturing costs. w w

BOM Example

Quantity ID# Total Cost

6TU8 20.00 2PC 1

Back 5DR Seat Nails Legs

Unit Price
5/Unit 5.00 5/Unit 10/Unit 10.00 0.50/Unit 2.50

1 4

1 5

Screenshots of BOM Software