INVENTORY MANAGEMENT

INVENTORY MANAGEMENT

 It is the one of the major current asset and almost accounts for 60% of the total
current assets in most of the organisations
 It is composed of the assets that will be sold in the future in the normal course of
business
 The assets which are stored by firm as inventory include RAW
MATERIALS ,WORK IN PROCESS AND FINISHED GOODS
INVENTORY MANAGEMENT

 Raw Material inventory contains items that are purchased by the firm from others
and they are converted to finished goods through production process
 Work in process inventory consists of items currently used in production
process.They are semi-finished goods,They are at various stages of production
 Finished goods represent final and finished goods which are available for sale.
INVENTORY MANAGEMENT

 Inventory management involves all functional areas such as finance, marketing,

production and purchasing
 The job of financial manager is to reconcile the conflicting viewpoints of various
functional areas regarding the appropriate level of inventory
OBJECTIVE OF INVENTORY MANAGEMENT

 To minimize investments in Inventory

 To meet a demand for the product by efficiently organizing the production and
sales operations
 Because maintaining inventory involves costs. Smaller the inventory lower the
costs
 But larger inventory helps in smooth functioning of firms.
COSTS ON INVENTORY

ORDERING COST CARRYING COSTS

 Requisitioning  Warehousing
 Order Placing  Handling
 Transportation  Clerical and staff
 Receiving, inspecting and storing  Insurance
 Clerical and Staff
 Deterioration and Obsolescence
 They increase in proportion to number of orders
 They decrease in proportion to increase in
placed
inventory
 More frequently inventory is ordered the higher will
be the firm’s ordering cots.
OPTIMUM ORDER QUANTITY

 The optimum inventory size is known as ECONOMIC ORDER QUANTITY

 It is the size at which the total ordering cost and carrying costs are minimum
 We can follow Trial and error approach, formula approach and graphic approach
ECONOMIC ORDER QUANTITY
ECONOMIC ORDER QUANTITY

 Economic Order Quantity (EOQ) is a production formula used to determines the

most efficient amount of goods that should be purchased based on ordering and
carrying costs.
 In other words, it represents the optimal quantity of inventory a company should
order each time in order to minimize the costs associated with ordering and
holding inventory.
ECONOMIC ORDER QUANTITY
CARRYING COSTS & ORDERING COSTS

 Carrying Costs= ½ X Order quantity X Annual carrying costs per unit

 Ordering Cost=Number of orders X Ordering costs per order
 =Annual demand/order size X Ordering costs per order
ABC ANALYSIS

 ABC analysis is an approach for classifying inventory items based on the items’
consumption values.
 ABC classification is based on the premise that not all inventory is of equal
value. 
 Consumption value is the total value of an item consumed over a specified time
period, for example a year.
 The approach is based on the Pareto principle to help manage what matters and is
applied in this context.
ABC ANALYSIS

 A items are goods where annual consumption value is the highest.

 The Pareto Principle states that 80% of your inventory costs comes from just 20% of
your inventory. This is known as the 80/20 rule and it helps shape the results of your
ABC Analysis.
 Applying the Pareto principle (also referred to as the 80/20 rule where 80 percent of
the output is determined by 20 percent of the input), they comprise a relatively small
number of items but have a relatively high consumption value.
 So it’s logical that analysis and control of this class is relatively intense, since there is
the greatest potential to reduce costs or losses.
ABC ANALYSIS

 B items are interclass items. Their consumption values are lower than A
items but higher than C items.
 C items have the lowest consumption value. This class has a relatively high
proportion of the total number of lines but with relatively low consumption
values.
 Logically, it’s not usually cost-effective to deploy tight inventory controls,
as the value at risk of significant loss is relatively low and the cost of
analysis would typically yield relatively low returns.
ABC ANALYSIS

 Since businesses are not all the same, the thresholds that define the upper
and lower limits of each class are not definable.
 ABC analysis makes a buyer’s job easier
 Better control over high-value inventory improves availability, and reduces
losses and costs
 More efficient use of stock management resources.
ABC ANALYSIS