Inventory

An Inventory can be defined as stock of goods which is held for the purpose of sales to
gain maximum profit.

or
It is defined as the array of goods used in production or finished goods held by a
company during its normal course of business.
It is classified as a current asset on a company's balance sheet.
Inventory Management
The objective of inventory management is to strike a balance between inventory investment and customer service.

Functions of Inventory
It makes possible smooth and efficient operation of a manufacturing organization by
decoupling individual segments of total operation.
1. To provide a selection of goods for anticipated demand and to separate the firm
from fluctuations in demand.
2. To separate various parts of the production process.
3. To take advantage of quantity discounts.
4. To hedge against inflation.
Types of Inventory
• Raw material

– Purchased but not processed (unprocessed materials used to produce a good). 

Examples: Aluminum and steel for the manufacture of cars

Flour for bakeries that produce bread

Crude oil held by refineries

• Work-in-process (WIP) inventory is the partially finished goods waiting for completion and
resale.

Undergone some change but not completed

A function of cycle time for a product

• Maintenance/repair/operating (MRO)

– Necessary to keep machinery and processes productive

• Finished goods: Finished goods are products that go through the production process and are
completed and ready for sale. Retailers typically refer to this inventory as merchandise.
Common examples of merchandise include electronics, clothes, and cars held by retailers.
– Completed product awaiting shipment

Figure 1. The Material Flow Cycle

Inventory Control

( to reduce investment in inventories and ensuring that production process does not suffer at
the same time)

Inventory control is a planned approach of determining what to order, when to order, how
much to order and how much to stock, So that cost associated with buying and storing will
be optimal without interrupting production and sale. Inventory control deals with the two
problems,

1. When should an order to be placed.

2. How much should be ordered

The answer to the first question determines the economic order quantity EOQ by minimizing the total
inventory cost, which is given by Purchase +set-up (Ordering cost)+carrying cost+ shortage cost
Objectives of inventory control system
1. To ensure adequate supply of products and avoid storage as far as possible.

2. To make sure finance investment is minimum.

3. Effective purchasing and storing consumption, accounting is more important

objective.

4. To maintain timely record of all inventory items and to maintain the stock in desired
limits.

5. To ensure timely action for replenishment.

6. To provide reserve stock for variation in lead times of delivery material.

7. To provide scientific base for both short term and long-term planning materials.
Importance of Inventory Control

• It helps to achieve customer satisfaction.

• It helps to segregate best selling items and poor selling items. Increase the
stock of good selling items and decrease the stock of poor selling items.

• It ensure cashflow.

• It ensure better warehouse space utilization.

• It helps better human recourse utilization.

Cost Associated with Inventories

Inventory cost includes the costs to order and hold inventory, as well as to administer the related

paperwork. This cost is examined by management as part of its evaluation of how much inventory to

keep on hand.

Set-up Cost: It is associated with the setting up of machinery before starting production is generally

assumed to be independent of the quantity order for or produced.

Ordering Cost: This is a cost associated with ordering of raw material for production purposes.

Advertisements, consumption of stationery and postage, telephone charges, telegrams, rent for space

used by the purchasing department, travelling expenditures incurred etc., constitute the ordering cost.

Production Cost: The cost of purchasing a unit of an item is known as purchase/production cost.
Carrying or Holding Cost:

• It is the cost associated with carrying or holding the goods in stores. Holding cost
increases with the increase of cost. It also increases with the increase of stock or
inventory.

• The following are the components of holding cost: Cost of storage, Taxes, Insurance,
Interest on invested capital etc.,
Shortage (Stock-out Cost): The penalty for running out of stock. (when an item can

not be supplied by on the customer’s demand) is known as shortage cost. This cost

includes the loss of potential profit through sales of items and loss of goodwill in terms

of permanent loss of customers and its associated lost of profit in future sales.

It includes the following:

• Loss of production

• Loss of profit

• Unproductive cost of men, machines and other capital resources

• Loss of goodwill
Economic Order Quantity (EOQ) Models
What is the order quantity which will give us minimum total cost of the inventory management.
Economic Order Quantity (EOQ) Models
https://www.youtube.com/watch?v=fFR1nYhF_iw&t=6s
Classifying the materials: Various types of analysis

Cost : value of the particular

material.

Volume: Usages of the

particular material