INVENTORY

MANAGEMENT

SUBMITTED TO: - SUBMITTED BY: -

DR.B.D.MISHRA MEGHA VAISHY
JASMEET KAUR WALIA
( H.O.D) NEHA MAHANA
VAISHALI DHIRHE
REENA KAUSHIK
 Meaning of inventory

Inventory represents that portion of purchased

or manufactured goods which remains unused &
unsold. The literary meaning of inventory is
stock of goods.
 Definition

According to Collins English dictionary for

advanced learners;
 “An inventory is a written list of all the
objects in a particular place” &
 “An inventory is a supply or stock of
something”.
 Types of inventory
• Inventory of raw materials
• Inventory of stores & spare parts
• Inventory of work-in-process
(W.I.P):
• Inventory of finished goods
• Flabby inventory
• Safety inventory
• Profit making inventory
• Normal inventory
  Purpose of Holding Inventory

Avoiding lost
sales

Reduction in
ordering costs

Reduction in risk
of production
 Importance of inventory
1. For smooth running business operation inventory is
indispensible. The prime components of business
operations are production & marketing. Inventory
establishes a very important linkage between the two.

2. Since inventory by setting coordination between

production & marketing makes production &
distribution more easy & constant, the stability in
employment in the business concern becomes possible.
 3. In most of the business concerns, inventory forms
largest component of working capital. Inventory as a
working capital is helpful in earning the profit.
 Meaning of inventory management
Inventory management is, therefore, a scientific method of
determining what, when & how to purchase & how much to
have in stock for a given period of time. Inventories which
comprise of raw materials, consumable stores, work-in-
process, & finished goods are to be purchased & stored.
 Definition of inventory management

Inventory management refers mainly to when a firm strives to

attain and uphold an optimal inventory of goods while also
taking note of all orders, shipping and handling, and other
associated costs.
 Objectives of inventory management
 To ensure continuous supply of materials, spares and finished
goods so that production should not suffer at any time and the
customers demand should also be met.

 To avoid both over-stocking and under-stocking of inventory.

 To maintain investments in inventories at the optimum level as

required by the operational and sales activities.

 To keep material cost under control so that they contribute in

reducing cost of production and overall costs.

 To eliminate duplication in ordering or replenishing stocks.

 To minimize losses through deterioration, pilferage,
wastages and damages.
 To design proper organization for inventory
management.
 To ensure perpetual inventory control so that
materials shown in stock ledgers should be fixed
actually lying in the stores.
 To ensure right quality goods at reasonable prices.
 To facilitate furnishing of data for short-term and
long-term planning and control of inventory.
 To minimize carrying cost of inventory.

 To keep investment in inventory at optimum level.

 To reduce the losses of theft, obsolescence & wastage

etc.

 To make arrangement for sale of slow moving items.

 To minimize inventory ordering costs.

COST ASSOCIATED WITH INVENTORY
MATERIAL COST

ORDERING COST

CARRYING COST

SHORTAGE COST
 FORMULA
 NO. OF ORDERS =

 ANNUAL ORDERING COST= NO. OF ORDERS × ORDERING COST

 ANNUAL CARRYING COST = × CARRYING COST

 ANNUAL PURCHASE COST = ANNUAL REQUIREMENT × PURCHASE PRICE

 TOTAL COST = ANNUAL ( ORDERING+ CARRYING + PURCHASE) COST

 PRACTICAL
A company is reviewing its stock policy and has the following
alternatives available for the purchase of stock no. 789.

 Purchase stock twice monthly, 100 units;

 Purchase monthly, 200 units;
 Purchase every three months, 600 units;
 Purchase six-monthly, 12oo units;
 Purchase annually, 2400 units.

It is ascertained that the purchase price per unit is re. 0.80 for deliveries
upto 500 units. A 5% discount is offered by the supplier on the whole
order where deliveries are 501 and upto 1000 and 10% reduction on the
total order for deliveries in excess of 1000 units. Each purchase order
incurs ordering cost of rs. 5. Carrying costs are rs. 0.25 per unit of
average stock quantity held.
INVENTORY CONTROL SYSTEM
 ABC INVENTORY CONTROL SYSTEM

 JUST-IN-TIME SYSTEM

 OUTSOURCING

 COMPUTERIZED INVENTORY CONTROL SYSTEM

TECHNIQUES OF INVENTORY
MANAGEMENT

TRADITIONAL MODERN OR
APPROACH SCIENTIFIC APPROACH

1. A.B.C ANALYSIS.
2. V.E.D ANALYSIS.
3. EOQ ANALYSIS.
 TRADITIONAL APPROACH
 In this the various levels of inventory may be compared from time to time
between the companies come from the same industry or with the same
company over a period of time.

 In this the comparison is done for establishing the standards which can be
used in calculating the efficiency or it will be helpful in inventory
management.

 The ratios may be the significant indicators

of efficiency of management & control of
raw material, work-in-progress, finished
goods inventory.

 Quicker the turnover is greater will be the

profitability.
 The following formula is used for calculation :-

• MATERIALS TURNOVER =
 
• WORK-IN-PROCESS TURNOVER =
 
• FINISHED GOODS TURNOVER =

 Higher the ratio shorter the average time

between investment in a particular type of
inventory.

 Lower the ratio is a signal of danger, which

may be the result of defective purchasing of
raw material.
 MODERN OR SCIENTIFIC
APPROACH
 The problems of inventory management and control are related to the following facts:-

1. Best size of the order is the core problem of inventory management.

2. What should be best point of time for placing the order for new goods/materials.

3. Meeting the uncertainties either in the supply of goods/materials ordered.

 While solving the problems mentioned above.

 It becomes difficult to give equal attention to all the items

or goods included in inventory.

 Therefore, a question arises in the form of a problem as:-

whether can only few selected items should be considered
more attentively?

 This problem may be solved by using A.B.C. analysis,

V.E.D. analysis, etc.
 A.B.C ANALYSIS
 A.B.C stands for “ALWAYS BETTER CONTROL”.

 In this the various items of inventory are classified into three categories A, B,
C.

 The classification of inventory items in an organization is based on annual

consumption & annual value of the items.
A CATEGORY :- Very High Control Because They Are
Less In Quantity & The Rate Of Consumption Is Also
Very High.

B CATEGORY :- Moderate Control Because The Items

Are Of Little Less In Quantity & The Consumption Rate
Is Also Moderate.

C CATEGORY :- Very Less Control Because They Are

Huge In Quantity & The Rate Of Consumption Is Very
Less.
 GRAPH SHOWING A.B.C
CATEGORY
ANALYSIS
PERCENTAGE OF PERCENTAGE OF CONTROL REQUIRED
ITEMS ANNUAL
CONSUMPTION
VALUE
A 5% to 10% 70% to 80% VERY HIGH CONTROL

B 20% to 30% 15% to 20% MODERATE CONTROL

C 70% to 80% 5% to 10% LESS CONTROL

DIFFERENCE BETWEEN A,B&C ITEMS
S. A Items B Items C Items
No
1. Very Strict Control. Medium Control By Low Control & Powers
Control By Higher Medium Authority. Can Be Deliberated By
Authority. The User Department.

2. No Or Less Safety No Safety Stock & High Safety Stock & Less
Stock. Periodic Ordering. Frequent Ordering.( 6
Frequent Ordering. Months Or Annually)

3. Consumption Pattern In This It Is Followed In This It Is Followed semi

Is Follow Up Daily Or Forth night Or Monthly. Quarterly Or Quarterly.
Weekly.

4. Material Planning The Past Pattern Of Rough Estimates Can Be

Should Be Accurate & Consumption Can Be Made For Material
Day To Day. Taken As Basis For Planning.
Material Planning.
ADVANTAGES OF ABC ANALYSIS
1. This analys is ensures that minimum capital shall be invested in inventory and at
the same time there will be no fear of production stoppage due to inadequacy of
inventory.

2. If this analysis is followed along with Economic Order Quantity, the expenses to
be incurred in ordering, getting the delivery and carrying the inventory may be
kept at minimum level.

3. Management has to pay attention to all the items

which involves other things like the wastage of time,
materials,etc. This technique saves valuable time of the
management because few selected items are cared for.

4. Since the purchase procedure becomes more

scientific and systematic under this technique, this
function may be assigned in a routine manner.
5. This analysis can be applied to other areas of business operations also.

6. It becomes possible to concentrate in all the areas which need genuine efforts.

7. It is the most effective and economical method as it is based on selective

approach.

LIMITATIONS OF ABC ANALYSIS

1. Consumption pattern for all the items cannot be
determined.

2. Unitary value cannot be calculated for each item.

3. There are certain items which are highly

consumed but no inventory is made.
 V.E.D ANALYSIS
 V.E.D stands for “VITAL ESSENTIAL DESIRABLE.”

 This analysis is more relevant for the spare parts.

 This analysis is based on the criticality of the inventory.

VITAL:- Vital Parts Non-availability Leads To

Closing Of Factory.

ESSENTIAL:- Essential Parts Non-availability Will

Effect The Efficiency Of The Production Process.

DESIRABLE:- Desirable Parts Non-availability

Lead To Decrease In Efficiency & Reduction Of
Labour, but it wont affect the production process.
 Economic Order Quantity (EOQ)
 
Economic Order Quantity (EOQ) Definition:
Economic Order Quantity is the optimal order size to minimize all
inventory costs.

Thus, the EOQ analysis provides answers to the following order quantity
problems:
1. How much of inventory should be bought in an order on each
replenishment?
2. Should the quantity be purchased be large or small?
3. Should the requirement of materials during a given period of time be
purchased in one lot or should it be purchased in installments?
Underlying Assumptions of Economic
Order Quantity:
1. The ordering cost is constant.

2. The rate of demand is constant

3. The lead time is fixed

4. The purchase price of the item is constant i.e. no

discount is available

5. The replenishment is made instantaneously; the

whole batch is delivered at once.
EOQ Formula:
 
EOQ = √2CO / I 
WHERE: C = Annual Usage
O = Ordering Cost Per Order
I = Carrying Cost Per Unit
Number of orders to be placed in a period = C / EOQ
 EOQ Model
Annual Cost

Total Cost Curve

Holding Cost

Order (Setup) Cost

Optimal Order Quantity

Order Quantity (Q*)
Minimum level
The minimum level or minimum stock is that level of stock below
which stock should not be allowed to fall. In case of any item falling
below this level, there is danger of stopping of production and,
therefore, the management should give top priority to the
acquisition of new supplies.
Following factors are taken into account while fixing minimum stock
level:
1. LEAD TIME
2. RATE OF CONSUMPTION
3. NATURE OF MATERIAL

Minimum level = Re-order level-(normal consumption*normal re-

order period)
Maximum level

It is the quantity of materials beyond which a firm should not

exceed its stocks. If the quantity exceeds maximum level limit then
it will be overstocking. A firm should avoid overstocking because it
will result in high material costs. Overstocking will mean blocking
of more working capital, more space for stocking the materials,
more wastage of materials and chances of losses from obsolescence.

Maximum level= (reorder level+ reorder quantity)

– (minimum consumption rate * minimum
reorder period)
 Re-ordering level
When the quantity of materials reaches at a certain figure
then fresh order is sent to get materials again. The order
is sent before the materials reach minimum stock level.
Re-ordering level or ordering level is fixed between
minimum level and maximum level.

Re-order level= (lead time * usage rate per day) + safety

stock
Danger level
It is the level beyond which materials should not fall in any case. If
danger level arises then immediately steps should be taken to
replenish the stocks even more cost is incurred in arranging the
materials. If materials are not arranged immediately there is a
possibility of stoppage of work. Danger level is determined with the
following concepts:

Danger level= (minimum rate of consumption *

minimum reorder period)
Average stock level
Average stock level represents the average stock which is
maintained in the stores. This level is above the minimum level
and below the minimum level. The following formula is used to
calculate average stock level:

Average stock= ½(maximum stock level +

minimum stock level)

SAFETY STOCK
Safety stock is a buffer to meet some unanticipated
increases in usage.
EXAMPLE
A company uses annually 50000 units of an item each
costing Rs. 1.20. each. Each order costs Rs. 45 and
inventory carrying cost 15% of the annual average
inventory value.
1. Find EOQ
2. If the company operates 250 days a year, the
procurement time is 10 days and safety stock is 500
units, find re-order level, maximum, minimum and
average inventory.
Solution:
 
EOQ = √2CO / I 

 
= 5000 units
 
 Consumption per day = 50000/250days
= 200 units
 Re-order level= safety stock + lead time consumption
= 500+ (10*200)
= 2500 units
  
Maximum level= ROL-(minimum consumption during lead
time)+EOQ
= 2500-(10*200)+5000
= 5500 units

Minimum level = Re-order level-(normal

consumption*normal re-order
period)
=2500-(10*200)
= 500 units
Average stock= ½(maximum stock level + minimum
stock level)
=1/2(5500+500)
=3000 units.
Limitations of EOQ Model:
1. The assumption of constant usage and the instantaneous or
immediate replenishment of inventories are not always
practical.
2. Safety stock is always required because deliveries from
suppliers may be delayed for reasons beyond control. Also
because there may be an unexpected demand for stocks.
3. EOQ assumes that the demand is constant and known with
certainty which always is not the case. Demand may rise and
fall depending upon various factors leaving a certain degree of
uncertainty behind it.
4. Computational problems may arise and hence the number of
orders to be placed may not be always 100% accurate if
fractions or decimals are involved.
 CONCLUSION
The techniques of inventory management, discussed above are
very useful in determining the optimum level of inventory and
finding answers to the problems of the economic order
quantity, the reorder point and the safety stock.

These techniques are very essential to economise the use of

resources by minimizing the total inventory cost. Our
discussion of inventory management indicates the broad
framework for managing inventories.

More sophisticated techniques may be used to handle

inventory management problems more efficiently and
effectively.
THANK YOU