Unit III – Part A

Basics of Inventory Management

Prof. Vijay Kr. Khurana
Professor, MAIMS
vijaykhurana.faculty@maims.ac.in
 What do you understand by Inventory?
● Inventory generally refers to the materials in stock.
● It is also called the idle resource of an enterprise.
● Inventories represent those items which are either stocked for
sale or they are in the process of manufacturing or they are in
the form of materials, which are yet to be utilised.
● Inventory= Raw Material, Work in process, Finished Goods,
spares, components, consumable stores etc.
● Four Types of Inventory are:-
● (1) raw material inventory, (2) work-in-process inventory,
● (3) maintenance/repair/operating supply (MRO) inventory, and
(4) finished goods inventory.
 Why we need Inventory?
1. Transaction
- Inventory kept due to lack of perfect
synchronization of (the normal) inflow and outflow
of the material.
2. Precaution
- Inventory kept to cover uncertainties in demand
and supply.
3. Speculation
- Inventory kept for speculative purposes.
 Why we need Inventory?
● 1. To stabilise production:
● 2. To take advantage of price discounts:
● 3. To meet the demand during the replenishment period:
● 4. To prevent loss of orders (sales):
● 5. To keep pace with changing market conditions
● 6. To decouple production from distribution.
● 7. To hedge against inflation and price changes.
● 8. Sometimes the organizations have to stock materials due
to other reasons like suppliers minimum quantity condition,
seasonal availability of materials or sudden increase in
prices.
 Why we need to exercise Inventory Control?
● Inventory control is a planned approach of determining
what to order, when to order and how much to order and
how much to stock so that costs associated with buying
and storing are optimal without interrupting production
and sales.
● Inventory control basically deals with two problems: (i)
When should an order be placed? (Order level), and (ii)
How much should be ordered? (Order quantity).
 What we need to exercise Inventory Control?
Objectives of Inventory Control
● 1. To ensure adequate supply of products to customer and avoid
shortages as far as possible. ; 2. To make sure that the financial
investment in inventories is minimum.
● 3. Efficient purchasing, storing, consumption and accounting for
materials. ; 4. To maintain timely record of inventories of all the
items and to maintain the stock within the desired limits.
● 5. To ensure timely action for replenishment.
● 6. To provide a reserve stock for variations in lead times of
delivery of materials. ; 7. To provide a scientific base for both
short-term and long-term planning of materials.
 What we need to exercise Inventory Control?
Benefits of Inventory Control
● 1. Improvement in customer’s relationship because of the timely
delivery of goods and services.
● 2. Smooth and uninterrupted production and, hence, no stock
out.
● 3. Efficient utilisation of working capital.
● 4. Helps in minimising loss due to deterioration, obsolescence
damage and pilferage.
● 5. Economy in purchasing.
● 6. Eliminates the possibility of duplicate ordering.
 What are Essentials of Effective Inventory Control /
Management ?

What is difference between Inventory Control and Inventory

Management?
Essentials of Effective Inventory Control/ Management
For an efficient and successful inventory control here are certain
important conditions or elements. They are as follows:
● Proper Classification and Identification of Inventories
● Standardization and Simplification of Inventories
● Setting Maximum and Minimum limits for each part of inventory
● Prioritize your Inventory
● Track all product information.
● Defining Economic Order Quantity
● Be consistent in how you receive stock
● Adequate Storage Facilities
Essentials of Effective Inventory Control/ Management
● Adequate Records and Reports
● Analyze supplier performance
● Intelligent and Experienced Personnel
● Proper Co-ordination
● Budgeting
● Practice the 80/20 inventory rule
● Proper Internal Check / Audit your inventory
● Invest in inventory management technology.
● Use technology that integrates well
What Factors influence/ affect Inventory Control Policy?
● Financial Factors - such as the cost of borrowing money,
expenses associated with warehouse operations
and transportation costs
● Suppliers performance - like their reliability
● Lead Time - is the time it takes from the moment an item is
ordered to the moment it arrives. More vs less; Buy vs Make
● Product Type - example, perishable vs non-perishable,
hazardous vs normal, bulky vs. small size, costly vs cheaper,
easily available vs short supply
● Management Orientation
What Factors influence/ affect Inventory Control Policy?
● Characteristics of the manufacturing / production system
● Degree of specialization and differentiation of the product at
various stages
● Process capability and flexibility
● Production capacity and storage facility
● Amount of Protection needed against Shortages
● External Factors – Inflation, Strike situation in communication
facilities, Wars or some other natural calamities like famines,
floods, etc., Change in Govt. Policies
 Basic Questions in Inventory Control
 How much? (How much to keep or order?)
 When? (When should this be done?)
 Inventory models try to answer these questions while
optimizing for costs.
 Transaction or ‘Normal’ inventory is first calculated
based on normal usages and lead times to procure.
 Precaution or ‘Safety stocks’ of inventory are then
added to take care of uncertainties in the demand and
in supply.

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 Inventory Models
Inventory Carrying cost
Inventory Ordering cost
Cost of Purchase = Purchase price+ Transit Insurance+ Inward
transport expenses
 Basics of Inventory Models
Costs of Carrying (Cc)include, in all the inventory models:
● Cost of capital invested in holding inventory
● Cost of space/ storing/ warehousing
● Cost of material handling
● Cost of obsolescence and spoilage
● Cost of insurance
● Cost of administration
More the quantity purchased/ order size, more is the carrying
cost and vice versa
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 Basics of Inventory Models
Costs of Ordering (Co)include, in all the inventory models:
● Cost of placing an order, typing, stationary
● Time and cost of negotiation
● Salaries paid to purchasing team
● Overheads of purchasing team
● Cost of follow-up
● Cost of initial checking, follow-up of returns
More the quantity purchased/ order size, lesser is the
ordering cost and vice versa
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Basics of Inventory Models
Basics of Inventory Models
 Basics of Inventory Models
Safety Stocks
● Lead time is an important figure, because the inventory
coverage has to be provided for excess demand over the
procurement / manufacturing lead time.
● Safety stock or Buffer stock = (Dmax-Davg) over the lead time,
where, Dmax = maximum demand for the material,
Davg = average demand for the material

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 Basics of Inventory Models

● Concept of Service Level

● Dmax and hence the safety stock is based on management’s
own ‘risk’ perception. The ‘risk’ is of not being able to provide
service (i.e. material) when it is required.

● Out of 100 occasions, if on 95 occasions the material was

available, then it is described as 95 % ‘service level.’

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Inventory Models
 1. Basic Inventory Model – Purchase Model With
Instantaneous Replenishment and without shortages
 The basic model assumes:
a) Demand for the material is at a constant known rate.
b) Material is ordered several times and each order is of
the same size.
c) Order is placed whenever the stock of material
reaches the Re-order Point (or Level).
d) There is instantaneous replenishment.

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1. The basic model, known as Economic Order Quantity
(EOQ) model is discussed below >

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 1. Basic Inventory Model – Purchase Model With
Instantaneous Replenishment and without shortages
 1. Basic Inventory Model – Purchase Model With
Instantaneous Replenishment and without shortages

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 1. Basic Inventory Model – Purchase Model With
Instantaneous Replenishment and without shortages

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Numerical