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INTRODUCTION<br />Significant part of the current asset<br />Large amount of inventory leads to considerable lapse of fund<br />Imperative to manage to avoid unnecessary investment <br />
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Cont………..<br />Inventory Control measure and regulate to predetermine <br /> -size for order or production, <br /> -safety stock<br /> - minimum level of order<br /> - maximum level of order<br />
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Nature of inventories<br />Raw material<br />Work in process<br />Finished goods<br />
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NEED TO HOLD INVENTORIES<br />Transaction motive(smooth production)<br />Precautionary motive(demand)<br />Production motive (price)<br />
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PRODUCTION CYCLE<br />Time span between introduction raw material to the conversion into the finished product <br />
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OBJECTIVE OF INVENTORY MANAGEMENT<br />To meet unforeseen future demand due to variation in forecast figures and actual figures.<br />To meet the customer requirement timely, effectively, efficiently and smoothly <br />To smoothen the production process.<br />To facilitate intermittent production of several products on the same facility.<br />
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Cont……..<br />To gain economy of production or purchase in lots.<br />To reduce loss due to changes in prices of inventory items.<br />To meet the time lag for transportation of goods.<br />To balance various costs of inventory such as order cost or set up cost and inventory carrying cost<br />
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Cont……..<br />To balance the stock out cost/opportunity cost due to loss of sales against the costs of inventory.<br />To minimize losses due to deterioration, obsolescence, damage etc. <br />
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Optimum level of inventory<br />It lies between two danger point,i.e between excessive and inadequate level<br />
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Major danger in the overinvesment<br />Unnecessary tie-up of firm’s fund and loss of profit<br />Excessive carrying cost<br />Risk of liquidity<br />
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Major danger in the inadequate level<br />Production hold-up<br />Failure to meet delivery commitment<br />
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Effective inventory management<br />Continues supply of raw material to facilitate production<br />Maintain sufficient stock of raw materials in periods of short supply and anticipate price changes<br />Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service<br />
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Cont……..<br />Minimise the carrying cost and time<br />Control investment in inventories and keep it an optimum level<br />
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Inventory management techniques<br />Aim to maximise the shareholder wealth <br />For efficient inventory management, we have to answer<br /> -how much should be ordered ? (ans;EOQ)<br /> -when should it be ordered ? (ans;reorder point)<br />
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Economic order quantity<br />ordering materials whenever stock reaches the reorder point<br />It tells how production to be schedule<br /> optimum level of inventory involves two types of cost<br /> 1.ordering cost<br /> 2.carrying cost<br />
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Ordering cost<br />It is the entire cost to acquire the raw material(supplies).<br />It include<br /> -Requisitioning<br /> -order placing<br /> -Transportation<br /> -Receiving, inspecting and storing<br /> -clerical and staff<br />
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Carrying cost<br />It is the cost incurred to maintain the given level of inventory<br />It include<br /> -Warehousing<br /> -Handling<br /> -clerical and staff<br /> -Insurance<br /> -Deterioration and obsolescene<br />
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Ordering and carrying cost trade off<br />Optimum level of inventory referred to EOQ<br />To determine EOQ-three approaches<br /> -Trial and error approach<br /> -Formula approach<br /> -Graphical approach<br />
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Trial and error approach<br />Assumptions <br /> -known annual requirement<br /> -steady usage<br /> -ordering and carrying cost to be constant through the entire period <br />
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Example – illustrating the trial and error approach<br />Estimated annual requirement, A =1200unit<br />Purchasing cost per unit, P(Rs) =50<br />Ordering cost (per order),O(Rs) =37.50<br />Carrying cost per unit,c(Re) =1<br />
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Inference from the TC table<br />OrderTotal cost <br />1.For single order(once in year) 637.5<br />2.12 order (once in a month) 500<br />3.4 order(once in every 3 month) 300<br />i.e.the third option is the most economic<br />
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Order formula approach <br />It is more easier way compared to trial and error approach <br />Assumption<br /> -carrying cost per unit constant<br /> -ordering cost per order fixed<br />
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Cont…………<br />O=ordering cost per order<br />A=Total annual requirement<br />Q=order size<br />Per unit carrying cost=c<br />Number of order=A/Q<br />TOC(Total order cost)=(A/Q)XO<br />
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Cont……<br />Carrying cost increases with increase order size, because of large have to be maintained<br />Ordering cost decline with increase in order size, because larger order size means lesser no of order<br />Total cost has the behaviour of both ordering cost and carrying cost<br />EOQ=deviating point of TC<br />
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Quantity discount<br />Supplier offer discount for large order size (above EOQ)<br />Net return=discount savings –additional carrying cost<br />If return +ve = can avail the discount offer <br />If return –ve= order size should be EOQ level<br />
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Example<br />d=discount rate (.005)<br />Discount on savings=dXPXA=(.005X50X1200)<br /> =300<br />Savings on the ordering cost=(OA/Q)-(OA/q)<br />Here Q=EOQ & q=discount quantity(400)<br />=O[A/Q-A/q]<br />=37.5[1200/300-1200/400]<br /> =37.5<br />
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Cont……<br />Net return=[dPA+ savings on - additional <br /> discount] carrying cost<br /> =(300+37.5)-50<br /> =287.5<br />Here net return is +ve= firm should order 400<br /> unit<br />
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Important Terms<br />Minimum Level – It is the minimum stock to be maintained for smooth production.<br />Maximum Level – It is the level of stock, beyond which a firm should not maintain the stock.<br />Reorder Level – The stock level at which an order should be placed.<br />Safety Stock – Stock for usage at normal rate during the extension of lead time.<br />
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Case study of inventory control (ABC)<br />Several types of inventories are there in ABC<br />Classify the inventories into<br /> -High value =A<br /> -Least value =C<br /> -reasonable attention=B(A&C)<br />
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Cont…….<br />ABC analysis concentrate on important items<br /> =Control by important exception(CIE)<br />Classified in the importance of their relative value=Proportion Value Analysis(PVA)<br />
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Step involved in implementing the ABC analysis<br />Classify ,determine expected use & price of the inventories<br />Determine total value of item(expected unitXunit price)<br />Rank the items (according to total value)<br />Compute the ratios (no.of unit/total unit) & (each value of item/total value of all item)<br />Combine on the basis of relative values (A,B,C)<br />