Inventory management


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Inventory management

  1. 1. Inventory
  2. 2. Put your queries on www.financeclubb.comSession Outline• Inventory• Inventory Management• Factors Determining Inventory Levels• EOQ Model• Inventory Valuation• Just in Time2
  3. 3. Put your queries on www.financeclubb.comInventory3Inventory means Tangible propertywhich is held:• For Sale in the ordinary course ofBusiness OR;• In the process of Production (i.e.WIP) for Sale OR;• For Consumption in the productionof good & services which will beused for sale in the ordinary courseof Business• Inventory Includes Raw-Material,FG, WIP, Spares, Consumables etc.InventoryInventory Management means:• An Optimum Investment in theInventories• Striking balance between AdequateStock & Investment• Maintain Adequate Stock and thattoo by keeping Investment atMinimum Level. It is also known asOptimum Level of Inventory• Maintaining Inventory at theOptimum Level is called InventoryMagt.Inventory Management
  4. 4. Put your queries on www.financeclubb.comObjectives of Inventory Management4• Availability of Materials• Promotion of ManufacturingEfficiency• Minimizing of wastage• Better service to customer• Control of production level• Optimum level of inventoriesOperating• Economy in purchasing• Efficient use of capital• Reasonable price• Minimizing costFinancial
  5. 5. Put your queries on www.financeclubb.comFactors determining optimum level ofinventory5• Nature of Business• Anticipated volume of sales• Availability of funds• Attitude of ManagementGeneral Factors• Seasonal nature of business• Process length• Terms of purchase• Supply conditions• Loan facilitySpecific Factors
  6. 6. Put your queries on www.financeclubb.comInventory Costs6.... Cost of holding an item of inventory.... Cost of replenishing Inventory.... Loss when demand can not be metCarrying CostOrdering CostShortage Cost
  7. 7. Put your queries on www.financeclubb.comEOQ Model72FUQ =PCQ = economic order quantityF = cost per orderU = annual usage/demandF = cost per orderC = percent carrying costP = price per unit
  8. 8. Put your queries on www.financeclubb.comEOQ Model8CostsTotal costsCarrying costsOrdering costsQuantity ordered
  9. 9. Put your queries on www.financeclubb.comInventory Order Cycle9
  10. 10. Put your queries on www.financeclubb.comAssumptions of EOQ Model• Demand is known with certainty and isconstant over time• No shortages are allowed• Lead time for receipt of orders is constant• Order quantity is received all at once10
  11. 11. Put your queries on www.financeclubb.comRe-order Point• If the usage rate of materials and the leadtime for procurement are known withcertainty, then the ordering level would simplybe:Lead time in days for procurement X Avg. daily usage• When the usage rate and lead time are likelyto vary, the reorder level should be:(Lead Time X Avg. daily consumption)+ Safety stock11
  12. 12. Put your queries on www.financeclubb.comIllustrationMarvel Limited uses a large quantity of salt in its productionprocess. Annual consumption is 60,000 tonnes over a 50-weekworking year. It costs ` 100 to initiate and process an order anddelivery follow two weeks later. Storage costs for the salt areestimated at 10 paise per tonne per annum. The currentpractice is to order twice a year when the stock falls to 10,000tonnes. Recommend an appropriate ordering policy for MarvelLimited, and contrast it with the cost of the current policy.12
  13. 13. Put your queries on www.financeclubb.comIllustrationUsing EOQ Model• Number of orders per year = 60,000/10,954 = 5.5 orders• Re-order level = 2×60,000/50 = 2,400 tonnes• Total cost of optimal policy = holding costs + ordering costs =(0.1×10954)/2 + (100×60,000)/10,954= 547.70 + 547.74 = ` 1,09513
  14. 14. Put your queries on www.financeclubb.comInventory ValuationThe important methods of pricing inventories used inproduction are:• FIFO (First in First Out) Method The material which is issuedfirst is priced on the basis of the cost of material receivedearliest, so on and so forth.• Weighted Average Cost Method Material issued are pricedat the weighted average cost of materials in stocks14
  15. 15. Put your queries on www.financeclubb.comJust in Time (JIT)• The JIT control system implies that the firm shouldmaintain a minimal level of inventory and rely onsuppliers to provide parts and components ‘just-in-time’ to meet its assembly requirements.• This may be contrasted with the traditional inventorymanagement system which calls for maintaining ahealthy level of safety stock to provide a reasonableprotection against uncertainties of consumption andsupply – the traditional system may be referred to as a“just-in-case” system.15
  16. 16. Put your queries on www.financeclubb.comSummary16• Inventories represent a very significant proportion of total assets.• A distinction may be drawn between ‘process or movement’inventories and ‘organization’ inventories.• According to EOQ model, the optimal order quantity is:Q =• JIT system can be used to manage inventory levels2 FUPC
  17. 17. Put your queries on www.financeclubb.comThank Youmail@pace2race.com17