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INVENTORY MANAGEMENT
1
What is Inventory
• Inventory is stock of items held to meet future
demand.
• It is a list for goods and materials, or those
goods and materials themselves, held available
in stock by a business.
• It is collection of goods processed to form
desired output to the organization.
2
Working capital relation with inventory
• Inventory and working capital have a symbiotic relationship in business.
Working capital is a financial formula that measures a company’s
operating liquidity. The basic working capital formula is current assets
minus current liabilities, with inventory being part of a company’s current
assets. Companies that derive a large portion of sales will often have
copious(abundant) amounts of inventory, which can affect the working
capital formula. Significant adjustments relating to inventory can signal
improper operational or accounting techniques employed by a company.
• Inventory is a liquid asset (hence it being included in the current asset
group) in accounting terms. Companies can usually sell this inventory fairly
quickly in order to pay bills and increase cash to pay other operating bills.
Most companies use accounts payable to pay for new inventory
purchases. Therefore, inventory affects working capital on both sides:
asset and liability. Companies are typically unable to purchase large
amounts of inventory in order to improve their working capital position.
This metric ensures the company cannot mislead business stakeholders
through simple transactions
3
Types of Inventories
Raw
material
Raw
material
Work in
progress
Work in
progress
Work in
progress
Work in
progress
Work in
progress
Work in
progress
Work in
progress
Work in
progress
Work in
progress
Finished
goods
C
u
s
t
o
m
e
r
4
Firm or Organization
C
u
s
t
o
m
e
r
• Raw Material Goods
– Basic inputs that are converted into finished product through
the manufacturing process.Raw material inventory consists of
basic mateials used as input in the firm’s production
operations.Its purpose is to decouple the production function
from the purchasing function. e.g for a steel manufacturing firm
iron ore is the main material.
• “Work in progress” Goods
– Semi-manufactured products need some more works before
they become finished goods for sale.The more complex and
lengthy the production process,the larger will be the investment
in WIP inventory.Wip inventry is to decouple many operations in
production process so that machine failure and work stoppages
at any stage do not effect the subsequent stages.
5
Types of Inventories contd.
TYPES cont.
• Finished Goods
– Completely manufactured products ready for sale . The finished
goods inventory consists of unsold goods on which production
processes has been completed . The purpose of finished goods
to decouple production and sales functions , so that sales
become unhindered by stoppages/slowdowns in the production
process . The firm holding such as inventory can absorb
bottleneck in the production process.
• Supplied Goods
– Office and plant cleaning materials not directly enter production
but are necessary for production process and do not involve
significant investment
6
Inventory cost
• Carrying cost
It is the cost of maintaining inventory in company’s
warehouse or cost of holding an item in inventory
• Ordering cost
cost that are incurred at the time an order is placed .
These costs are periodic and normally remain constant
regardless of size of the order.
• Shortage cost
Temporary and permanent loss of sales when demand
cannot be met . It is alternately called stock out cost or
backorder cost.
7
ECONOMIC ORDER QUANTITY MODEL
• The basic issue in inventory management is to arrive at
the optimal level of inventory , i.e a level that
unhindered production distribution functions without
excessively trying funds in inventory . This, therefore
involve a tradeoff between profitability and liquidity.
The quantity of inventory to be ordered and timing of
order are the underlying issues that need to be
resolved to arrive at the optimal level of inventory.
• The two questions that the inventory theory tries to
address are:
1. How much should be ordered?
2. When should it be ordered?
8
s
9
Co - cost of placing order D - annual demand
Cc - annual per-unit carrying cost Q - order
quantity
• Annual ordering cost =
• Annual carrying cost =
10
Co D
Q
Cc Q
2
Total cost = Co D
Q
Cc Q
2
Inventory Management
• Inventory management is all about specifying the size and
placement of stocked goods.
• It is required at different locations within a facility or within
multiple locations of a supply network to protect the regular and
planned course of production against the random disturbance of
running out of materials or goods.
• Inventory management also concerns with carrying costs of
inventory, asset management, inventory forecasting, inventory
valuation, inventory visibility, future inventory price forecasting,
physical inventory, available physical space for inventory.
11
• Track inventory
– To look after the amount of inventory i.e. stock coming into the
business.
• How much to order?
– To specify units of inventory to be used by organization.
• When to order?
– Specify the duration of getting the inventory.
Tasks in Inventory
Management
12
Inventory Management flow cycle
Raw Material  InspectionMoving Processing  Setup Final Product
13
Flow chart
14
Advantages of Inventory Management
• To decouple or separate various parts of the
production process.
• To split up the firm from fluctuations in demand and
provide a stock of goods that will provide a selection
i.e. variety for customers.
• To take advantage of quantity discounts.
• To survive against inflation.
15
reasons for keeping stock
To preserve the Inventory management, collection of
stock should be in solid state. Here are some reasons for
firms to keep the stock,
• Time
– The time lags present in the supply chain, from supplier
to user at every stage, requires that you maintain
certain amounts of inventory to use in this lead time.
• Variations
– Inventory is to be maintained for consumption during
'variations in lead time'.
16
Reasons for keeping stock contd.
• Uncertainty
– Inventories are maintained as buffers to meet
uncertainties in demand, supply and movements of
goods.
• Economies of scale
– Ideal condition of "one unit at a time at a place, where
a user needs it, when he needs it" principle tends to
incur lots of costs in terms of logistics. So bulk buying,
movement and storing brings in economies of scale,
thus inventory.
17
•THANK YOU
18

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Inventory management

  • 2. What is Inventory • Inventory is stock of items held to meet future demand. • It is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. • It is collection of goods processed to form desired output to the organization. 2
  • 3. Working capital relation with inventory • Inventory and working capital have a symbiotic relationship in business. Working capital is a financial formula that measures a company’s operating liquidity. The basic working capital formula is current assets minus current liabilities, with inventory being part of a company’s current assets. Companies that derive a large portion of sales will often have copious(abundant) amounts of inventory, which can affect the working capital formula. Significant adjustments relating to inventory can signal improper operational or accounting techniques employed by a company. • Inventory is a liquid asset (hence it being included in the current asset group) in accounting terms. Companies can usually sell this inventory fairly quickly in order to pay bills and increase cash to pay other operating bills. Most companies use accounts payable to pay for new inventory purchases. Therefore, inventory affects working capital on both sides: asset and liability. Companies are typically unable to purchase large amounts of inventory in order to improve their working capital position. This metric ensures the company cannot mislead business stakeholders through simple transactions 3
  • 4. Types of Inventories Raw material Raw material Work in progress Work in progress Work in progress Work in progress Work in progress Work in progress Work in progress Work in progress Work in progress Finished goods C u s t o m e r 4 Firm or Organization C u s t o m e r
  • 5. • Raw Material Goods – Basic inputs that are converted into finished product through the manufacturing process.Raw material inventory consists of basic mateials used as input in the firm’s production operations.Its purpose is to decouple the production function from the purchasing function. e.g for a steel manufacturing firm iron ore is the main material. • “Work in progress” Goods – Semi-manufactured products need some more works before they become finished goods for sale.The more complex and lengthy the production process,the larger will be the investment in WIP inventory.Wip inventry is to decouple many operations in production process so that machine failure and work stoppages at any stage do not effect the subsequent stages. 5 Types of Inventories contd.
  • 6. TYPES cont. • Finished Goods – Completely manufactured products ready for sale . The finished goods inventory consists of unsold goods on which production processes has been completed . The purpose of finished goods to decouple production and sales functions , so that sales become unhindered by stoppages/slowdowns in the production process . The firm holding such as inventory can absorb bottleneck in the production process. • Supplied Goods – Office and plant cleaning materials not directly enter production but are necessary for production process and do not involve significant investment 6
  • 7. Inventory cost • Carrying cost It is the cost of maintaining inventory in company’s warehouse or cost of holding an item in inventory • Ordering cost cost that are incurred at the time an order is placed . These costs are periodic and normally remain constant regardless of size of the order. • Shortage cost Temporary and permanent loss of sales when demand cannot be met . It is alternately called stock out cost or backorder cost. 7
  • 8. ECONOMIC ORDER QUANTITY MODEL • The basic issue in inventory management is to arrive at the optimal level of inventory , i.e a level that unhindered production distribution functions without excessively trying funds in inventory . This, therefore involve a tradeoff between profitability and liquidity. The quantity of inventory to be ordered and timing of order are the underlying issues that need to be resolved to arrive at the optimal level of inventory. • The two questions that the inventory theory tries to address are: 1. How much should be ordered? 2. When should it be ordered? 8
  • 9. s 9
  • 10. Co - cost of placing order D - annual demand Cc - annual per-unit carrying cost Q - order quantity • Annual ordering cost = • Annual carrying cost = 10 Co D Q Cc Q 2 Total cost = Co D Q Cc Q 2
  • 11. Inventory Management • Inventory management is all about specifying the size and placement of stocked goods. • It is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. • Inventory management also concerns with carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory. 11
  • 12. • Track inventory – To look after the amount of inventory i.e. stock coming into the business. • How much to order? – To specify units of inventory to be used by organization. • When to order? – Specify the duration of getting the inventory. Tasks in Inventory Management 12
  • 13. Inventory Management flow cycle Raw Material  InspectionMoving Processing  Setup Final Product 13
  • 15. Advantages of Inventory Management • To decouple or separate various parts of the production process. • To split up the firm from fluctuations in demand and provide a stock of goods that will provide a selection i.e. variety for customers. • To take advantage of quantity discounts. • To survive against inflation. 15
  • 16. reasons for keeping stock To preserve the Inventory management, collection of stock should be in solid state. Here are some reasons for firms to keep the stock, • Time – The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this lead time. • Variations – Inventory is to be maintained for consumption during 'variations in lead time'. 16
  • 17. Reasons for keeping stock contd. • Uncertainty – Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. • Economies of scale – Ideal condition of "one unit at a time at a place, where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory. 17