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DEVTECH FINANCE
ENHANCE YOUR FINANCIAL KNOWLEDGE
INVENTORY
MANAGEMENT
DEFINITION &
OBJECTIVE
EOQ
NUMERICAL
ABC
ANALYSIS
STOCK LEVELS
INTRODUCTION TO INVENTORY MANAGEMENT
• Inventory means stock of goods like raw material, work in progress,
stores of finished goods, consumables etc.
• Inventory management means planning, organizing, handling and
storing adequate level of inventory with optimized cost to meet
consumer’s demand.
• There are two most significant costs involved in managing inventory
(ordering cost and carrying cost)
• Inventory occupy 50–80% of the total current assets of the business
concern. It is very essential part of working capital management and
production management.
OBJECTIVES OF INVENTORY MANAGEMENT
• To maintain optimum inventory level to maximize the profitability and
reduce the cost
• To meet the seasonal demand of the products
• To plan when to purchase and where to purchase
• To avoid both over stock and under stock of inventory
• To run production process efficiently
• To analyze and classify the inventory on basis of volume and value
ECONOMIC ORDER QUANTITY
• Economic Order Quantity (EOQ) refers to the optimum level of inventory at
which the total cost of inventory comprising ordering cost and carrying cost is
minimum maintaining the forecasted demand adequacy.
• FORMULA : EOQ = √2AO / C
• A - Annual consumption, O - Ordering cost per order, C - Carrying cost
(expressed in percentage terms of purchase price per unit)
• Find out the economic order quantity, number of orders per year, ordering cost,
carrying cost from the following information:
i. ANNUAL CONSUMPTION: 80,000 units
ii. PURCHASE PRICE PER UNIT: Rs.50
iii. ORDERING COST PER ORDER: Rs.1200
iv. INVENTORY CARRYING COST: 6% of the purchase price
EOQ NUMERICAL SOLVED
• EOQ = √2AO / C
= √2 * 80000 * 1200 / 0.06 * 50 = 8000 units
• NO. OF ORDERS PER YEAR = Annual Consumption (A) / Economic Order Qty.
(EOQ) = 80000 units / 8000 units = 10 orders per year
• TOTAL ORDERING COST = Ordering cost per unit * No. of order per year
= Rs.1200 * 10 orders = Rs. 12000
• TOTAL CARRYING COST = Carrying cost per unit * (EOQ/ 2)
= (0.06*50) * (8000/2) = Rs.12000
• TOTAL INVENTORY COST = Total Ordering Cost + Total Carrying Cost
= 12000 + 12000 = Rs. 24000
A-B-C ANALYSIS OF INVENTORY
A-B-C ANALYSIS
• It is the inventory management technique that divide inventory into three
categories based on the value and volume of the inventories.
• In most inventories a small proportion of items accounts for substantial usage
and high monetary value while a large proportion of items accounts for small
usage and low monetary value.
• ABC analysis advocates a selective approach to classify and focus greater
concentration on inventory items accounting for high monetary value and bulk
usage.
CATEGORY VOLUME (%) VALUE (%)
A 15-25% 60-75%
B 20-30% 20-30%
C 40-60% 10-15%
LEVELS OF INVENTORY
• STOCK LEVEL - It is the level of stock which is maintained by the business
concern at all times.The business concern must maintain optimum level of stock
to smooth running of the business process.
• MINIMUM LEVEL - The business concern must maintain minimum level of
stock at all times. If the stocks are less than the minimum level, then the work
will stop due to shortage of material.
• RE-ORDER LEVEL - It is fixed between minimum level and maximum level. Re-
order level is the level when the business concern makes fresh order at this
level.
• MAXIMUM LEVEL - It is the maximum limit of the quantity of inventories, the
business concern must maintain. If the quantity exceeds maximum level limit
then it will be overstocking.
• DANGER LEVEL - It is the level below the minimum level. It leads to stoppage
of the production process.
THANK YOU FOR WATCHING
DEVTECH
FINANCE

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Inventory Management

  • 1. DEVTECH FINANCE ENHANCE YOUR FINANCIAL KNOWLEDGE INVENTORY MANAGEMENT DEFINITION & OBJECTIVE EOQ NUMERICAL ABC ANALYSIS STOCK LEVELS
  • 2. INTRODUCTION TO INVENTORY MANAGEMENT • Inventory means stock of goods like raw material, work in progress, stores of finished goods, consumables etc. • Inventory management means planning, organizing, handling and storing adequate level of inventory with optimized cost to meet consumer’s demand. • There are two most significant costs involved in managing inventory (ordering cost and carrying cost) • Inventory occupy 50–80% of the total current assets of the business concern. It is very essential part of working capital management and production management.
  • 3. OBJECTIVES OF INVENTORY MANAGEMENT • To maintain optimum inventory level to maximize the profitability and reduce the cost • To meet the seasonal demand of the products • To plan when to purchase and where to purchase • To avoid both over stock and under stock of inventory • To run production process efficiently • To analyze and classify the inventory on basis of volume and value
  • 4. ECONOMIC ORDER QUANTITY • Economic Order Quantity (EOQ) refers to the optimum level of inventory at which the total cost of inventory comprising ordering cost and carrying cost is minimum maintaining the forecasted demand adequacy. • FORMULA : EOQ = √2AO / C • A - Annual consumption, O - Ordering cost per order, C - Carrying cost (expressed in percentage terms of purchase price per unit) • Find out the economic order quantity, number of orders per year, ordering cost, carrying cost from the following information: i. ANNUAL CONSUMPTION: 80,000 units ii. PURCHASE PRICE PER UNIT: Rs.50 iii. ORDERING COST PER ORDER: Rs.1200 iv. INVENTORY CARRYING COST: 6% of the purchase price
  • 5. EOQ NUMERICAL SOLVED • EOQ = √2AO / C = √2 * 80000 * 1200 / 0.06 * 50 = 8000 units • NO. OF ORDERS PER YEAR = Annual Consumption (A) / Economic Order Qty. (EOQ) = 80000 units / 8000 units = 10 orders per year • TOTAL ORDERING COST = Ordering cost per unit * No. of order per year = Rs.1200 * 10 orders = Rs. 12000 • TOTAL CARRYING COST = Carrying cost per unit * (EOQ/ 2) = (0.06*50) * (8000/2) = Rs.12000 • TOTAL INVENTORY COST = Total Ordering Cost + Total Carrying Cost = 12000 + 12000 = Rs. 24000
  • 6. A-B-C ANALYSIS OF INVENTORY A-B-C ANALYSIS • It is the inventory management technique that divide inventory into three categories based on the value and volume of the inventories. • In most inventories a small proportion of items accounts for substantial usage and high monetary value while a large proportion of items accounts for small usage and low monetary value. • ABC analysis advocates a selective approach to classify and focus greater concentration on inventory items accounting for high monetary value and bulk usage. CATEGORY VOLUME (%) VALUE (%) A 15-25% 60-75% B 20-30% 20-30% C 40-60% 10-15%
  • 7. LEVELS OF INVENTORY • STOCK LEVEL - It is the level of stock which is maintained by the business concern at all times.The business concern must maintain optimum level of stock to smooth running of the business process. • MINIMUM LEVEL - The business concern must maintain minimum level of stock at all times. If the stocks are less than the minimum level, then the work will stop due to shortage of material. • RE-ORDER LEVEL - It is fixed between minimum level and maximum level. Re- order level is the level when the business concern makes fresh order at this level. • MAXIMUM LEVEL - It is the maximum limit of the quantity of inventories, the business concern must maintain. If the quantity exceeds maximum level limit then it will be overstocking. • DANGER LEVEL - It is the level below the minimum level. It leads to stoppage of the production process.
  • 8. THANK YOU FOR WATCHING DEVTECH FINANCE