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Unit-3
Inventory Control
Introduction to Inventory
• Inventory is defined as the list of movable
goods which helps directly or indirectly in the
production of goods for sale. Inventory is
service to production.
• Inventory may also be defined as a
comprehensive list of movable items which are
required for manufacturing the products and to
maintain the plant facilities in working
conditions.
Inventory DefinitionInventory Definition
• A stock of items held to meet
future demand
• It can be defined as the stock of
goods, commodities or other
resources that are stored at any
given period of future production
Types of Inventory
Inputs
• Raw Materials
• Purchased parts
• Maintenance and
Repair Materials
Outputs
• Finished Goods
• Scrap and Waste
Process
In Process
• Partially
Completed
Products and
Subassemblies
(in warehouses, or
“in transit”)
(often on the
factory floor)
Classification Of Inventories
• Inventory can be classified as:
1.Direct inventories:- which play a direct role in the
manufacture of a product and becomes an integral
part of the finished product are called direct
inventories.
2.Indirect inventories :- are those materials which
help the raw materials to get converted into the
finished products, but do not become an integral part
of the finished products.
Direct Inventories
1. Raw Materials :- are those basic materials from which
components, parts & products are manufactured by the
company.
2. In Process Inventories( work in progress):- are
the semi-finished goods at various stages of manufacture.
3. Purchase parts
4. Finished goods
Indirect Inventories
1. Tools:- various tools like Standard tools , Hand tools
2. Supplies :- it includes materials used in running the plant
but do not go into the product . Supplies include :-
• miscellaneous consumable stores such as brooms, cotton
waste, vim powder .
• General office supplies such a s candles , pencils , pens
etc.
• Ledgers & journals , Electric supplies etc.
Inventory Control
• Inventory control refers to the process whereby the
investment in materials & parts carried in stock is regulated
within predetermined limits set in accordance with the
inventory policy established by the management.
• Inventory control aims at maintaining the values of the
inventories at the lowest possible level at the same time
seeing that the required inventories are available at all
items.
Reasons To Hold InventoryReasons To Hold Inventory
• Meet variations in customer demand:
– Meet unexpected demand
– Smooth seasonal or cyclical demand
• Pricing related:
– Temporary price discount
– Take advantage of quantity discounts
• Process & supply surprises
– Internal – upsets in parts of or our own processes
– External – delays in incoming goods
Reasons To NOT Hold InventoryReasons To NOT Hold Inventory
• Increases Carrying cost
– Financially calculable
• Takes up valuable factory space
– Especially for in-process inventory
• Inventory covers up “problems” …
• Wastage of materials
• Increase in Maintenance cost
Determining Inventory Level
1. Order quantity
2. Lead time
3. Safety stock - Extra inventory is needed to
protect against unreliable forecast &
protection against stock outs.
4. Reorder point - It is pre-known that it takes
days between initiating the order & receiving
the required quantity.
Lead Time
• There is always some interval between the time the
need for the material is determined & the time the
material is actually received . This period is known as
lead time . It consists of requisition. It consists of
Requisition time ( Rt )+ Procurement time(Pt).
• Requisition time consists of time required to prepare
purchase requisition & placing the order to a selected
vendor.
• Procurement time - time for the seller to get or
prepare the inventory for dispatch & time for inventory
to be dispatched from the supplier & to reach the
customer.
Inventory costs
• Inventory analysis identifies 4 major cost
components:
1.Purchase cost
2.Ordering cost
3.Carrying cost – Direct & Indirect cost
4.Stock out cost
Purchase cost
• This refers to the nominal
cost of inventory. It is the
purchase price for the items
that are bought from outside
sources, and the production
cost if the items are
produced within the
organization
Ordering Cost/ setup Cost
• Ordering cost is incurred
whenever the inventory is
replenished. It includes costs
associated with the
processing & chasing of the
purchase order,
transportations, inspection for
quality, expediting overdue
orders & so on. It is also
known as “procurement cost”
Carrying cost
Direct Cost
• Capital costs
• Storage costs
• Service costs
Indirect Cost
• Risk costs
• Incremental increase
in infrastructure Costs
Stock-out costs
• Stock out cost means the cost
associated with the not serving the
customers . Stock out implies
shortages .
Other types of cost in inventory control are
• Warehousing Costs
• Damage & obsolescence cost

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Lecture17,18,19,20

  • 2. Introduction to Inventory • Inventory is defined as the list of movable goods which helps directly or indirectly in the production of goods for sale. Inventory is service to production. • Inventory may also be defined as a comprehensive list of movable items which are required for manufacturing the products and to maintain the plant facilities in working conditions.
  • 3. Inventory DefinitionInventory Definition • A stock of items held to meet future demand • It can be defined as the stock of goods, commodities or other resources that are stored at any given period of future production
  • 4. Types of Inventory Inputs • Raw Materials • Purchased parts • Maintenance and Repair Materials Outputs • Finished Goods • Scrap and Waste Process In Process • Partially Completed Products and Subassemblies (in warehouses, or “in transit”) (often on the factory floor)
  • 5. Classification Of Inventories • Inventory can be classified as: 1.Direct inventories:- which play a direct role in the manufacture of a product and becomes an integral part of the finished product are called direct inventories. 2.Indirect inventories :- are those materials which help the raw materials to get converted into the finished products, but do not become an integral part of the finished products.
  • 6. Direct Inventories 1. Raw Materials :- are those basic materials from which components, parts & products are manufactured by the company. 2. In Process Inventories( work in progress):- are the semi-finished goods at various stages of manufacture. 3. Purchase parts 4. Finished goods
  • 7. Indirect Inventories 1. Tools:- various tools like Standard tools , Hand tools 2. Supplies :- it includes materials used in running the plant but do not go into the product . Supplies include :- • miscellaneous consumable stores such as brooms, cotton waste, vim powder . • General office supplies such a s candles , pencils , pens etc. • Ledgers & journals , Electric supplies etc.
  • 8. Inventory Control • Inventory control refers to the process whereby the investment in materials & parts carried in stock is regulated within predetermined limits set in accordance with the inventory policy established by the management. • Inventory control aims at maintaining the values of the inventories at the lowest possible level at the same time seeing that the required inventories are available at all items.
  • 9. Reasons To Hold InventoryReasons To Hold Inventory • Meet variations in customer demand: – Meet unexpected demand – Smooth seasonal or cyclical demand • Pricing related: – Temporary price discount – Take advantage of quantity discounts • Process & supply surprises – Internal – upsets in parts of or our own processes – External – delays in incoming goods
  • 10. Reasons To NOT Hold InventoryReasons To NOT Hold Inventory • Increases Carrying cost – Financially calculable • Takes up valuable factory space – Especially for in-process inventory • Inventory covers up “problems” … • Wastage of materials • Increase in Maintenance cost
  • 11. Determining Inventory Level 1. Order quantity 2. Lead time 3. Safety stock - Extra inventory is needed to protect against unreliable forecast & protection against stock outs. 4. Reorder point - It is pre-known that it takes days between initiating the order & receiving the required quantity.
  • 12. Lead Time • There is always some interval between the time the need for the material is determined & the time the material is actually received . This period is known as lead time . It consists of requisition. It consists of Requisition time ( Rt )+ Procurement time(Pt). • Requisition time consists of time required to prepare purchase requisition & placing the order to a selected vendor. • Procurement time - time for the seller to get or prepare the inventory for dispatch & time for inventory to be dispatched from the supplier & to reach the customer.
  • 13. Inventory costs • Inventory analysis identifies 4 major cost components: 1.Purchase cost 2.Ordering cost 3.Carrying cost – Direct & Indirect cost 4.Stock out cost
  • 14. Purchase cost • This refers to the nominal cost of inventory. It is the purchase price for the items that are bought from outside sources, and the production cost if the items are produced within the organization Ordering Cost/ setup Cost • Ordering cost is incurred whenever the inventory is replenished. It includes costs associated with the processing & chasing of the purchase order, transportations, inspection for quality, expediting overdue orders & so on. It is also known as “procurement cost”
  • 15. Carrying cost Direct Cost • Capital costs • Storage costs • Service costs Indirect Cost • Risk costs • Incremental increase in infrastructure Costs
  • 16. Stock-out costs • Stock out cost means the cost associated with the not serving the customers . Stock out implies shortages . Other types of cost in inventory control are • Warehousing Costs • Damage & obsolescence cost