2. Fundamentals of Inventory
Management
Maintaining sufficient stock levels for
uninterrupted production schedule.
Maintaining sufficient supply of finished goods
for unaffected sales.
Minimising the total cost of inventory
maintenance.
3. Motives for holding Inventory
Transaction Motive – to match the time lag between
demand and supply of raw materials.
Precautionary Motive – to hold inventory against
unpredictable risks like strike, short supply, power cuts,
lengthy import procedures
Speculative Motive – to benefit from quantity
discounts due to bulk purchasing or anticipated price
hikes
4. Benefits of holding inventory
Avoiding loss of sales
Trade discounts
Reducing ordering costs
Uninterrupted production
Reducing the risks of production shortages
5. Risks of holding excessive
inventory
Price decline
Obsolescence
Increased Costs of purchase, ordering and
carrying
Quality costs like cost of replacing products after
shipment; cost of defective parts; cost of vendor
development, and inspection costs
6. Objective of Inventory
Management
To determine the optimum level of inventory, by
considering the costs:-
Carrying cost – is the cost per unit of
holding/maintaining raw material/WIP/FG
(a) Storage costs – the cost of storing one unit of
raw material by the firm.
(eg) rent of space occupied; air-conditioning costs;
insurance costs; warehousing and handling costs;
cost of pilferage
7. Contd….
(b) Cost of financing
It includes funds used to purchase/ production
of inventory, including any explicit costs like
interest on borrowings.
Total carrying cost is variable and varies
with the level of inventory carried.
8. Techniques of Inventory
Management
EOQ Model which is based on the following
assumptions:-
The usage rate is even throughout the year
There is no time gap between placing an
order and getting its supply
The cost per order and cost of carrying
inventory are fixed
The only 2 costs involved are the cost of
carrying the inventory and ordering costs.
9. ABC Analysis (Always Better
Control)
Category A – 10% of the items covering 75% of
the value
Category B – Lies between A and C - 20% items
representing 15% of the value
Category C – large number of items of small
value – 70% of the items covering 10% of the
value
10. Merits of ABC Analysis
Better control on costly items
Helps to control the Stock Turnover Ratio
between 6 to 12 times in a year.
Inventory maintained at optimum level
Storage costs are reduced
11. Contd…
Determination of Stock Levels – like
re-order level
Minimum level
Maximum level
Average level
EOQ
Danger level
12. JIT (Just in Time) System
Minimises stock holding
Creates a good rapport with the suppliers
Results in savings in cost and investment
Reduces the clerical costs of recording stores
13. VED ANALYSIS
Vital- stock out costs very high
Essential – stock out can be managed for a
few hours only- cost of loss is high
Desirable - will not lead to production
stoppage- can hold up to a week
14. FSN ANALYSIS
Classification based on material consumption
Also based on inventory turnover
Fast moving
Slow moving
Non- moving
15. Others
Min Max Method
Perpetual Inventory System
Bin card and Stores Ledger updated
Continuous stock verification with Bin Card
Reconciliation of discrepancies
Remedial measures
Stock records corrected
16. Others
Automatic Order System – done with the
help of technology to fix an “Order Point
Quantity”.
Input –Output Ratio
Input –output Ratio = Input in units/ output in
units x 100 (answer will be in %)