Inventory Management and its different method

1. Presented by
Neelam Kushwaha
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2. MEANING OF INVENTORY
• The term “ Inventory” is originated from
the French word “ inventaire” and the
Latin “inventariom”, which implies a list
of thing found.
• The meaning of Inventory is stock of
goods.
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3. INTRODUCTION
 Inventory Management occupies the most significant position in
the structure of working capital.
 Management of inventory may be defined as the sum of total of
those activities necessary for the acquisition, storage, disposal
or use of materials.
 Maintenance of Large size of inventories by a firm required a
considerable amount of funds to be invested on them. Efficient
and Effective inventory management is necessary in order to
avoid unnecessary investment and inadequate investment.
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4. Components
Of
inventory
Raw
Materials
Work-in-
process
Finished
products
Stores
&
spares
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5. Raw Materials:
Raw materials are those inputs that are converted into finished goods
through a manufacturing or conversion process. These form a major input
for manufacturing
a product.
Work -in-process:
Work-in-process is a stage of stocks between raw materials and finished
goods. They represent products that need to under go some other
process to become finished goods.
Finished products:
Finished products are those products, which are completely manufactured
and ready for sale
Stores & spares:
Stores & spares inventory (include office and plant cleaning materials like ,
soap, brooms,, oil , fuel , light, bulbs etc.) are purchased and stored for the
purpose of maintenance of machinery.
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6. Objectives of Inventory Management
• To maintain a large size of inventories of raw
material and work-in-process for efficient and
smooth production and of finished goods for
uninterrupted sales operations.
• To maintain a minimum investment in
inventories to maximize profitability.
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7. AN EFFECTIVE INVENTORY MANAGEMENT SHOULD
 ensure a continuous supply of raw materials, to facilitate
uninterrupted production
 maintain sufficient stocks of raw materials in periods of short
supply and anticipate price changes
 maintain sufficient finished goods inventory for smooth sales
operation, and efficient customer service.
 minimize the carrying cost and time, and
 control investment in inventories and keep it at an optimum
level.
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8. INVENTORY MANAGEMENT MOTIVES
The Transaction Motive: Transaction motive includes production of
goods and sale of goods. Transaction motive facilitates uninterrupted
production and delivery of order at a given time (right time).
The Precautionary Motive : This motive necessitates the holding of
inventories for unexpected changes in demand and supply factors.
The speculative Motive : This compels to hold some inventories to take
the advantage of changes in prices and getting quantity discounts.
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9. NEED FOR BALANCED INVESTMENT IN INVENTORY
a) Dangers of Excessive (over) Investment in inventory:
• The excessive level of a Inventories consumes funds of the
company , they cannot be used for any purpose since they have
locked in inventory, and they involve an opportunity costs.
• Carrying excessive inventory over a long- period leads to the loss
liquidity . It may not be possible to sell the inventories in times
without loss,
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10. b) Dangers of inadequate Investment in Inventories
• Inadequate raw materials and work- in- progress inventories will disturb
production.
• When firm is not able to produce goods without interruption,
that leads inadequate of storage of finished goods. If finished
goods are not sufficient to meet customer demand, the customers
demand, the customer demand, the customers may shift to the
competitors, which will lead to loss of customers permanently.
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11. COSTS OF HOLDING INVENTORIES
Ordering costs:
Ordering costs are those costs that are associated with
the acquisition of raw materials. In other words The costs
that are spend from placing an order to raw materials to the
receipt of raw materials.
Inventory carrying costs:
Inventory carrying costs are those costs, which are
associated in carrying or maintaining inventory.
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13. RISKS OF
HOLDING
INVENTORY
Price Decline:
Product
Deterioration:
Product
Obsolescence:
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14. Inventory management ensures an adequate supply of
materials and stores , minimizes stock outs and
shortages and avoids costly interruptions in operations.
It keeps down investment in inventories;
inventory carrying costs, and obsolescence
losses to the minimum.
It facilitates purchasing economies
through the measurement of requirements
on the basis of recorded experience.
Benefits of
holding
Inventory
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15. Two questions:
How Much to order?
When to order ?
Inventory Models
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16. TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT/
CONTROL
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17. Assumption of EOQ Model
Demand for the product is constant and uniform throughout
the period .
Lead time (time from ordering to receipt) is constant.
Price per unit of product is constant.
Inventory holding cost is based on average inventory.
Ordering cost are constant.
EOQ FORMULA
2
EOQ =
AO
c
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18. TOTAL COST
TOTAL ANNUAL
CARRYING
COSTS
TOTAL
ANNUAL
ORDER COSTS
EOQ
QUANTITY (UNITS)
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19. LIMITATIONS OF EOQ
Constant Usage: This may not be possible to predict , if usage
varies unpredictably, as it often does , no formula will work well.
Faulty Basic Information: Ordering and Carrying costs is the base
For EOQ calculation. It assumes that ordering cost is constant per
order is fixed, but actually varies from commodity to commodity.
Carrying cost also can vary with the company’s opportunity cost of
capital.
Costly Calculation : In many cases, the cost estimation, cost of
Possession and acquisition and calculating EOQ exceeds the
savings made by buying that quantity.
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20. ORDER POINT PROBLEM:
After determination of EOQ, then at what level should the order be
placed? If the inventory level is too high , it will be unnecessary blocks
the capital, and if the level is too low, it will disturb the production by
frequent stock out and also involves high ordering cost. Hence, an
efficient management of inventory needs to maintain optimum inventory
level, where there is no stock out and the costs are minimum. The
different stock levels are
a) MINIMUM LEVEL
Minimum stock is that level that must be maintained always, production
will be disturbed, if it is less than minimum level. While determination of
minimum stock level, lead time , consumption rate , the material nature
must be considered
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21. Minimum stock level = Reorder level-[ Normal usage×
Average delivery time]
b) Reordering level : Reorder level is that level of inventory at in
weeks , which an order should be placed for replenishing the
current stock of inventory. Generally, the reorder level lies
between minimum stock level and maximum stock level.
Re-order point = Lead time (in days) ×Average Daily usage
c) Safety stock: Prediction of average daily usage and lead- time
is difficult. Raw materials may vary from day- to day or from week-
to-week, it is in the case of lead-time also. Lead- time may be
delayed , if the usage increases then the company faces problem
of stock out. To avoid stock out firm may require to maintain
safety stock.
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22. Re-order point= Lead time (in days) ×Average usage + Safety stock
d) Maximum Level: Maximum level of stock , is that level of stock
beyond which a firm should not maintain the stock. If the firm stocks
inventory beyond the maximum stock level it is called as
overstocking. Excess inventory involves heavy cost of inventory ,
because it blocks firms funds in investment inventory, excess ,
carrying cost, wastage, obsolescence, and theft cost . Hence, firm
should not stock above the maximum stock level.
Maximum Stock Level= Reorder Level+ Reorder Quantity- (Minimum Usage
× Minimum Delivery Time)
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23. e) Average Stock Level:
Average Stock Level = Minimum level + [Reorder
Quantity ÷ 2
(f) Danger Stock Level : Danger Level is that level of
materials beyond which materials should not fall in any
situation. When it falls in danger level it will disturb
production. Hence, the firm should not allow the stock level
to go danger level, if at all falls in that level then immediately
stock should be arranged even if it costly.
Danger Level = Average Usage × Minimum Deliver
Time ( for Emergency purchase)
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24. ABC ANALSIS
It is a very effective and useful tool for classifying , monitoring and
control inventories . The firm should not keep same degree of control
on all the items of inventory. It is based on pareto’s of law. The firm
should put maximum control on those items whose value is the
highest , with the comparison of the other two items. The higher value
Items are classified ‘ A items’ and would be under tight control. At the
Other end of the classification, we find category ‘ C items’ , on this type
of inventory we cannot afford expense of rigid controls, frequent
ordering and expending because of the low value or low amounts in
this area. ‘B’ items fall in between ‘A item’ and ‘ C items’ and require
reasonable attention of management.
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25. GRAPHIC PRESENTATION OF ABC ANALYSIS
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26. JUST IN TIME (JIT)
In a JIT systems, material or the manufactured components and parts
arrive to the manufacturing sites or stores just few hours before they are
put to use. The delivery of material is synchronized with the
manufacturing cycle and speed. JIT system eliminates the necessity of
carrying large inventories, and thus, saves Carrying and other related
costs to the manufacturer. The system requires perfect understanding
and coordination between the manufacturer and suppliers, in terms of
the timing of delivery and quality of material.
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27. TWO- BIN TECHNIQUE:
It is the oldest techniques of inventory control. Generally, it is used to
control ‘c’ category inventories. According to this technique, stock of
each item is separated into two piles, bins or group. First bin contains
stock, just enough to last from the date a new order is placed until it is
received for inventory. The second bin contains stock, which is enough
to meet current demand over the period of replenishment. First stock is
Issued from first bin whenever the first bin is completed, then an ordered
material is received.
VED CLASSIFICATION:
According to this classification, inventories are grouped based on
the effect of production and inventories are grouped into three are
Vital, Essential and Desirable inventories. It is specially used for
classification of spare parts. If a part is vital, in production, then it is
classified as ‘V’, if it is essential, then it is assigned ‘ E’ and if it is
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28. not so essential, desirable that is given ‘D’ . ‘V’ category item are stocked
high and category ‘D’ items are maintained at minimum level.
HML CLASSIFICATION:
Here the materials are classified based on the unit value and not on the
annual usage value. The inventory is classified into three categories such
as High, Medium, and Low. As it is adopted in selective inventory control
(ABC) technique. The inventory items should be listed in the descending
order of unit value and it is up to the management to fix limits for three
categories. This classification is useful for keeping control over
consumption at department level
SDE CLASSIFICATION:
This SDE classification is made based on the availability of materials. It
is very much useful in the case of scarcity of supply of inventories. Here
‘S’ refers to ‘scarce’ inventory item, generally imported and those, which
are in short supply category referred to as ‘D’ – ‘Difficult’ inventory
CONT…
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29. FSN CLASSIFICATION :
Under this technique inventory is classified based on movement of
inventories from stores. FSN stands for fast moving (F), slow moving(S) , and
non- moving(N). This technique particularly involved in inventory useful for
avoiding obsolescence. The items are usually grouped in periods of 12
months. Active moving items need to be reviewed regularly and surplus
items, Non-moving items may be examined further and their disposal can be
considered.
Order Cycling System :
In this system periodic reviews are made of each item of inventory
and orders are placed to restore stock to a prescribed supply level .
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30. Approaches to Inventory systems:
Two general approaches to inventory system,
a) Fixed order Quantity system (‘Q’ system)
Fixed quantity of materials is ordered whenever the stock level
researches to the re-order level.
b) Fixed order Periodic System ( ‘P’ system)
Stock position of each item of material is reviewed periodically
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Computerized inventory control system :
It enables a company to easily track large items of inventories . It is an automatic
system of Counting inventories , recording withdrawals and revising the balance.
There is an in-built System of placing order as the computer notices that the reorder
point has been reached. The computerized inventory system is inevitable for large
retail stores , which carry thousand items

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