M.com FM

1. Module –II
INVENTORY MANAGEMENT
Introduction
Every concern constitute inventories as a part of
its working capital. It fluctuate from time to time.
It requires proper control and management of
inventories. The purpose of inventory mgt is to
ensure availability of materials in sufficient
quantity as and when required a d also to
minimise investment in inventories.

2. Meaning and nature of inventory
• Inventory means “stock of goods” or “list of
goods”.In a manufacturing concern, it includes
• raw materials,
• work-in-progress,
• Consumables,
• Finished goods, and
• Spares.

3. Defining Inventory
Inventory is an idle stock of physical
goods that contain economic value,
and are held in various forms by an
organization in its custody awaiting
packing, processing, transformation,
use or sale in a future point of time.

4. From the above definition the following points
stand out with reference to inventory:
• All organizations engaged in production or sale of
products hold inventory in one form or other.
• Inventory can be in complete state or incomplete
state.
• Inventory is held to facilitate future consumption,
sale or further processing/value addition.
• All inventoried resources have economic value
and can be considered as assets of the
organization.

5. Purpose of holding inventory
• The purpose of storing inventory is
to make the finished products
available for sale. Selling activity in
no scenario should be stopped for
want or shortage of inventory.
Hence, businesses store inventory
despite the costs of holding
inventory.

6. Functions and purpose of inventory:
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The basic function of inventories is to act as a buffer
to decouple or uncouple the various activities of a
firm so that all do not have to be pursued at exactly
the same rate. The key activities are:
Purchasing
Production and
Selling.
Inventory storage functions in such a way that these
activities can be carried on independently.

7. Risk and Costs of holding Inventories.
1.Capital costs:-maintaining of inventories results in blocking
of the firm’s financial resources.The funds of the firm may
be arranged from outside source, it requires a cost.
2.Storage and handling costs:-It involves storage costs like
godown rent, insurance charges etc. and also cost of
handling materials.
3.Risk of price decline:-For holding inventories, suppliers may
give price reduction. This may be due to increased market
supplies, competition and depression in the market.
4.Risk deterioration in quality:-the quality of the materials
may also deteriorate while the inventories are kept in
stores.

8. Definition of Inventory Management.
• Inventory management refers mainly to when a firm
strives to attain and uphold an optimal inventory of
goods while also taking note of all orders, shipping
and handling, and other associated costs.
• Inventory management is mainly about identifying
the amount and the position of the goods that a firm
has in their inventory. Inventory management is
imperative as it helps to defend the intended course
of production against the chance of running out of
important materials or goods.

9. • Inventory management also includes making
essential connections between the
replenishment lead time of goods, asset
management, the carrying costs of inventory,
future inventory price forecasting, physical
inventory, available space for inventory,
demand forecasting and much more.

10. Objectives of inventory management.
The main objective of inventory management is to maintain
inventory at appropriate level to avoid excessive or shortage of
inventory because both the cases are undesirable for business.
Thus, management is faced with the following conflicting
objectives:
1. To keep inventory at sufficiently high level to perform
production and sales activities smoothly.
2. To minimize investment in inventory at minimum level to
maximize profitability.

11. Other objectives of inventory management are explained as
under:1. To ensure that the supply of raw material & finished goods will
remain continuous so that production process is not halted and
demands of customers are duly met.
2. To minimize carrying cost of inventory.
3. To keep investment in inventory at optimum level.
4. To reduce the losses of theft, obsolescence & wastage etc.
5. To make arrangement for sale of slow moving items.
6. To minimize inventory ordering costs.

12. Tools and techniques of Inventory
management
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Determination of Stock levels
determination of Safety stocks
Selecting a proper system of Ordering for inventory
Determination of Economic Order Quantity
ABC Analysis
VED Analysis
Inventory Turnover ratio
Aging Schedule of Inventories
Preparation of Inventory Reports
Lead time
Perpectual Inventory System &
JIT Control System

13. 1.Determination of stock levels.
• a).Minimum level:-the quantity which must be
maintained in hand at all times.If stocks are less than
the minimum level then the work will stop due to
shortage of materials.It depends upon the factors like
lead time, rate of consumption and nature of materials.
• Min.Stock level= Re-order level-(Normal consumption x
Normal Re-order period)
• b) Re-order level:-It represents the level of order sent
before the materials reach minimum stock-level.
Maximum Consumption x Max. re-order period.

14. c) Maximum stock level:-it is the quantity of materials beyond which a
firm should not exceed its stocks.if the quantity exceeds max.level
limit then it will be overstocking.
Overstocking will mean blocking of more working cpl, more space for
storing the materials, more wastage of materials and more chances
of losses from obsolescence.
Re-ordering level+Re-order qty-(Min.consumption x Min.reordering period)
Max. stock level will depends upon the following factors;
i-The availability of cpl for the purchase of materials.
ii- Max. requirements of materials at any point of time.

15. iii- Availability of space for storing the materials.
iv- the rate of consumption of materials during lead time.
v- the cost of maintaining the stores.
vi- the possibility of fluctuations in prices.
vii-the nature of material(if perishable goods cannot
stored for long)
viii-Availability of materials (seasonal-it stored for long)
ix- Restrictions imposed by govt.
x-Changing fashions will affect the calculations of
max.level.

16. d) Danger level:- It is the level beyond which materials should
not fall in any case.If danger level arises then it leads more
costs in arranging materials and if not , there is a
possibility of stoppage of works.
Ave.comsumption x Max.re-order period for emergency
purchases.
e) Ave. stock level
Min.Stock level + ½ of re-order qty
OR
Min.Stock level +Max.stock level
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17. 2.Determination of safety stocks.
• Safety stock is a stock which is maintained by
an organisation in order to meet out any of
the unanticipated increase in the usage of
materials.
The basic problem for inventory management is
to determine the level of qty of safety stocks
to be maintained by the organisation at all
times.

18. 3.Selecting a proper system of
Ordering for inventory
The basic problem of inventory is to decide the
re-order point. This point indicates when an
order should be placed. The re-order point is
determined with the help of these thingsa)Average consumption rate
b) duration of lead time
c)Economic Order Quantity.

19. 4.Economic Order Quantity(EOQ)
It refers to that size of the lot to be purchased at a minimum
cost. For this, ordering cost and carrying cost should be
considered.
a) ordering cost-which can be incurred for placing an order
and securing the supplies.
It consists-Cost of ordering goods, exps.incurred
for transportation of goods, inspection costs,
stationery etc.
b) carrying cost-which can be incurred for holding
inventories.It consistscapital invested in inventories, storage-costs, loss of
materials due to deterioration and obsolescence, insurance
cost, cost of spoilage in handling of materials.

20. safety stock levels
• Safety stock is a term to describe a level of
extra stock that is maintained to mitigate risk
of stockouts (shortfall in raw material or
packaging) due to uncertainties in supply and
demand. Adequate safety stock levels permit
business operations to proceed according to
their plans. They serve as an insurance against
stockouts.

21. Ordering system of Inventory
• For a systematic approach of ordering system is
that to decide the re-order point.(when an order
should be placed)For this,
Average consumption rate, duration of lead time,
and EOQ should be considered. There are three
systems of ordering and a concern can choose
any one of there,
EOQ(Fixed order qty system)
Periodic re-ordering system
Single or scheduled part delivery system.