This document discusses inventory functions and costs. It describes five categories of stock: pipeline, cycle, seasonal, safety, and other. Inventory costs include procurement costs which are generally fixed per order, inventory holding costs which are the cost per unit per time period, and stockout costs when demand exceeds supply. The document advocates for selective inventory control using ABC analysis to prioritize items based on annual consumption value and tailor inventory policies accordingly in order to minimize total inventory costs.

2. FUNCTIONS OF INVENTORIES
 BASICALLY INVENTORIES ARE IDLE RESOURCES
MAINTAINED IN VARIOUS FORMS.
 RAW MATERIALS
 PURCHASED AND MANUFACTURED PARTS
 SUB ASSEMBLIES
 FINISHED PRODUCTS
Since inventories represent a sizable investment in a
logistic system, we must be aware of the functions they
perform.

3. FIVE CATEGORIES OF STOCK
 PIPE LINE STOCK (in process stock, in transit stock): it
can be reduced only by improved design of the system.
 CYCLE STOCKS (batch production owing to
- economies of scale
- technological requirements )
• SEASONAL STOCK(time varying requirements of an item)
• SAFETY STOCK (supply and demand un certainties, lead
time un certainties)
• STOCKS HELD FOR OTHER REASONS (-decoupling
stages of production,
price, quantity discounts and speculation)
-

4. INVENTORY RELATED COSTS
 PROCUREMENT COSTS:(cost per order is generally
fixed and not dependant on order quantity)
 COSTS ASSOCIATED WITH EXISTENCE OF
INVENTORIES:( supply exceeds demand):
cost/unit/unit time
iC
inventory carrying cost rate
• COSTS ASSOCIATED WITH STOCK OUTS: (demand
exceeds supply)
(cost/unit) or (cost/unit/unit time)

5. PROCUREMENT COSTS
 Procurement costs cost of goods
cost per order is generally fixed
(not dependent on order quantity) ordering cost
- Administrative component
- Handling
- Transportation
- Inspection of arrivals

6. INVENTORY HOLDING COSTS
 COSTS ASSOCIATED WITH EXISTENCE OF
INVENTORIES:( supply exceeds demand):
cost/unit/unit time
iC
inventory carrying cost rate
-storage and handling
-interest on tied up capital
-property taxes
-insurance
-spoilage
-obsolescence
-pilferage

7. STORAGE COSTS
• COSTS ASSOCIATED WITH STOCK OUTS: (demand
exceeds supply)
(cost/unit) or (cost/unit/unit time)
 Additional costs of special order
 Back order if possible
 Loss of customer goodwill
 Lost sales

8. SELECTIVE INVENTORY CONTROL
 In a large number there are
 Significant few
 Insignificant many PARETO’S LAW
 Typical organizations deal with a large variety of stocked
items (10000-100000 is not uncommon)
Depending on rankings of
Value (∑(annual demand * unit price))=ABC analysis (Always
Better Control)
Criticality (Vital , Essential, Desirable)= VED analysis
Usage frequency= FSN analysis
 SUITABLE POLICIES CAN BE CHOSEN BASED ON PRODUCT
CHARACTERISTICS

10. Objective of ABC analysis
rationalization of ordering policies:
Equal treatment to all:
Annual
consumption
value(rs)
No: of orders Value per
order
Average
inventory
1 60000 4 15000 7500
2 4000 4 1000 500
3 1000 4 250 125
Total
inventory=8125

11. Preferential treatment on the basis
of ABC analysis
Annual
consumption
value(rs)
No: of orders Value per
order
Average
inventory
1 60000 8 7500 3750
2 4000 3 1333 667
3 1000 1 1000 500
Total
inventory=4917

12. Determination of reorder point

13. Policy implications of selective
inventory control