This presentation discusses key concepts of inventory management. It covers types of inventories like raw materials, work in progress and finished goods. It also discusses motives for holding inventory like transaction, precautionary and speculative motives. Techniques like economic order quantity model, reorder point model and ABC analysis are explained. Benefits of just-in-time inventory system like reduced costs and wastage are highlighted. Examples of companies like Amazon, Boeing, Dell, Tesla and Toyota effectively using just-in-time system are provided.

1. Inventory
Management
Done By:
Lokesh Soni - # 3532
Mishi Yadav - # 3533
Vishal Dhir - # 3534
Suryaansh Jain - # 3536
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2. What will we learn through this PPT
 Types, motives, costs associated, benefits
and objectives of inventories
 Techniques in Inventory Management:
 Economic Order Quantity (EOQ)
 Re-order Point
 Inventory Management Control Systems:
 ABC Analysis
 Inventory Turnover Ratio
 Just-in-Time System Approach
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3. Types of Inventories
 Raw Materials Inventory
 Work-in-progress Inventory
 Finished Goods Inventory
 Supplies or Stores and Spares
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4. Motives of Holding Inventories
 Transaction Motive
 Precautionary Motive
 Speculative Motive
4

5. Costs Associated with Inventories
 Ordering Cost
 Carrying Cost
 Cost of Storage
 Cost of Financing
 Stock out Cost
5

6. 6
Benefits & Objectives of Holding Inventories
 Objective:
 Determine & maintain optimum level of
investment in inventories
 Benefits:
 Uninterrupted production operations
 Smooth sales operations
 Availing discounts in purchasing
 Avoiding stock outs

7. 7
Economic Order Quantity Model
Definition: The EOQ model attempts to determine
the order size of an item that will minimize the total
inventory costs* and also ensuring availability of
that item whenever needed.
* Total inventory cost = Total carrying cost + Total ordering cost

8. 8
Assumptions of EOQ
 Demand is constant and uniform
 The lead time is zero
 Only ordering & carrying costs are associated
with inventory
 Carrying cost is fixed & cost per order is
constant

9. 9
EOQ Formula
• 𝐸𝑂𝑄 =
2𝐴𝑂
𝐶
Where,
EOQ = Economic Order Quantity
A = Annual Demand of an item
O = Ordering cost per order
C = Carrying cost per unit per annum

10. 10
Graphical Representation
Ordering cost
Costs
Holding cost
Total cost
Source: informit.com
Economic
Order
Quantity
Order size

11. 11
Numerical Example
The following information is available in respect
to an item
• Annual usage, A = 20,000 units
• Ordering cost, O = ₹1875 per order
• Carrying cost, C = ₹ 3 per unit/ per annum

12. 12
Solution
𝐸𝑂𝑄 =
2𝐴𝑂
𝐶
=
(2∗20,000∗1,875)
3
= 5,000 units
No. of orders per year
=
20,000
5,000
= 4
If the order size is 5000 units:
Order cost = ₹1875*4 = ₹7500
Avg. inventory = 2,500 (i.e. 5000/2)
Carrying cost = Avg. inventory*3
=2500*3 = ₹7500
Total annual cost = ₹15000

13. 13
Solution
If the order size is 4,000 units:
No. of orders = 5 (i.e. 20000/4000)
Order cost = ₹1875*5 = ₹9,375
Avg. inventory = 2,000
Carrying cost = Avg. inventory*3
=2,000*3 = ₹6,000
Total annual cost = ₹15,375
If the order size is 6,667 units:
No. of orders = 3 (i.e. 20000/6667)
Order cost = ₹1875*3 =₹5,625
Avg. inventory = 3,333
Carrying cost = Avg. inventory*3
=3,333*3 = ₹7,500
Total annual cost =₹15,625

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Shortcomings of EOQ
 It is difficult to know demand with certainty
 Zero lead time assumption is unlikely to be true
 Qty. computed maybe hypothetical (e.g.
fractional EOQ)
 Assumption of fixed carrying cost & constant
cost per order is unrealistic

15. Re-order Point
 Level at which firm places fresh purchase
order
 Depends upon:
 Lead Time or Delivery Period
 Rate of Consumption of Inventory
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16. Formula: Re-order Point =
Safety Stock + Consumption during Lead Time
Safety Stock:
Inventory held to accommodate against
unforeseen circumstances
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17. Re-order Point Determination
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18. ABC (Always Better Control) Analysis
 A Category Items
 B Category Items
 C Category Items
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19. 0
20
40
60
80
100
120
10 20 30 40 50 60 60 80 90 100
Item
B
Item
C
Percentage of Inventory items
Percentage
of
Inventory
Values
Item
A
(Quantity)
(Value)
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20. Advantages of ABC Analysis
 Control on costly items
 Scientific method
 Help in Utilization
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21. Company (1)* (2)* (3) = [(1) + (2)] / 2 (4)* (5)* (6) = (4) + (5) (7) = (6) / (3)
Hindustan Unilever Ltd. 3,383 2,636 3009.5 14,951 -391 14,560 4.84
ITC Ltd. 9,471 8,038 8754.5 13,605 -527 13,078 1.49
Nestle India Ltd. 1,416 1,283 1349.5 5,554 -69 5,485 4.06
Britannia Industries Ltd. 991 634 812.5 5,510 -43 5,467 6.73
Dabur India Ltd. 1,114 809 961.5 2,756 -177 2,579 2.68
* Source = Balance Sheet and P/L A/c of Respective Companies
(1) - Closing Inventory (in ₹)
(2) - Opening Inventory (in ₹)
(3) - Average Inventory (in ₹)
(4) - Cost of Material Consumed (in ₹)
(5) - Change in Inventories of Finished Goods, (
5) - Work-in-Progress and Stock-in-Trade (in ₹)
(6) - Cost of Revenue from Operations (in ₹)
(7) - Inventory Turnover Ratio (in Times)
Inventory Turnover Ratio
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22. Observations that can be drawn
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 Hindustan Unilever Ltd., Nestle India Ltd.
& Dabur India Ltd. have a high ratio
 Britannia Industries Ltd. ratio might be
too high
 ITC Ltd. has a low ratio

23. 23
Just In Time Inventory
Management
It is a form of inventory management that
requires working closely with suppliers so that
raw materials arrive as production is
scheduled to begin, with a goal to maintain
minimum inventory on hand and reduce costs.

24. 24
Advantages of Just in Time
 Reduction of wastage and overproduction
 Reduction in obsolete inventory and stock
 Minimizes raw material on hand
 Lowers cost
 Reduces work in progress goods
 Improves cash flows

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Disadvantages of Just in Time
 Highly dependent on smooth Supply Chain
 Prone to cost disruptions
 Reliance on forecast of availability of raw material
 Tight scheduling increases pressures
 Not efficient in sudden changes

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What Companies Use JIT
Inventory Management?
Amazon.Com
 Ecommerce retail giant uses a variation of JIT: setting up
dedicated space inside key suppliers’ warehouses
 Amazon has a small fenced off area within Proctor &
Gamble’s (P&G) Pennsylvania warehouse
 Amazon can meet the critical 24-hour delivery window
with P&G personal care products.

27. 27
The Boeing Company:
 Beginning in the mid-1990s, Boeing applied JIT across
the enterprise
 The company relies heavily on its supply base to meet
customer demand
Dell Technologies :
 Dell adopted Lean/JIT operations in the 1980s with
direct-to-consumer sales.
 Company would order parts when it made a sale to a
customer

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Tesla:
 Tesla took ownership of its supply chain, keeps minimal
inventory and essentially manufactures on demand
 This practice helps Tesla have more capital available
because it isn’t tied up with surplus inventory
Toyota Motor Corporation:
 Toyota is one of the most well-known examples of
companies using the JIT method.
 Toyota only receives raw materials in the factory when
it is ready to start building the automobile

29. Contribution
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 Lokesh Soni (#3532) - Types of Inventories (Slide No. 3), ABC
Analysis (Slide No. 18-20)
 Mishi Yadav (#3533) - Benefits & Objectives of Inventory
Management (Slide No. 6), EOQ Model (Slide No. 7-14)
 Vishal Dhir (#3534) - Just in Time System Approach (Slide
No. 23-28)
 Suryaansh Jain (#3536) - Editing & Compiling, Motives &
Cost associated with Inventory (Slide No. 4-5), Re-order Point
(Slide No. 15-17), Inventory Turnover Ratio (Slide No. 21-22)

30. Bibliography
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 Fundamentals of Financial Management Book
written by Surender Singh & Rajeev Kaur
 Fundamentals of Financial Management Book
written by Dr. R.P. Rustagi
 www.moneycontrol.com
 www.informit.com

31. Thank You
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