The document discusses inventory management. It describes the functions of inventory management as decoupling production from suppliers, providing selection for customers, taking advantage of quantity discounts, and hedging against price changes. It also describes different types of inventory like raw materials, work in process, and finished goods. A key concept is ABC analysis for classifying inventory into classes A, B, and C based on financial value and controlling inventory accordingly. Record accuracy is important for making precise reorder and scheduling decisions. The document also compares periodic and continuous inventory review systems.

1. Inventory Management

2. Functions of Inventory Management
• There are different shapes of inventory in a company
and the function of inventory management is:
1. To “decouple” or separate various parts of the
production process from suppliers.
2. To provide a stock of goods that will provide a
selection for the customers as in a retail shop.
3. To take advantage of quantity discounts.
4. To hedge against inflation and upward price trends/
changes.

3. Shapes of Inventory
• Raw Materials.
• Work In Process.
• Maintenance/ Repair/ Operating Supply
(MRO) inventory.
• Finished goods Inventory.
However it is important to understand:
• How inventory items can be classified?
• How accurate records of inventory can be
maintained?

4. Classifications of Inventory
• The Pareto Principal states:
“Critical Few and Trivial Many” the idea is to focus on
few critical/costly inventory parts and not trivial many.
ABC analysis is one of the techniques of classifying
Inventories:
• Class “A” Those items which may be just 10-15% of the total
inventory volume but they represent 70- 80% of the total
financial volume in inventory.
• Class “B” Those items which may be up to30% of the total
inventory volume but they represent 15 – 20% of the total
financial volume in inventory.
• Class “C” Those items which may be up to 50% of the total
inventory volume but they represent 5 - 10% of the total
financial volume in inventory.

5. Advantages of Classification
It helps making policy for controlling Inventory.
For example ABC classification guides us to:
• Purchasing resources expended on supplier development
should be much higher for item in category “A” as
compared to those in “B” or “C”.
• “A” items as compared to “B” or “C” should have tighter
inventory control. May be they are kept in a more secure
area and accuracy of inventory record for “A be more
critical than “B” or “C”.
• Forecasting items under category “A” may be very careful
as compared to items under “B” or “C”.

6. Record Accuracy
• Record accuracy allows organizations to focus on
those items only that are needed, rather than
setting for being sure that, “some of everything” is
in inventory.
• Accuracy of inventory record can help organizations
make precise decisions about re-ordering,
scheduling, shipping and making contractual
commitments with clients.

7. Cycle of Counting
Determining the frequency of verification of inventory is known
as Cycle of Counting and it depends upon the category:
• For category “A” the frequency may be every month
• For category “B” the frequency may be every quarter
• For category “C” the frequency may be every six months
we have these cyclic audits as above it can help the organization to:
• Avoid shutting down the facility for a couple of days
• Eliminate annual inventory adjustments
• Allows the cause of error to be identified and remedial action taken.
• Trained personal audit the accuracy
• Helps maintaining an accurate inventory record.
Such audits don’t have to be pre decided but can be surprise audits
OR the stocks can be verified each time something i.e; issue or receipt
is recorded.

8. Control of Inventory in Services
• General Stores, departmental stores, food shops etc. are form of
services where inventory is maintained and therefore needs to have
a system to control it. Because:
Inventory that is un accounted for between receipt and time of sale is a
loss. This loss could be because of:
Damage of the missing articles, theft or mistake in counting while
receiving.
A loss of inventory in a retail shop can be more than 3%, however, if it is
1% of sale, it is considered to be good.
For having a tight control over inventory in a store, it requires:
1. Honest people are selected and properly trained and disciplined.
2. There is a tight control over the incoming shipments.

9. Inventory Models
• Independent Demand: This means the inventory
that is not dependent upon any other inventory.
• Dependent Demand: This means the inventory of
an item is dependent upon another.

10. Volume of Inventory
• It is believed that the smaller the volume of the inventory,
better is your Supply Chain and the Inventory Management.
• However there are certain factors which demand high
inventory level, similarly there are factors which demand low
inventory levels.
• The factors which demand low Volumes of inventory are
the “ holding Costs “.
• The factors which demand high volumes of inventory are:
1. Ordering Cost
2. Labour and Equipment Cost
3. Transportation Cost

11. Types of Inventory
• Cycle Inventory: The portion of total inventory that
varies with the lot size is called Cycle Inventory.
• Safety Stock Inventory: Holding inventory slightly
more than the requirement.
• Anticipation Inventory: When there is a threat
from supply line of higher rates, non-availability in
the near future, or uncertainty in demand or peak
demand is seasonal
• Pipeline Inventory: The inventory consisting of
orders that have been placed but not received yet.

12. Inventory Reducing Tactics
• There are few tactics which could be utilized
for reduction of inventory, which are in two
steps:
• Primary Leavers: These are the ones which
must be activated if the inventory is to be
reduced.
• Secondary Leavers: Are the ones which counter
the penalty costs of applying the primary
leavers.

13. Inventory Control Systems
– Periodic review system: Known as “P” system.
– Continuous Review System: Known as “Q” system.
This is also known as the Re-Order Point system
• or fixed order quantity system
• ..

14. Comparison of Both systems
• Advantages Of “P” system:
• Administration is easier because the replishments are made
periodically. Easier for the employees to spare some time for
the review once after every interval.
• Order for multiple items from the same supplier could be
combined into a single purchase order. This approach reduces
ordering and transportation expenses and gives the edge to
the buyer to claim a rebate as well.
• The inventory position is needed to be known only after fixed
intervals and not continuously as in the case of Continuous
Review “Q”
Advantages Of “Q” System:
• The review frequency can be individualized/ tailored for each item
depending upon its frequency and volume being used. This will
reduce ordering and holding costs.
• Fixed lot sizes if in large size may result in discounts on quantity
basis.
• Lower safety stocks result in savings.