This document discusses inventory management. It defines inventory as goods or materials held by a business for processing and resale. There are different types of inventory including raw materials, work in progress, and finished goods. Maintaining the appropriate levels of each type of inventory is important for production and sales. Various inventory management tools are described such as ABC analysis, reorder points, economic order quantity, and safety margins. The goals of inventory management are to balance inventory costs, maintain liquidity, and maximize profitability.
Inventory Management
Use of Inventory
Types of Costs
ABC Analysis
VED Analysis
Economic Order Quantity (EOQ)
Types of Inventory Management System
Assumptions of EOQ
Basic Fixed Order Quantity Model (EOQ)
EOQ Curve
ABC and VED Classification
Function / Use of Inventory
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Inventory means stock of goods like raw material, work in progress, stores of finished goods, consumables etc.
Inventory management means planning, organizing, handling and storing adequate level of inventory with optimized cost to meet consumer’s demand.
There are two most significant costs involved in managing inventory (ordering cost and carrying cost)
Inventory occupy 50–80% of the total current assets of the business concern. It is very essential part of working capital management and production management.
ECONOMIC ORDER QUANTITY
Economic Order Quantity (EOQ) refers to the optimum level of inventory at which the total cost of inventory comprising ordering cost and carrying cost is minimum maintaining the forecasted demand adequacy.
FORMULA : EOQ = √2AO / C
A - Annual consumption, O - Ordering cost per order, C - Carrying cost (expressed in percentage terms of purchase price per unit)
A-B-C ANALYSIS OF INVENTORY
It is the inventory management technique that divide inventory into three categories based on the value and volume of the inventories.
In most inventories a small proportion of items accounts for substantial usage and high monetary value while a large proportion of items accounts for small usage and low monetary value.
ABC analysis advocates a selective approach to classify and focus greater concentration on inventory items accounting for high monetary value and bulk usage.
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Inventory Management
Use of Inventory
Types of Costs
ABC Analysis
VED Analysis
Economic Order Quantity (EOQ)
Types of Inventory Management System
Assumptions of EOQ
Basic Fixed Order Quantity Model (EOQ)
EOQ Curve
ABC and VED Classification
Function / Use of Inventory
https://youtu.be/PuhgTVN_E_I
Click on the link to watch full video on youtube
Inventory means stock of goods like raw material, work in progress, stores of finished goods, consumables etc.
Inventory management means planning, organizing, handling and storing adequate level of inventory with optimized cost to meet consumer’s demand.
There are two most significant costs involved in managing inventory (ordering cost and carrying cost)
Inventory occupy 50–80% of the total current assets of the business concern. It is very essential part of working capital management and production management.
ECONOMIC ORDER QUANTITY
Economic Order Quantity (EOQ) refers to the optimum level of inventory at which the total cost of inventory comprising ordering cost and carrying cost is minimum maintaining the forecasted demand adequacy.
FORMULA : EOQ = √2AO / C
A - Annual consumption, O - Ordering cost per order, C - Carrying cost (expressed in percentage terms of purchase price per unit)
A-B-C ANALYSIS OF INVENTORY
It is the inventory management technique that divide inventory into three categories based on the value and volume of the inventories.
In most inventories a small proportion of items accounts for substantial usage and high monetary value while a large proportion of items accounts for small usage and low monetary value.
ABC analysis advocates a selective approach to classify and focus greater concentration on inventory items accounting for high monetary value and bulk usage.
Thank you for watching
Subscribe to DevTech Finance
hey friends, we know from earlier research that material control is the major component of cost. so, let us have a look at few tenchniques relating to material control
Inventory Management Hacks: Inventory management is one of the most important tasks for supply chain management professionals.
Here is 4 simple inventory management hacks by http://emergeapp.net
INVENTORY MANAGEMENT:
What is inventory?
Why do we care for inventory?
What do you consider regarding inventory?
Cost of inventory
Benefits of inventory
Modelling inventory in supply chain
Types of inventory models
Kattareeya Prompreing
白雅欣
iD:DA61G209
(Student in Ph.D. Business and Management, College Business, STUST
email:da61g209@stust.edu.tw
: katt.rmutl@gmail.com
A brief summary of Inventory Management techniques. It includes the following methods of Inventory control: Economic Order Quantity, VED classification, Just in Time, ABC analysis, FSN analysis, VMI analysis, FIFO analysis. I have further discussed by focusing on the automobile industry.
hey friends, we know from earlier research that material control is the major component of cost. so, let us have a look at few tenchniques relating to material control
Inventory Management Hacks: Inventory management is one of the most important tasks for supply chain management professionals.
Here is 4 simple inventory management hacks by http://emergeapp.net
INVENTORY MANAGEMENT:
What is inventory?
Why do we care for inventory?
What do you consider regarding inventory?
Cost of inventory
Benefits of inventory
Modelling inventory in supply chain
Types of inventory models
Kattareeya Prompreing
白雅欣
iD:DA61G209
(Student in Ph.D. Business and Management, College Business, STUST
email:da61g209@stust.edu.tw
: katt.rmutl@gmail.com
A brief summary of Inventory Management techniques. It includes the following methods of Inventory control: Economic Order Quantity, VED classification, Just in Time, ABC analysis, FSN analysis, VMI analysis, FIFO analysis. I have further discussed by focusing on the automobile industry.
Materials Management
Understand the role of materials management industries.
4.1 Explain the importance of materials management in Industry
4.2 Know Functions of Materials Management
4.3 Derive expression for inventory control.
4.4 Explain ABC analysis
4.5 Define safety stock
4.6 Define reorder level
4.7 Derive an expression for economic ordering quantity
4.8 Know the functions of Stores Management
4.9 Explain types of store layouts
4.10 List out stores records
4.11 Explain the Bin card
4.12 Describe Cardex method
4.13 Explain general purchasing procedures
4.14 Explain tendering, E-tendering and E-procurement procedures
4.15 List out purchase records
4.16 Know the applications of RFID (Radio Frequency Identification De
4.17 Understand the applications of RFID in material management
EOQ-complete, Just in Time (JIT), Lead time analysis, Inventory models (detai...Srishti Bhardwaj
SIM Unit-3
Economic order quantity (EOQ)
Derivation of EOQ formula,
reasons to modify EOQ to suit to real life situations,
Just in time,
Lead-time analysis,
Effect of long lead-time on costs and profitability,
elements of lead-time,
inventory models:
safety stocks,
fixation of re-order level and
desired inventory level,
designing of Q and P models of inventory control.
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2. Inventory
Inventory or stock is the quantity of goods or
materials held by a business firm for
processing and resale.
This is relevant to manufacturing and trading
companies rather than servicing companies.
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3. Inventory Nature
• Part of current assets
• Liquidity
• High liquidity compared to fixed assets
• Low liquidity compared to other current assets
• Part of operating cycle.
• Liquidity lag
• Creation lag: payment lag to the supplier, a benefit to the firm
• Storage lag: Pay to supplier before the sale
• Sale lag:Credit sales
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4. Inventory Types
Primary Inventory or Stock
Raw Material
Stores and Spares
Processed Inventory or Stock
Work-In-Process orWork in progress (WIP)
Finished Goods
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5. Raw Materials
• Tangible inputs or material which are in
natural form needed for manufacturing
process.
• Also known as
• Unprocessed material
• Primary Commodity
• Feed Stock
• All manufacturing companies need not have
raw materials
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6. Raw Materials Examples
• Steel – Iron Ore
• Textile – Cotton
• Cement – Limestone
• Glass – Sand
• Sugar – Sugarcane
• Edible Oil – Seeds like groundnuts & sunflower
• Plastic – Oil, natural gas, coal
• Rubber – Latex from trees
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7. 2. Stores and Spares
• These are the basic inputs required for the
manufacturing process.
• These are not raw materials.
• Stores and spares are the finished goods
bought from suppliers.
• Manufacturing companies may have both
raw materials and stores & spares as the
inputs.
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8. Stores and Spares examples
Wires, watchers, nuts and bolts are the
common stores and spares for many
manufacturing companies.
• Automobile – Tyre, Battery, lamp, wire, disc,
and drum
• Aircraft – Fiber glass, passenger seats and
tyres.
• Shipping – Steel bars and sheets.
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9. 3. Work in Process (WIP)
• This is the inventory or stock forWIP.
• It is also known as semi finished goods.
• This has minimum storage compared to raw
material and stores & spares.
• This is a moving inventory.
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11. 4. Finished Goods
• This is the stock of final goods or finished
goods ready to be sold.
• They are stored due the lag in transportation
or handling for delivery.
• They are also stored to meet unforeseen
demands and expected fall in production.
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13. Need for inventory
All types of inventory
• Absorb planning errors
• Meet unforeseen fluctuations in supply and demand
Primary and WIP
• Facilitate smooth production
• Avoid risk of production shortages
• Reduce Ordering cost
• Increase Productivity
• Bulk purchase for discounts
Finished Goods
• Sales cushion
• Support marketing operations
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14. Inventory Costs
Direct costs
Material cost (M)
Ordering cost (O)
Carrying cost (C)
Indirect Costs
Cost of funds tied up with inventory
Cost of running out of stock
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15. Material Costs (M)
• Costs of purchasing the goods at an agreed
price.
• It includes transportation and handling costs.
• Material cost = Price per unit * Quantity
M = P*C
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16. Ordering Costs (O)
• It is related to ordering the material
• It includes the following
• Purchase requisition
• Preparing purchase order
• Order follow
• Transportation
• Inspection
• Total Ordering Cost = Cost per order * number of orders
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17. Carrying Cost (C)
• It is the cost of storing the goods.
• It includes the following
• Ware house charges
• Insurance
• Depreciation
• Store keeper wages Salary
• Security costs
• Pilferage
• Theft
• Obsolescence
Total Carrying Cost = Average Inventory * Unit Price * % Carrying cost
= Q/2 * P * C
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18. Cost of funds
Cost of funds tied up with inventory.
Higher the cost lower the profitability and vice versa.
Funding the inventory or working capital funding is
crucial in inventory management.
It includes
Cost of borrowing funds
Opportunity cost
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19. Cost of running out of stock
Primary goal of inventory management is to
provide liquidity in the process of manufacturing.
Manufacturing process is uninterrupted with
enough levels of inventory is maintained.
Lack of inventory cushion or running out of stock
disturbs the production process and it may also
lead to shutdown.
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20. Inventory Management
It is a management discipline which primarily
deals with the timing, quantity and
placement of stocked goods for value
addition resulting in maximizing the firm’s
profits.
The scope of inventory management
depends on the nature of the manufacturing
process and product.
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21. Inventory Management Goals
• Promote liquidity
• Minimize or reduce inventory costs
• Direct cost : Material cost, ordering cost, ware
housing, transportation, etc.
• Indirect costs: insurance, obsolescence, pilferage,
theft, etc.
• Maximize profitability
• Minimize the investment in inventory
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23. A. Qualitative Measures
1. Accurate Demand Forecast
2. Production Budget
3. Control Procedure
4. Avoid Inadequate inventories and excess inventories
5. Timely supply of quality materials
6. Economic rates in material purchase
7. Selection of right vendors
8. Optimize Inventory Investment.
9. Timely payment of vendors Bills.
10. Co-ordination between purchase, stores and users.
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24. B. Inventory Systems
1. Bin System
2. ABC System
3. XYZ System
4. FSN System
5. VED System
6. GOLF System
7. SDE System
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25. 1. Bin System
Two bin systems
When one bin is emptied, a second bin necessitates a
reorder process.
Redline System
It is a painted bin at a reorder level.
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26. 2. ABC Technique
This is related to Pareto’s law or 80/20 principle.
This method gives attention to the matters to the
degree of their importance instead of giving equal
attention to all matters.
The value for the inventory depends on their degree
of importance and classified into 3 categories into A,
B and C.
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27. ABC Techniques
The ABC method is practiced in two forms as follows
Based on the unit price
Based on annual consumption
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28. Based on Unit Price Method
A class Items have high value and B class Items have
medium Value. The low value items are classified as
C class items.
A B C items in an automobile company can be seen
as follows
A: Engine, gear box, crank shaft etc.
B: Battery, fuel pipe, head lamps etc
C: Nuts, bolts, washers, gaskets etc.
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29. Based on Annual Consumption Value Method
All the items are compiled and then arranged in a descending
order as per the previous year’s annual consumption level with
cut off points.
A - High value items - 10% in number but 70% in value
B - Medium value items - 20% in number but 20% in value
C - LowValue items - 70% in number but 10% in value.
Example
A Class Items: Rs 10 Lakhs and above
B Class Items: Rs.1 Lakh to Rs 10 Lakh
C Class Items: Less than Rs 1 lakh
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30. Stock Maintenance and Ordering
Class wise Maintenance
A : 2 Days
B : 5 Days
C : 10 Days
Class wise Order Levels
A: Frequent ordering close follow up of Safety Stock.
B : Slightly more with periodical follow up of safety stock.
C: Annual orders and higher stocks.
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31. 3. XYZ
Inventory categorized based on the value as on
date as follows
X – HighValue Item
Y – MediumValue item
Z – LowValue Item.
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32. 4. FSN
Inventory categorized based on the issue of
materials by users for a given period.
F – Fast
S – Slow
N – Non Moving
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33. 5. VED
Inventory is classified based on the importance
and criticality of usage.
V –Vital
E – Essential
D – Desirable
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34. 6. GOLF
Inventory is classified based on the source of
Procurement of the material.
G – Government
O – Ordinary
L – Local
F – Foreign
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35. 7. SDE
Inventory is classified based on the availability
of the material.
S – Scarce
D – Difficult
E – Easy
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37. 1. Re order point
• This is point above the daily usage depending on the lag in
delivery.
Reorder quantity is kept in a special package when ever it is
opened.
Re order point is attached to purchase requisition as
replenishment.
Reorder point = Average daily usage rate * lead time in days.
Ex: 100 units * 7 days = 700 units is the reorder point.
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38. 2. Margin of Safety
• This is over the reorder point and depends on the
following.
Carrying cost
Stock out costs
This is derived based on the conditions in the
economy, industry and business
It is forecasted using probability of normal, average
and worst situations.
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39. 3. Economic Order Quantity (EOQ)
EOQ is the optimum order size that will result in the lowest
total of ordering cost and carrying cost resulting in cost
reduction profit maximization.
It works when the costs and other factors constant including
Annual demand
Unit price
Carrying cost
It also assumes the following
Independent orders
Instantaneous delivery
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41. EOQ Problem
An automobile ancillary company has an annual production of
1,00,000 units. For each production cycle the ordering cost is Rs
120. If the cost of carrying is Rs 5 per unit, find the Optimum
quantity to order.
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