This document discusses inventory management techniques. It describes different types of inventory including raw materials, work in progress, and finished goods. It then explains several inventory analysis methods like ABC analysis, VED analysis, and EOQ analysis that are used to categorize inventory items. Key inventory management terms are also defined such as reorder level, reorder quantity, maximum and minimum inventory levels. The purpose is to efficiently control inventory levels and costs.

1. CHAPTER 5

2. INVENTORY
MANAGEMENT

3. INTRODUCTION
Inventory management involves the control of assets being
produced for the purpose of sale in normal course of the
company’s operations.inventory includes
oRaw materials
oWip
oFinished goods.

4. Types of inventory:
• Raw materials:this consists of basic materials that have
not yet been commited to production in a manf. Firm.
• Stores and spares:these are the products which acts as
the accessories to the main products produced for the
purpose of sale.
• Work in progress:those goods which are in the process of
production.
• Finished goods:products awaiting for sale.

5. PURPOSE OF INVENTORY
• Avoiding lost sales
• Gaining quantity discounts
• Reducing ordering costs
• Achieving efficient production runs
• Reducing risk of production shortages

6. Importance:
• Making Adequate Availability of Inventories
• Minimising Costs and Investments in Inventories
• Quick delivery of goods
• Customer retention
• Smooth flow of production
• Continuous production
• Optimum use of resources
• Availing heavy discounts

7. Features:
• Optimum use of resources
• Smooth flow of production
• Gaining discounts
• Easy and quick delivery
• Customer satisfaction
• Customer retention
• Lowering avg. costs
• Employee satisfaction

8. COSTS FOR INVENTORIES
• Material costs
• Ordering costs
• Carrying costs
• Opportunity costs
• Cost of running out of goods

9. Inventory management techniques
• ABC Analysis
This analysis enables the mgt. to keep a close watch on
a relatively less no. of items which account for a high
%age of a value of annual usage of items of inventory.
Firm using ABC analysis segregates inventory in 3
categories:

10. contd.
• The A items are those in which the firm has the highest
amount of investment.(approx. 70% of invt.)
• The B items are those in which the firm has the next
highest amount of investment.(approx. 20%)
• The C items are those in which the firm has the least
amount of investment.(approx. 10%).

11. VED Analysis
It attempts to classify the items used into three broad
categories:
• Vital
• Essential
• Desirable.
The analysis classifies items on the basis of their
criticality for the industry or company

12. Explanation:
• Vital: Vital category items are those items without which
the production activities or any other activity of the
company, would come to a halt, or at least be drastically
affected.
• Essential: Essential items are those items whose stock –
out cost is very high for the company.
• Desirable: Desirable items are those items whose stock-
out or shortage causes only a minor disruption for a short
duration in the production schedule. The cost incurred is
very nominal.

13. Importance:
• . VED Analysis is very useful to categorize items of spare
parts and components. In fact, in the inventory control of
spare parts and components it is advisable, for the
organization to use a combination of ABC and VED
Analysis. Such control system would be found to be more
effective and meaningful.

14. GOLF Analysis
• The classification of inventory under this category is
headed in 4 sources:
• G- government control supplies
• O-ordinarily available/open market
• L-local availability
• F- foreign source of supply items.

15. FSND Analysis
Based on the consumption pattern of the items, the
FSND classification calls for classification of items as
• F = Fast moving items
• S = Slow moving items
• N = Normal moving items
• D = Dead items or non-moving items.
[F stands for fast, ‘S’ stand for slow moving, ‘N’ stand for
non-moving materials & parts. This will automatically
reduce inventory costs.]

16. CONTD:
Cut off points of these classes are usually in terms of
number of items issued during the last few years. This
helps in preventing obsolescence and ensures disposal of
dead stock:
Ffast, ‘S’ stand for slow moving, ‘N’ stand for non-moving
materials & parts. This will automatically reduce inventory
costs.

17. EOQ Analysis
It refers to optimal order size that will result in the
lowesttotal of ordering and carrying costs of an
inventorygiven its expected usage and costs.
The firm attempts to determine the order size that will
minimise the total inventory costs.

18. Assumptions:
• Constant or uniform demand
• Constant price
• Constant carrying costs
• Constant ordering costs
• Instantaneous delivery
• Independent orders.

19. P system:
• P model in inventory control is also known as fixed-period
system.
• That means,the orders are placed after a fixed interval of
time. It could be once in a day, once in every 2,3, or 5
days, once in a week etc.
• Once the order interval is fixed, the only other decision left
will be to decide the quantity of the order, which depends
on the rate of demand/consumption and the lead time for
replenishment.

20. • The maximum inventory level=M
• Current inventory level= C
• Order quantity(q)= M-C
• M depends on the average daily demand rate during the
review period and the safety stock.

21. FIXED ORDER QUANTITY SYSTEM
OR Q-SYSTEM
• Safety stock is needed to protect against a stockout after
the reorder point is reached
and prior to receipt of an order.
• This period is usually called lead-time.
• The reorder point B is composed of the mean lead-time
demand plus safety stock.
• Average inventory level on hand just before the receipt of
a replenishment order is the
safety stock.

22. Important terms:
• The maximum level of inventory could be described as
the maximum capacity of a business to stock goods
(inventory or raw material) in its store, which may be due
to reasons like demand limitation of goods (in production
or sales), the storage capacity of business, rationed funds
etc.
• The maximum level of stock is the level above which a
business does not or cannot hold stock in its premises.

23. • Maximum Level = Re-order level + Re-order quantity –
(Minimum usage × Minimum lead time)

24. Minimum level:
• Minimum level of stock. The minimum level of stock is a
certain predetermined minimum quantity of raw materials
or merchandise inventory which should always be
available in stock in the normal course of business
• Minimum Level of Inventory = (Maximum usage ×
Maximum lead time) – (Average usage × Average lead
time)
• Or
• Minimum Level of inventory = Re-order level – (Average
usage × Average lead time)

25. Reorder level of stock
• Reorder level of stock (also known as reorder point or
ordering point) in a business is a preset level of stock or
inventory at which the business places a new order with
its suppliers to obtain the delivery of raw materials or
finished goods inventory.
• Maximum demand or usage (in days, weeks or months) ×
Maximum lead time (in days, weeks or months)
• [Maximum demand or usage (in days, weeks or months) ×
Maximum lead time (in days, weeks or months)] + Safety
stock

26. Reorder quantity:
• reorder quantity is the quantity of the order that is to be
placed on a new purchase order for the particular item.
The ordered quantity or the number of units needs to be
optimum taking into account the various factors like cost
of order, cost of transportation, carrying costs, etc. The
reorder quantity is the quantity which, given the normal
usage, provides the best balance between the various
factors like quantity discounts, freight, storage costs, and
working capital requirement.
• Reorder quantity= safety stock+(usage rate*lead time)