This document discusses inventory management. It defines inventory as materials held until needed for production, consumption, or sale. There are direct inventories like raw materials, work in progress, and finished goods. Indirect inventories include tools and supplies. The objectives of inventory management are to minimize costs and disruptions while maintaining sufficient stock. Economic order quantity and ABC analysis are discussed as methods to classify and control inventory levels.

1. INVENTORY MANAGEMENT
Presented by: Ram babu
Amit Kumar
Ankit sharma

2. In dictionary meaning of inventory is a “detailed list of
goods, furniture etc.” Many understand the word
inventory, as a stock of goods, but the generally
accepted meaning of the word ‘goods’ in the
accounting language, is the stock of finished goods
only. In a manufacturing organization, however, in
addition to the stock of finished goods, there will be
stock of partly finished goods, raw materials and
stores. The collective name of these entire items is
‘inventory’.

3. Inventory is material that the firm obtains in advance of
need, holds until it is needed, and then used, consumes,
incorporates into a product, sells, or otherwise disposes it of.
A business inventory is temporary in nature.
Inventories are stock of any kind like fuel and lubricants,
spare parts and semi-processed materials to be stored for
future use mainly in the process of production or it can be
known as the ideal resource of any kind having some
economic values.

4. Independent Demand
A
B(4) C(2)
D(2) E(1) D(3) F(2)
Dependent Demand
Independent demand is uncertain.
Dependent demand is certain.
Inventory

5. Inventory management supervises the flow of goods
from manufacturers to warehouses and from these
facilities to point of sale. A key function of Inventory
management is to keep a detailed record of each new
or returned product as it enters or leaves a
warehouse or point of sale

6.  The primary objectives of inventory management are:
 To minimize the possibility of disruption in the
production schedule of a firm for want of raw material,
stock and spares.
 maintain sufficient stock of raw material in the period
of short supply and anticipate price changes.
 ensure a continuous supply of material to production
department facilitating uninterrupted production.
 minimize the carrying cost and time.
 +maintain sufficient stock of finished goods for smooth
sales operations.

7. • ensure that materials are available for use in production and
production services as and when required.
• ensure that finished goods are available for delivery to
customers to fulfill orders, smooth sales operation and
efficient customer service.
• minimize investment in inventories and minimize the
carrying cost and time.
• protect the inventory against deterioration, obsolescence and
unauthorized use.
• maintain sufficient stock of raw material in period of short
supply and anticipate price changes.

8. Functions of inventory management
To meet anticipated customer demand (to meet the
anticipated stocks, average demand)
To smooth production requirements (create seasonal
inventories to meet seasonal demand).
To decouple operations (eliminate sources of disruptions).
To protect against stock outs (hold safety stocks to prevent
the risk of shortages)
To take advantages order cycle (buys more quantities then
immediate requirements –cycle stock, periodic orders or
order cycles).

9. To hedge against price increases (purchase larger
order to hedge future price increase or implement
volume discount).
To take advantage of quantity discount( supplies
may give discount on large orders).

10. 1.Direct inventories: The inventories which play a direct role in the
manufacture of a product and become an integral part of the finished
product are called direct inventories. Direct inventories are classified as:
(a) Raw materials: theses are the materials which are machined or before
they are ready to be used in assembly of the finished products. They
include items like steel, copper,
tin,lead,cotton,rubber,forgins,leather,wood.
(b)Work in progress: in this process inventories are the semi finished goods
at various stages of manufacture. The output of one machine is fed to
another machine for further processing. Raw materials becomes work in
progress at the end of first operation and remain in that classification
until they become piece parts or finish goods. Work in progress can be
found on the conveyors, pallets in and around the machine and in
temporary storage and waiting for the next operations.

11. (c) purchased parts: these are some purchased items.(components, sub
assemblies, finished parts etc.),purchased from outside suppliers instead of
manufacturing in the factory itself. For example, ball
bearings,screws,nuts,bolts,tyres required in automobile industries.
(d) Finished goods: finished goods inventories contain the output the
production process. These are the finished (final) products ready for
dispatching to the customer products usually leave work in progress
classification and enter in the classification of finished goods at the point of
final inspection they are ready for delivery to the customers or to finished
goods store.
2.Indirect inventories: are those materials which help the raw materials to
get converted into the finished product, but do not become an integral part
of the finished products. Indirect inventories are further classified as:

12. (a) Tools: various tools used for processing are classified as:
(i)Standard tools used on machines such as lathe tools, milling
cutters,drill,reamers taps,hobs,broaches,chasers,form tool etc.
(ii)Hand tools such as hand saws,chisels,drill
guns,hammers,mallets,pliers,spanners,wrenches,punches etc.
(b) Supplies: it includes materials used in running the plant but do not go
into the product. Supplies include:
(i)miscellaneous consumable stores such as brooms, cottons waste, toilet
paper, vim powder, jute etc.
(ii) welding, soldering, and tinning materials such as electrodes,welding
rods,
solder,spelter etc..
(iii)abrasive materials such as emery cloth,emery belts, and paper emery,
graphite
etc.
(iv) empties such as bags ,glass, bottles, card board boxes, drums jars
tins etc.

13. CLASSIFICATION
OF INVENTORIES
COST:
Inventories’ cost are traditionally
categorized into four basic types:

14. Purchase cost:
For items that are purchased from outside the firms,
this is usually the unit price that the firm pays to its
vendor. As an item moves through the logistics
system of the firms, it purchase cost in the inventory
analysis should reflect its fully landed cost, by which
is meant the cost to acquire and moves the item to
that point in the system.

15. ORDERING COST:
In addition to the per unit purchase cost, there is usually an
additional cost which is incurred whenever we order, reorder
or replenish the inventory. If we produce items internally then
there will be an organization set up cost. This happens because
we have to shut down the manufacturing line and change over,
reconfigure the line to make a specific item.
This is the cost involved with processing the order, involving
paying the bill, auditing, and so forth.

16. HOLDING COST:
The cost that accrue due to the actual holding of the inventory over a
time period. Many different kinds of cost can be considered as holding
cost. The key characteristics of holding cost varies with the amount of
inventory being held and the time that the inventory is held. The holding
cost can further be classified as follows:
• Storage cost
• Service cost
• Risk cost
•Capital cost.

17. SHORTAGE COST:
When a demand arises which cannot be satisfied from
available inventory an inventory shortage occurs.
Purchase, ordering and holding cost can be thought of
as the cost of having inventories, while shortage cost
result for not having inventory, or for not having
enough inventory at the right place at the right time

18. Four specific case where shortage cost may
exist are:
 Back orders
 Lost sales
 Lost customer cost
 Disruption cost

19. Inventory control:
Inventory control is the means by which materials of
the correct quality and in correct quantity are made
available as and when required with due regard to
economic in storage and ordering cost. Hear the
desired level of inventory can neither be high or low
because high level inventory will lead to increase in
carrying cost while low level of inventory will lead
to increase in ordering cost

20. • To ensure smooth flow of stock.
• To provide for required quality of materials.
• To control investments in stock.
• Protection against fluctuating demand.
• Protection against fluctuations in output.
• Minimization of risk and uncertainty.
• Risk of obsolescence.
• Minimization of material cost.

21. Economic order quantity
Inventory level
Perpetual inventory control
ABC system of control
Inventory turnover ratio

22.  We want to determine the optimal number of
units to order so that we minimize the total cost
associated with the purchase, delivery and
storage of the product.

23. Cont…
• cost of holding an item in inventory
Carrying cost
• cost of replenishing inventory
Ordering cost
• temporary or permanent loss of sales when
demand cannot be met
Shortage cost

24.  E.O.Q = √(2*UP)/C OR =√2RCp/CH =
√2AS/I
E.O.Q=Economic order quantity
U or A or= annual usage in unit
P or Cp or S = cost of placing an order
Ch or C or I = cost of storage of one unit in
inventory for one year.

25.  Re order level
Reorder level= maximum usage*maximum
reorder period
Or RL=minimum level +(normal usage*normal
delivery time)
 Minimum stock level
MSL=reorder level – (normal usage)*normal
delivery time

26.  Maximum stock level
MSL= reorder level + reorder
quantity(minimum usage )*minimum delivery
time
 Average stock level
ASL=(minimum level +maximum level)/2

27.  It is implies maintenance of up to date stock
records and in its board sense it covers both
continuous stock tacking as well as up to date
recording of stores books

28. Divides inventory into three classes based on
Consumption Value
Consumption Value = (Unit price of an item) (No. of units consumed per annum)
 Class A - High Consumption Value
 Class B - Medium Consumption Value
 Class C - Low Consumption Value

29. ABC Classification System
Classifying inventory according to some measure
of importance and allocating control efforts
accordingly.
A - very important
B - mod. important
C - least important

30. According to this approach to inventory control high value items are
more closely controlled than low value items. Each item of inventory is
given A, B or C denomination depending upon the amount spent for that
particular item. “A”
or the highest value items should be under the tight control and under
responsibility of the most experienced personnel, while “C” or the lowest
value may be under simple physical control.
It may also be clear with the help of the following examples:
“A” Category – 5% to 10% of the items represent 70% to 75%
of the money value.
“B” Category – 15% to 20% of the items represent 15% to 20%
of the money.
“C” Category – The remaining number of the items represent
5% to 10% of the money value.
The

31. Advantages of ABC Analysis
1. It ensures a closer and a more strict control over
such items, which are having a sizable investment in
there.
2. It releases working capital, which would otherwise
have been locked up for a more profitable channel of
investment.
3. It reduces inventory-carrying cost.
4. It enables the relaxation of control for the ‘C’ items
and thus makes it possible for a sufficient buffer
stock to be created.
5. It enables the maintenance of high inventory turn
over rate.

32.  ITR= cost of goods sold /average inventory
cost of goods sold = sales –gross profit
average stock = (opening stock+closeing
stock)/2

33. THANK YOU