The document discusses inventory management. It defines inventory as items held to meet future demand. It notes that inventory constitutes a significant part of current assets for companies and that effective management is important. It describes different types of inventory like raw materials, work in progress and finished goods. It outlines reasons for holding inventory like meeting demand variations. The objective of inventory management is to maintain optimal levels while minimizing costs. Key aspects covered include inventory models, classification approaches, and emerging trends in inventory management.

1. 03/04/18 1

2. 03/04/18 2
Inventory DefinitionInventory Definition
 A stock of items held to meet future
demand
 Inventory is a list for goods and
materials, or those goods and materials
themselves, held available in stock by a
business.

3. 03/04/18 3
Introduction
 Constitute significant part of current assets
 On an average approximately 60% of current
assets in Public Limited Companies in India
 A considerable amount of fund is required
 Effective and efficient management is imperative to
avoid unnecessary investment
 Improper inventory management affects long term
profitability and may fail ultimately
 10 to 20% of inventory can be reduced without any
adverse effect on production and sales by using
simple inventory planning and control techniques

4. 03/04/18 4
Types of Inventory
Work in
process
Work in
process
Work in
process
Finished
goods
Raw
Materials
Vendors Customer

5. 03/04/18 5
Nature of Inventories
 Raw Materials – Basic inputs that are converted
into finished product through the manufacturing
process
 Work-in-progress – Semi-manufactured
products need some more works before they
become finished goods for sale
 Finished Goods – Completely manufactured
products ready for sale
 Supplies – Office and plant cleaning materials
not directly enter production but are necessary
for production process and do not involve
significant investment.

6. 03/04/18 6
ReasonsReasons To HoldTo Hold InventoryInventory
 Meet variations in customer demand:
 Meet unexpected demand
 Smooth seasonal or cyclical demand
 Pricing related:
 Temporary price discounts
 Hedge against price increases
 Take advantage of quantity discounts
 Process & supply surprises
 Internal – upsets in parts of or our own processes
 External – delays in incoming goods

7. 03/04/18 7
Objective of Inventory Management
 To maintain a optimum size of inventory for
efficient and smooth production and sales
operations
 To maintain a minimum investment in inventories
to maximize the profitability
 Effort should be made to place an order at the
right time with right source to acquire the right
quantity at the right price and right quality

8. 03/04/18 8
An effective inventory management should
 Ensure a continuous supply of raw materials to
facilitate uninterrupted production
 Maintain sufficient stocks of raw materials in
periods of short supply and anticipate price
changes
 Maintain sufficient finished goods inventory for
smooth sales operation, and efficient customer
service
 Minimize the carrying cost and time
 Control investment in inventories and keep it at an
optimum level

9. 03/04/18 9
An optimum inventory level involves three
types of costs
Ordering costs:-
 Quotation or tendering
 Requisitioning
 Order placing
 Transportation
 Receiving, inspecting and
storing
 Quality control
 Clerical and staff
Stock-out cost
 Loss of sale
 Failure to meet delivery
commitments
Carrying costs:-
 Warehousing or storage
 Handling
 Clerical and staff
 Insurance
 Interest
 Deterioration,shrinkage,
evaporation and
obsolescence
 Taxes
 Cost of capital

10. 03/04/18 10
Dangers of Over investment
 Unnecessary tie-up of firm’s fund and loss of
profit – involves opportunity cost
 Excessive carrying cost
 Risk of liquidity- difficult to convert into cash
 Physical deterioration of inventories while in
storage due to mishandling and improper
storage facilities

11. 03/04/18 11
Dangers of under-investment
 Production hold-ups – loss of labor hours
 Failure to meet delivery commitments
 Customers may shift to competitors which
will amount to a permanent loss to the firm
 May affect the goodwill and image of the firm

12. 03/04/18 12
-Track inventory
–How much to order
–When to order
Functions of Inventory Management

13. Classification of inventory
• ABC Classification
• HML Classification
• XYZ Classification
• VED Classification
• FSN Classification
• SDF Classification
• GOLF Classification
• SOS Classification

14. ABC Classification
• In most of the cases 10 to 20 % of the
inventory account for 70 to 80% of the annual
activity.
• A typical manufacturing operation shows that
the top 15% of the line items, in terms of
annual rupees usage, represent 80% of total
annual rupees usage.
• Next 15% of items reflect 15% of annual
rupees
• Next 70% accounts only for 5% usage
A
B
C

15. XYZ Classification
 On the basis of value of inventory stored
 Whereas ABC was on the basis of value of
consumption to value.
 X – High Value
 Y – Medium value
 Z – Least value
Aimed to identify items which are extensively
stocked.

16. HML Classification
 On the basis of unit value of item
 There is 1000 unit of Q @ Rs. 10 and
10,000 units of W @ Rs. 5.
Aimed to control the purchase of raw materials.
H – High, M- Medium, L - Low

17. VED Classification
• Mainly for spare parts because their
consumption pattern is different from raw
materials.
• Raw materials on market demand
• Spare parts on performance of plant and
machinery.
• V – Vital, E – Essential, D – Desirable
Therefore V items has to be stocked more
and D Items has to be less stocked

18. FSN Classification
 According to the consumption pattern
 To combat obsolete items
 F – Fast moving
 S – Slow moving
 N – Non Moving

19. SDF & GOLF Classification
 Based on source of procurement
 S – Scarce, D- Difficult, E- Easy.
 GOLF
 G – Government, O – Ordinary, L – Local, F
– Foreign.

20. SOS Classification
 Raw materials especially for agriculture units
 S – Seasonal
 OS – Off seasonal

21. Deciding on the inventory model
 Assume an analyst applies an inventory
model that does not allow for spoilage to a
grocery chain’s ordering policy for lettuce and
formulates the strategy of ordering lettuce in
large amounts every 14 days. A little thought
will show that this is obliviously foolish. This
strategy implies that lettuce will be spoiled.
However it is not a failure of inventory, it is a
failure to apply the correct model.

22. Different approaches
 Certainty approach
Uncertain variables and risk are addressed
separately
 Uncertainty approach
Uncertain variables and risk are addressed
simultaneously
 Deterministic approach
 Probabilistic approach

23. Basic EOQ Model
Assumption
• Seasonal fluctuation in demand are ruled out
• Zero lead time – Time lapsed between purchase
order and inventory usage
• Cost of placing an order and receiving are same
and independent of the units ordered
• Annual cost of carrying the inventory is constant
• Total inventory cost = Ordering cost + carrying
cost

24. 03/04/18 24
EOQ – Three Approaches
 Trial and Error method
 Order-formula approach
 Graphical approach

25. 03/04/18 25
EOQ & Re-order point
 EOQ – gives answer to
question “How much to Order”
 Re-order point – gives answer
to question “when to order”

26. 03/04/18 26
Trial & Error Method
Assumptions:-
Annual requirement (C)=1200 units
Carrying cost (I) = Rs.1
Ordering cost (O) =Rs.37.5
Order size Q 1200 600 400 300 240 200 150 120 100
Average inventory Q/2 600 300 200 150 120 100 75 60 50
No. of orders C/Q 1 2 3 4 5 6 8 10 12
Annual carrying cost
I* Q/2
600 300 200 150 120 100 75 60 50
Annual ordering cost
O*C/Q
37.5 75 112.5 150 187.5 225 300 375 450
Total annual cost 637.5 375 312.5 300 307.5 325 375 435 500

27. 03/04/18 27
Order- Formula approach
1/2
EOQ =(2CO/I)
C = Annual demand
O = Ordering cost per order
I = Carrying cost per unit
1/2
EOQ =(2*1200*37.5/1) = 300 units

28. Q
0 T1 T2 T3 T4
Average inventory = Q/2
Time
Inventorylevel
orderquantity
Certainty case of the inventory cycle
1. Here the negative slope from Q to T1 represents the
inventory being used up
2. T1, T2, T3, T4 represents the replenishment points
3. The inventory varies between 0 and Q

29. Graphical method to find EOQ
CostinRS.
Order quantity
Ordering cost = DS/Q
Carrying cost = CQ/2
Total cost
EOQ0

30. Extension of basic EOQ model
 This model can be extended to include
quantity discounts, were simple calculation
for quantity discount is added.
 Non zero lead timeNon zero lead time

31. Extension of basic EOQ model
 Non – zero lead time
If the lead time is ‘n’ then procurement must be
done prior to ‘n’ days, i.e. T-n as shown in the
figure
T1 - n T2 - n T3 - n T4 - nT1 T2 T3 T4
Time
Q
0
Reorder point
Placement of a order

32. Probabilistic inventory model
 In practical inventory management
assumption may not be strictly correct.
1. Demand may fluctuate over time due to
seasonal, cyclical and random influences.
2. Lead time may also fluctuate because of
transportation delay, strikes or natural
disaster. For such reason most of the
companies use safety stock.

33.  But in some cases even the safety stock
becomes ineffective to combat stock out. Like:-
Probabilistic inventory model contd…
Reorder point
Safety stock
Placement
of order
Lead
time
T1 T2 T3 T4 T5 T6
Stock
out

34. A Review
So we have dealt with
1. EOQ model
2. Its extension
3. Probabilistic model
4. And now we will be dealing with special
inventory models

35. Special inventory model
 Non – Instantaneous replenishment
 Quantity Discount
 One – period decision

36. Non – Instantaneous replenishment
Special inventory model
A B C DA B C
Thus the inventory is replenished gradually than in lots
Particularly in situation were manufacturers use continues
production process
e.g. FACT makes Ammonium on a continual basis
Capacity 10 units

37. Discount Quantities
 If discount increases with the order
quantity, then the price of inventory is no
more constant
Special inventory model
Hence a new approach is needed to find the
best lot size
Total
cost
Annual holding
cost
Annual
ordering cost
Annual cost of
materials= + +

38. One period decisions
 If a newspaper seller does not buy enough
papers to resell on the street corner, sales
opportunity is lost. If the seller buys too
many, the overage cannot be sold because
nobody wants yesterdays newspaper.
Special inventory model
Applicable to fashion goods, seasonal goods and
due to change in technology
The newsboy problem

39. Inventory management under
uncertainty
1. Option price model
2. Risk adjusted discount cash flow (DFC)
Model
3. Dynamic inventory model

40. Option price model
 Option is a contract that gives the holder a
right to acquire or sell certain things at a
predetermined price without any obligation.
 Calculated by integrating the market
information and inventory control.

41. Risk adjusted discount cash flow (DFC)
Model
• Inventory control problem is converted to
capital budget problem
• Suppose a television dealer decides to hold
an additional inventory of 1000 television per
month. The cost of holding inventory is
spread overtime.
• Inflows = no: of units × probability × present
value
Beneficial for projects like oil drilling were the
benefit is acquired only after a long time but
once oil is struck the additional expanse is covered.

42. Dynamic inventory model
1. Uncertain variables are identified
2. Probability associated with them is taken
3. Simulation techniques are applied

43. Emerging trends in inventory management
• Entering into log term contract at a fixed price
to reduce uncertainties
• Just-in-time
• Kanbans – Japanese technique (Only
produce when demand comes)
• Internet based ordering system
• Supply chain management
• Vendor development
• Investment in plant and machinery

44. Inventory control responsibility
• Purchasing naturally has vest interest in
inventories, even to the extend that in some
companies the purchasing and stores functions
are combined.
• Production looks after the work in progress
• Logistics plays a major role in inventory control
• Inventories are economic importance to finance
department
• The fact that materials must be moved from one
place to another is of importance to materials
department
In effect the responsibility cannot be kept
on one head since inventory management
is a integrated effort

45. THANK YOU