The document covers inventory management, detailing types, functions, and definitions related to inventory, including reasons for holding inventory and associated costs. It emphasizes the importance of effective inventory management for operational efficiency and profitability. The presentation aims to provide insights into reducing inventory costs while maximizing resource utilization.

1. MATERIALS AND INVENTORY
MANAGEMENT
UNIT 2: INVENTORY FUNCTIONALITY AND
PRINCIPLES
Prepared and presented by,
Ganesha Pandian . N,
Assistant Professor.
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2. CONTENT
 Inventory types and characteristics
 Reasons for holding inventories
 Inventory functionality
 Inventory related definitions
 Costs relevant for inventory decision making
 Special focus on cost of carrying inventory 2
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3. INTRODUCTION
 Inventories – vital part in business
 Not only essential for operations – but also
contributes to the customer satisfaction
 Inventories substantial part of total assets
 Related to ROI (return on investment)
 Goal of inventory management – reduce the cost,
maximize the profitability and utilization of
resources 3
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4. TERMS AND DEFINITIONS IN INVENTORY
1. Inventory : can be defined as those stocks or items
used to support production, supporting activities and
customer services.
2. Inventory refers to equipment, building, fixtures and
also include the raw materials, work- in- progress and
finished goods.
3. Inventory functions – anticipation, hedge, cycle,
fluctuation, transportations and service parts.
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5. TERMS AND DEFINITIONS IN INVENTORY
 Inventory management – management concerned
with the planning and controlling of inventories
 Inventory policy – statement of goals or approach
towards the management of inventory
 Inventory costs – carrying cost and holding cost
 Inventory cycle – the length of time between the
replenishment
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6. TERMS AND DEFINITIONS IN INVENTORY
 Inventory planning: refers to the activities and
techniques to determine the desired level of items.
 Order point: point where the action to be taken to
replenish the stock.
 Lot size: how much amount of items to be ordered
each time economically
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7. INVENTORY TYPES AND CLASSIFICATIONS
 According to Arnold – Inventories are classified into
generally as raw materials, work-in-progress and
finished products
 Classification of items particularly depends on the
production environment
 According to association for operation management,
inventories are classified into
1. Categories
2. Functions 7
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8. CATEGORY WISE CLASSIFICATION
1. Raw materials
2. Work-in-progress
3. Semi-finished products or assemblies
4. Finished goods
5. Maintenance, repair and operating supplies
(MRO)
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9. FUNCTIONAL INVENTORIES
1. Transit inventories – materials is in transit stage
2. Cycle stock – replenished cyclically
3. Anticipation – goods produced or procured on
anticipating demand
4. Safety stock – protect against the stock-out (buffer
stock)
5. Hedging stock – anticipation stock when high risk
involved
6. Decoupling supply and demand – decoupling stock or
buffers
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10. CHARACTERISTICS OF INVENTORY
 Nature of inventory differs from one organization to
another
 Managing a service supply chain is different from
manufacturing or distribution supply chain
 There is a greater variation of nature of inventories
between the manufacturing and services inventory
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11. REASONS FOR HOLDING INVENTORIES
 To facilitate and stabilize production
 To eliminate disruption
 To meet customer demand whenever arises
 To carry safety stocks in order to prevent stock-outs
 To deal with variations in supply and demand
 To hedge against the price escalations
 To take advantage of price discounts
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12. MOTIVES BEHIND CARRYING INVENTORY
Transaction motive
Precautionary motive
Speculative motive
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13. INVENTORY COST AND ITS RELEVANCE FOR
DECISION MAKING
 The costs associated with the inventory are:
1. Item costs or materials costs – Direct cost for getting
an item
2. Holding costs or carrying costs – costs associated with
carrying materials in inventory
3. Ordering costs – Fixed costs associated with placing
an order
4. Shortage costs or stock-out costs – cost associated
with not having enough materials to meet demand 13
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14.  Inventory cost reduction is the important cost
decision in any business
 Time and lean manufacturing principles can be
used to manage inventory levels more efficiently.
 Technology plays an important role in cost
reduction.
 Many experts were finding ways and means of
reducing the size of holding the inventory
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15. CARRYING COST – SPECIAL FOCUS
 Two important costs associated with the inventory
holding are carrying cost and purchasing cost
 Both are opposite in nature. If one increases, then
another decreases
 Right order quantity is the balance between both the
ordering cost and carrying cost
 The cost incurred over the period of time for holding the
inventory – “Carrying cost”
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16.  Cost of carrying or holding inventory may be:
1. Opportunity cost
2. Physical space occupied by the inventory such
as rent, depreciation, utility cost, insurance,
taxes and etc.,
3. Cost of materials handling and cost of wastage
and obsolescence
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