This document discusses inventory management processes. It begins by introducing inventory management strategy development, which involves classifying products and markets, defining segment strategies, and setting operational policies. ABC analysis is described as a selective inventory control method that categorizes items into A, B, and C groups based on annual usage value and cost. Performance measurement tools for inventory management are also outlined, including inventory turnover ratio and stock out/carrying cost measurements.

1. MATERIAL AND INVENTORY MANAGEMENT
UNIT 5 : INVENTORY MANAGEMENT
PROCESSES
Prepared and Presented by,
Ganesha Pandian . N
Assistant Professor.
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2. CONTENT
 Strategy development process
 Methods for improved inventory management
 Selective inventory
 Control systems
 Tools for inventory control
 Performance measurement in inventory
management
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3. INTRODUCTION
 Effective inventory management process lies in
knowing what is available in hand and where it is
used and how to control it.
 Proper inventory management processes help to
reduce inventory and distribution costs and
increase operational efficiency 3
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4. STRATEGY DEVELOPMENT PROCESS
 An integrated inventory management strategy has the
following key elements: policies and process used to
determine where to place inventory, when to initiate
replenishment and how much to allocate
The strategy development process comprises of three
main steps:
1. Product market classification
2. Segment strategy definition
3. Operational policies and parameters 4
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5. PRODUCT MARKET CLASSIFICATION
Product or market classification also known as fine-
line or ABC classification
 Classification can be based on sales, profit
contribution, inventory value, usage rate and nature
of the items.
 80/20 rule or parento rule is applied 5
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6. SEGMENT STRATEGY
 It is about integrated inventory strategy for each
product/market group or segment
 Product segment have different degrees of importance
with regard to achieving the enterprise mission and
therefore desired difference in inventory responsiveness
should be brought in
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7. OPERATIONALISED POLICIES AND
PROCEDURES
 The procedures portray the actual numerical values
such as review period length, service objectives,
inventory carrying cost order quantities and reorder
point
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8. METHODS FOR IMPROVING INVENTORY
MANAGEMENT
 The below initiatives are taken to improve the
inventory management
1. Policy definition and refinement
2. Information integration
3. Expert system application
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9. SELECTIVE INVENTORY CONTROL METHOD –
ABC ANALYSIS
 This method of selective control uses the parento
principle in the inventory control
 According to this law “20% of the materials costs
contributes to 80% of total cost”
 This analysis is based on the annual usage value
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10. ABC ANALYSIS – CATEGORIZATION OF ITEMS
 A items – 5-10% of items which amounts to 70-75%
of total cost incurred
 B items – 10-15% of items which amounts to 10-
15% of total cost incurred
 C items – 70-80% of items which amounts to 5-10%
of total cost incurred 10
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11. CONDUCTING ABC ANALYSIS
1. Prepare a list of items and estimate their annual consumption (in units).
2. Determine the unit price of each item.
3. Multiply the annual consumption with the unit price to get the annual
consumption in rupees
4. Arrange the items in descending order of their annual usage starting with
the highest and ending with the lowest
5. Calculate the cumulative usage and express the same as cumulative usage
percentage. Also express the number of items into cumulative item
percentage
6. Plot a graph of cumulative usage as percentage vs cumulative item
percentage and segregate into A,B and C items
7. Decide the policies for control of these three categories
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12. PROBLEM
 Rohit gathered the following data on 10 items in
inventory along with annual cost. Using ABC
analysis, classify items into different categories.
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Item G112 H32
1
K67 V64
3
H816 B12
4
L01
2
M321 V137
Annual
cost
60000 400 3200 220 4500 570 200 310 140

13. VITAL, ESSENTIAL AND DESIRABLE (VED)
ANALYSIS
 Under this method items classified into
Vital: shortage cannot be tolerated
Essential: shortage can be tolerated for a shorter
period of time
Desirable: shortage will not adversely affected, but
must be scrutinized strictly 13
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14. OTHER INVENTORY CONTROL TECHNIQUES
 SDE (scarce, difficult and easily available) analysis
 HML (High, Medium, Low) analysis
 FSN (Fast moving, Slow moving and no moving)
analysis
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15. PERFORMANCE MEASUREMENT IN INVENTORY
MANAGEMENT
 Performance measurement in inventory control and
measuring the overall performance in inventory
management helps to bring in accuracy and
efficiency to organization.
Inventory control performance:
It is the degree to which accuracy in inventory records
is maintained in the primary measure of inventory
control performance 15
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16.  Inventory performance is measured by inventory
turnover ratio, cost profiling, ABC analysis for slow
moving inventory, stock out costs and carrying
cost of that inventory
Percentage measures are orders shipped on
schedule, line items shipped in schedule, total
units shipped on schedule and so on.
Absolute value measures are order days out of
stock, line item days out of stock, total item days
out of stock and so on. 16
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17. 17
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