Meaning:

The team inventory refers to the stock of material lying in stores and the products a company is manufacturing for sale. It may be defined as raw material held for use in manufacturing process or finished goods held for resale. For a manufacturing concern inventory may consist of raw material, semi-finished, finished goods, stores and spares parts etc. whereas trading concern inventory includes goods for ultimate resale purpose. Inventory constitutes one of the important current assets a firm holds. It establishes links between production and sale of product. Larger inventories give flexibility on operation. Holding of adequate quantity of raw material, semi-finished, finished goods, stores, spares parts, etc ensures smooth and unrestricted flow of production and sale. Without adequate quantity of raw material production process will hamper in times of scarcity of raw materials. Similarly a trading concern may have to forego the possible anticipated profit if, if he does not hold sufficient quantities of goods in stock to meet the increasing demands of the customers. Though advantages of increased inventories is more, the disadvantages include total cost of holding the inventories including storage and handling cost and required rate of capital being tied up in inventory. Therefore inventories should be increased until savings resulting there from exceeds total cost of holding the inventories. In other words a perfect balance must be maintained made in inventories and benefits to be obtained there. Inventory management includes the quantities of inventory to be carried, fixing time schedule, determining stock levels procuring, storing material, assigning inventory control responsibility and supervision. Thus inventory management is concerned with proper planning and controlling of raw material, semi-finished goods, finished goods, stores and spares parts, etc in stock for efficient production or ultimate selling purpose.

TYPES OF INVENTORY

Basically there are three kinds of inventory, they are:

1. Raw materials:Raw materials are those basic inputs that are converted into finished product through manufacturing process. Thus they are held for future production.

2. Semi-finished goods:Work-in-process inventories are semi finished goods. They represent products that need more work before they become finished products.

3. Finished goods:Finished goods inventories are those inventories which are completely manufactured products and are ready for sale. Stock of raw material and work in process facilities production, while stock of finished goods is required for smooth marketing operations

OBJECTIVES OF INVENTORY MANAGEMENT

The objectives of inventory management may be discussed under 2 heads. They are:

I. II.

Operating Objectives Financial Objectives.

Operating Objectives
1. Availability of material: The first and foremost objective of inventory management is to make all types of material availability at all times whenever they are included by the production department. It is necessary to maintain a minimum quantity of all types of material to move on the production schedule. 2. Minimizing wastage:

Inventory control is essential to minimize the wastage during its storage in the godowns or at work in the factory. Normal wastage i.e. uncontrollable wastage should be only permitted. Any abnormal but controllable wastage should strictly be controlled. Wastage of material by leakage, theft and spoilage due to rust, dust or dirt should be avoided. 3. Promotion of manufacturing efficiency: The manufacturing efficiency of the enterprise increase if right types of raw material is made available to the production department at the right time. It reduces wastage and cost of production and improves the moral of workers. 4. Better service to customer: In order to meet the demand of the customer, it is the responsibility of the concern to produced sufficient stock of finished goods to execute the orders received.

5. Control of production level:

The concern may decide to increase or decrease the production level in favorable time and the inventory may be controlled accordingly. Proper control of inventory helps in creating and maintaining buffer stock to meet any demand. Production varieties can also be avoided through proper control of inventories. 2. Optimum level of inventories Proper control of inventories helps management to procure material in time in order to run the plan efficiently. It avoids the out of stock danger.

Financial Objectives
1. Economy in purchasing Proper inventory control brings certain advantages and economies in purchasing the raw material. 2. Optimum investment and efficient use of capital The prime objective of inventory control from financial point of view is to have an optimum level of investment in inventories. It is the responsibility of financial management to set up the maximum and minimum level of stock to avoid deficiency or surplus stock position. 3. Reasonable price Management should ensure the supply of raw materials at a responsibility low price but without sacrificing the cost production and maximum the profits of the concern. 4. Minimizing costs Minimizing inventory costs such as handling, ordering cost and carrying cost etc is one of the main objectives of the inventory management. Financial management should help controlling the inventory cost in a way that reduces the cost per unit of inventory. Inventory costs are the part of total cost of production can also be minimized by controlling the inventory costs.

Need For Holding Inventory

1. Purchase, production and sale are separate activities. Goods of raw material have to be kept in stock for ensuring continuity in sale or productional activity inventory helps in keeping productional and sale activity in continuity at their own speed without any interruptions. 2. Large scale purchasing result in huge inventories. Bulk buying of raw material for production purpose or finished goods for resale purpose is done in order to take the advantage of high discount rate. 3. Quite often large orders are placed in order to reduce the cost of orders. The ordering cost includes typing of requisition form, checking, mailing, follow-up, etc. similarly when goods are received they must be inspected, and quantity be compared with invoices sent. Thus large

orders though reducing the cost of orders but increases the amount of capital blocked up in the large inventories. 4. Sometimes raw material may not be available in quantities required due to reasons beyond control, which may interrupt production activities and hence adequate quantity of raw material has to keep in ready stock. 5. Production process may be interrupted due to one or the other reasons, and therefore, adequate stores material, spares, lubricants, etc, have to be kept in stores. 6. Length of the production process also necessities holding of larger inventories. If the time gap in the process of conversion of raw material into finished goods is longer, more amounts of inventories in form of raw material is required to be held in stock.

Dangers of excess inventories

1. Unnecessary blocking of funds and loss of profit. 2. Excessive carrying cost. 3. Loss of liquidity. 4. Loss due to physical deterioration of inventories, due to passage of time or mishandling.

Dangers of inadequate inventories

1. Production stoppage. 2. Failure to meet delivery commitments.
Hence both excessive and inadequate inventories are not desirable. A perfect balance should be struck between investment made on the inventory and benefit to be obtained there from.

Cost of Holding Inventories

One of the responsibilities of the finance manager in managing the inventories effectively is to achieve trade-off in managing the inventory. In achieving this balance, the financial

manager should take into consideration the cost factor. There are some kinds of expenses, which are incurred immediately such as, purchase price, freight, loading, and unloading expenses of materials. Which are termed as direct costs, while some other expenses as termed as indirect cost. Cost of holding inventories consists of: Ordering Costs Carrying Costs.

Ordering Costs Ordering costs increase in proportion to the number of orders placed, more frequently the inventory is acquired, higher the firms ordering costs. If the firm maintains large inventory levels, there will be few orders placed and ordering costs will be relatively small. Ordering costs or acquisition costs includes costs incurred for:1. Requisitioning. 2. Order placing. 3. Transportation. 4. Receiving, inspecting, and storing. 5. Clerical and staff. Carrying Costs The carrying cost and the inventory size are positively related and move in the same direction. If the level of inventory increases, the Carrying costs incurred for maintaining a given level of inventory. They include costs incurred for:-

1. Warehousing Warehousing cost include rent, electricity, water, cleaning expenses, expenses on store keeper etc. 2. Handling Handling costs includes servicing cost such as labour for handling inventory, clerical and accounting costs. 3. Clerical and staff

This cost includes the salary and allowances of store keeper and staff engaged in maintaining the goods. 4. Insurance Insurance includes premium paid for insurance against fire, theft etc. 5. Deterioration and obsolescence. Deterioration and obsolescence include loss due to pilferage, fire, technical obsolescence, style obsolescence, price decline. It occurs when the products remains un-saleable or unused for a long time.

The sum of the ordering cost and the carrying costs represents the total cost of inventory. The operating objective of inventory management is too minimize cost, but at the same time ensures that an ideal quantity of material is carried in stock which neither increases the cost nor interrupts the production. carrying costs also increase and vice versa.

Techniques of Inventory Management

Efficient inventory management basically aims at reducing the cost of production and maintaining steady flow of manufacturing process or trading activity. Large inventory ensures continuous and un-interrupted flow of production. But, it requires heavy investment, higher carrying cost, and high risk of obsolescence. Low inventory requires lower investment, lower carrying cost, and low risk of obsolescence. But it results in stoppage or interruption in

the production process. Therefore finance manager is required to determine an idle quantity of materials to be carried in stock, which neither increases the cost of holding the inventory techniques are widely used to better control over the inventories.

1. Determination of stock level. Maximum stock level Minimum stock level Re-order level Danger level 2. Economic Order Quantity 3. ABC analysis. 4. Perpetual inventory system. Bin card Store ledger Store register 5. Other techniques Just in time approach (JIT) Ved analysis FSN analysis

1. STOCK LEVEL:In order to ensure steady supply of material as and when required, the different level of stock are fixed. They are:-

Maximum stock level:-

It indicates maximum quantity of materials that can be stored at any time. It is the maximum quantity, and the stock of any material should not exceed this limit. This level is fixed after taking into account the following factors. a. Rate of consumption b. Maximum requirements of materials for production purpose or for re-sale purpose at any given time. c. Lead time- the time taken to procure the material after placing the order. d. Nature of material to be stored- if the materials are perishable in nature, this level may be kept at low. e. Availability of storage space. f. Cost of storage and insurance. g. Economy in price- if the materials are costly the maximum level of stock may be kept at low as possible. Similarly if it is expected that price is likely to rise, this level may be increased slightly. Besides, availability of funds is also important in determining the maximum stock level.

FORMULA Maximum level= Re-order level + Re-order quantity (maximum consumption * minimum re-order period)

Minimum stock level:This level indicates lowest possible quantity of materials to be held in stock. It is lower limit of inventory. While fixing this level the following factors are taken into consideration. a. Nature of materials whether perishable or durable b. Lead time- which means maximum possible time required to obtain from the date of placing an order for them. c. Rate of consumption of material.

FORMULA Minimum level= Re-order level (Normal consumption * Normal Re-order period)

Re-order level:This level is an indication for re-establishment of stock. At this level, a step for purchasing materials is to be initiated. This level lies between maximum and minimum stock level, at re-order level, arrangement should be made to place the orders for material with suppliers. It is signal and indication that a new order must be placed.