Inventory Management

Unit: C
Inventory: Stocks of manufactured products and the
material that make up the product. It includes raw
materials, work-in-process, finished goods and stores
and spares (supplies).

Need for Inventories:

•Transaction motive
•Precautionary motive
•Speculative motive

Total Inventory Cost

•Cost of Material
•Ordering Cost
•Holding Cost
 ORDERING COSTS CARRYING / Holding
COSTS
 Requisitioning  Warehousing
 Order Placing  Handling
 Transportation Clerical Staf
 Receiving, Inspecting &  Insurance
Storing
 Clerical & Staf  Deflation,
Deterioration &
Obsolescence
 Objectives of Inventory
Management
• Ensure a continuous supply of raw materials to
facilitate uninterrupted production
• Maintain sufficient stock of raw materials in
periods of short supply and anticipate price
changes
• Maintain sufficient finished goods inventory for
smooth sales operations and efficient customer
service
• Minimise the inventory costs
• Control inventory investment by maintaining
optimum inventory
FACTORS INFLUENCING INVENTORY MANAGEMENT

 Lead Time
 Cost of Holding Inventory
Material Costs
Ordering Costs
Carrying Costs
Cost of tying-up of Funds
Cost of Under stocking
Cost of Overstocking
 Stock Levels
Reorder Level
Maximum Level
Minimum Level
Safety Level / Danger Level
Variety Reduction
 Materials Planning
 Service Levels
 Obsolete Inventory and Scrap
 Quantity Discounts
Inventory Management Techniques

• Economic order quantity (EOQ)

– ordering costs: requisitioning, order placing,
transportation, receiving, inspecting and storing,
administration
– carrying costs: warehousing, handling, clerical and
staf, insurance, depreciation and obsolescence
– ordering and carrying costs trade-of:
2AO
EOQ =
c
 EOQ – GRAPHICAL APPROACH

Minimum Total Costs

s ts
Co
g
Costs

yi n
arr
C

Ordering Cost

EOQ Order Size Q

Inventory Management Techniques
• Reorder point under certainty
– lead time
– average usage
Reorder point = Lead time x average usage
• Reorder point under uncertainty
– safety stock
Reorder point = (Lead time x average usage) +
safety stock
 Inventory Investment Analysis
• Estimation of incremental operating profit
• Estimation of incremental investment in
inventory
• Estimation of the incremental rate of return
(IRR)
• Comparison of the incremental rate of return
with the required rate of return (RRR)
• Optimum inventory:
IRR = RRR
Inventory Management Process
• Explicitly state the inventory policy
• Create an inventory monitoring cell
• Management group for controlling purchases
• Periodic meetings between purchase, materials
planning and production executives
• Monthly reviews of total inventory at
plant/corporate level
• Dovetail inventory control to the total budgeting
system
• Identify critical inventory items for closer scrutiny
 SELECTIVE CONTROL OF INVENTORY
Different classification methods

Classification Basis
ABC [Always Better Control ] Value of items
consumed
VED [ Vital, Essential, The importance or
Desirable] criticality
FSN [ Fast-moving, Slow- The pace at which the
moving, Non-moving ] material moves
HML [ High, Medium, Low ] Unit price of materials

SDE [ Scarce, Difficult, Easy ] Procurement Difficulties

XYZ Value of items in
storage