Inventory Management

Nature of Inventory
 Stocks of manufactured products and the
material that make up the product.
 Components:
 raw materials
 work-in-process
 finished goods
 stores and spares (supplies)

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Need for Inventories
 Transaction motive
 Precautionary motive
 Speculative motive

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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

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Causes of poor inventory control
 Over buying.
 Over production
 Cancellation of orders

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Carrying cost
 Cost of storage space.
 Depreciation cost
 Pilferage cost
 Obsolescence cost
 Handling cost
 Record keeping cost
 Taxes and insurance.

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Inventory Management Techniques
 Economic order quantity (EOQ)
 ordering costs: requisitioning, order placing,
transportation, receiving, inspecting and storing,
administration
 Purchase cost.
 Shortage cost.
 carrying costs: warehousing, handling, clerical and
staff, insurance, depreciation and obsolescence
 ordering and carrying costs trade-off:
2AO
EOQ =
c
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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

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Selective Inventory Control
 ABC analysis
 classify inventory into three categories according
to value
 control by importance and exception: maximum
attention to “A” items.
 5 to 10% of items account for 70 to 80 % of sales (
A items), 10 to 20 5 of items account for 15 to 20
% of annual sales ( B Items), 70 to 80 % of items
account for balance 5 to 10 5 of sales ( C items)
 VEDAnalysis.
 FSND Analysis
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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
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