29926935 presentation of inventory system new

8/2/2019 29926935 Presentation of Inventory System New

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INTRODUCTION

Inventories constitute a major component in current assets. Itconstitutes around 60% in the public limited companies, in India.

For the smooth running, every enterprises needs inventory.Inventory serve as a link between production processes. Due to its

major composition in current assets, the management ofinventories occupies a key role in working capital management.

So, inventory management is essential to allow the firm to avail the

opportunities to improve and at the time does not impair itsliquidity, with excessive or unproductive investment.


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Inventory Management

Inventory is one of themost expensive assets of

many companies.

It represents as much

as 40% of total investedcapital.


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SOME IMAGES


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MEANING AND NATURE OF INVENTORY

Inventory means stock of finished goods, in accounting language.

However, it includes raw materials, work in process, finished goodand stores in a manufacturing organization.


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Inventory

managementsystem

Warehousemanagement

ProductionPlanning

control

Sales &marketing

Customerrelationship

Decisionsupport/Business

analysis

Resourcemanagement

Accountingmanagement

Purchasemanagement

Inventorymanagement


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TYPES OF INVENTORY

RAW MATERIALS

WORK IN PROCESS

FINISHED GOODS

CASH AND MARKETABLE SECURITIES


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MOTIVES FOR HOLDING INVENTORIESHolding of inventories is expensive in the form of storage costs,

interest charges, deterioration of quality in holding stocks, theft and

pilferage. Firms hold inventories, basically, for the followingreasons

TRANSACTION MOTIVES

PRECAUTION MOTIVES

SPECULATIVE MOTIVE


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ORDERING COSTEvery time an order is placed stock replenishment, certain costs areinvolved. The ordering cost may vary, dependent upon the type of

item. However, an estimated of ordering cost can be obtained for agiven range of item.

THIS COST OF ORDERING INCLUDES:-

1.PAPER WORK COST2.FOLLOW UP COST

3.COST INVOLVED IN RECEIVING THE ORDER INSPECTION

4.ANY SET UP COST OF MACHINES5.SALARIES AND WAGES TO THE PURCHASE DEPARTMENT


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CARRYING COSTCarrying cost constitute all the costs of holding items in inventoryfor a given period of time. They are expressed either in rupees per

unit per period or as a percentage of the inventory value per period.components of this cost include the following

STORAGE AND HANDLING COST

OBSOLESCENCE AND DETERIOTION COSTS

INSURANCE

TAXES THE COST OF THE FUNDS INVESTED ININVENTORIES


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STOCK OUT COSTS

stock out costs are incurred whenever a business is unableto fill orders because the demand for an item is greater

than the amount currently available in inventory.

EXAMPLE:-stock out costs include the expenses ofplacing special orders and expediting incoming orders.


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OTHER CHARACTERSTICS OF INVENTORYSITUATIONS

LEAD TIMES

SOURCE AND LEVELS OF RISK

STATIC VERSUS DYNAMIC PROBLEMS

REPLESHMENT RATE


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OBJECTIVES OF INVENTORYMANAGEMENT

The primary objective of inventory management is to maintainthe quantity of stocks, in right location, at right time to ensure

the uninterrupted and, at the same time, minimize theinvestment in stock holding. Every firm is faced with two

conflicting issues:

1.Maximize investment, by maintaining excessive quantity sothat production is not affected and business opportunities are

not lost, for want of stocks.

2.Minimize investment in inventories as they involve costs andaffect profitability, adversely.


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TO SUM.THE OBJECTIVE OF INVENTORYMANAGEMENT CAN BE SUMMARIZED:-

Minimize the carrying costs and lead time in supplies

Maintain the sufficient stocks of finished goods forsmooth sales operations.

Ensure perpetual inventory control so that physicalstocks are always in agreement, with stocks shown in

records

Facilitate furnishing of data for short term and longterm planning and inventory control.


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TOOLS AND TECHNIQUES OFINVENTORY MANAGEMENT

A. Determination of stock levels

B. Determination of economic order quantity

C. A.B.C analysisD. V E D Analysis

E. Perpetual inventory system

F. JIT control system

G. Inventory turnover ratios


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DETERMINATION OF STOCK LEVELSMinimum level

Minimum level quantity that must be maintained, at alltimes if the stock holding falls below this level,production stops due to shortage of materials. This levelis fixed, considering the following factors

1.Lead time

2.Rate of consumption. Nature of materials

FORMULA FOR COMPUTATION OF MINIMUM STOCK IS:-minimum stock level-

Re ordering level-(normal consumption*Maximum re order period)


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B)REORDER LEVEL:-When the stock level reachesthe re ordering level, the order is placed for replenishment

of stocks. This level is fixed between the maximum stockand minimum stock.

THE FORMULA FOR CALCULATION IS:-

REORDERING STOCK LEVEL: Maximum consumption per day * Maximum re order

period


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MAXIMUM LEVEL: It is the level, beyond which the

stock level should not exceed. If this level is exceeded,there would be blockage of working capital, loss due to

wastage, risk of obsolescence and more rent for storagespace etc

FORMULA IS:Maximum stock level= Re ordering level+ Reordering quantity-(minimum consumption*

Minimum reordering period)


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SAFETY STOCK

There should be safety stock to take care of fluctuations inconsumptions pattern of raw materials. safety stock is to

meet unforeseen contingencies.


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DETERMINATION OF ECONOMIC ORDERQUANTITY

1.Ordering cost: The costs that are associated withpurchasing and placing an order is called ordering costs.

2.Carrying costs: These are the costs for holdinginventories. Higher the stock holding, larger would be

carrying costs and they would be lower if the stocks are

lower.


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The economic order size of inventory brings atrade off between carrying costs and ordering

costs.

FORMULA:

EOQ=(2AO/C)

WHERE A= Annual consumption of unit ,in rupees

O= Cost of placing order

C= Inventory carrying costs, per one unit


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GRAPHICAL PRESENTATION OF EOQ

The EOQ model can be presented graphically. To explain

it, there is example of placing an order of mangoes. ifannual consumption of an item is 1000 units and order isplaced for 200 units, each time, orders have to be placedfive times in a year. If we increase the size of the order

from 200 to 500 units, the number of orders has to bereduced from 5 to 2. The ordering costs would be lowerfor two orders, compared to five orders. In other words,with the increase in size of the order, total ordering costwould reduce..


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total cost

carrying cost

carrying cost

size of order

Graphical presentation of EOQ


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THE ABC ANALYSIS IS BASED ON THEFOLLOWING PRESUMPTIONS:

1.Managerial time and efforts is scare and limitedand limited

2. Some items of inventory are more important

than others


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ABC ANALYSIS

Under ABC analysis, the item is allocated to the group,depending on the amount of attention it deserves. Agroup requires the maximum concentrations of the

finance manager. This group constitutes a higher % in

terms of value, while it occupies lesser significance, interms of number of units. B group requires lesser

attention, compared to A group. The last group C hasto be given the least attention, as it constitutes less value

in the total annual consumptions.

ItemItem Annual consumptionAnnual consumption Rate (perRate (per Total value ofTotal value of


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ItemItem

No.No.Annual consumptionAnnual consumption

In terms of unitsIn terms of units

Rate (perRate (per

unit)rs.unit)rs.Total value ofTotal value of

consumptions(Rs.)consumptions(Rs.)

11 60006000 100100 600000600000

22 1000010000 6565 650000650000

33 50005000 5050 250000250000

44 2500025000 22 500005000055 40004000 2525 100000100000

66 1500015000 1010 150000150000

77 2500025000 66 150000150000

88 1000010000 55 5000050000

TotTot

alal100000100000 20 00 00020 00 000

PriorityPriority ItemItem % each item in% each item in Total value ofTotal value of % of each item in% of each item in cumulativecumulative


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PriorityPriority

orderorderItemItem

no.no.% each item in% each item in

total no. oftotal no. of

unitsunits

Total value ofTotal value of

consumpconsump% of each item in% of each item in

total valuetotal valuecumulativecumulative

11 10%10% 650000650000 33%33% 33%33%

22 6%6% 600000600000 30%30% 63%63%

33 5%5% 250000250000 12%12% 75%75%

44 15%15% 150000150000 8%8% 83%83%

55 25%25% 150000150000 8%8% 91%91%

66 4%4% 100000100000 5%5% 96%96%

77 25%25% 5000050000 2%2% 98%98%

88 10%10% 5000050000 2%2% 100%100%

TotalTotal 100%100% 20000002000000

GROUPGROUP ITEM NOITEM NO % ITEMS% ITEMS % ITEMS% ITEMS


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GROUPGROUP ITEM NO.ITEM NO. % ITEMS% ITEMS

(IN UNITS)(IN UNITS)

% ITEMS% ITEMS

(In value)(In value)

A.).) 2,1,32,1,3 21%21% 75%75%

B)B) 6,76,7 40%40% 16%16%

C)C) 5,4,85,4,8 39%39% 9%9%


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VED ANALYSIS

The VED analysis is used for control of spare parts. A-B-C

analysis is concerned with materials and is not totally andproperly suitable for spares. So, the spares are divided are into

three categories. Vital, desirable and essentials.


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PERPETUAL INVENTORY SYSTEMTHE PROCEDURE IS AS UNDERA). Stock taking team selects the storerooms, where

stock taking is to be done, on a random basis.B). All the bins in that storeroom are checked.

C). The physical balances in the bins is countered ormeasured , dependent on the type of the material.D). The actual stock is recorded in the sheets provided

for this purposes.

E). There is no prior intimation to the storesdepartment to maintain surprise element.

F) .All the stores are checked, at least, three or fourtimes in a year.


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JUST IN TIME INVENTORY CONTROL

SYSTEM

The basic philosophy of JIT is to keep only enough

quantity of stock on hand to meet the immediateproduction requirements. This concepts relies on thesuppliers to furnish stock just in time, as and when

needed.

Just in Time inventory control system aims ateliminating wastages, from every aspect of

manufacturing. This was first introduced in Japan in1950. Toyota was the first company to practice this

technique.


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OBJECTIVES OF JIT

Minimum/Zero inventory and associated costs.

Zero breakdown and continuous productions.

Manufacturing the right quantity, at right time

Ensure timely delivery of inputs as well as outputs.


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MAJOR ADVANTAGES OF JIT

Right quantities are purchased and produced, in right time

Wastage are eliminated, totally

Investment in inventory is controlled

Carrying cost is reduced.


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INVENTORY TURNOVER RATIOS

Inventory turnover ratio indicate the efficiency in using thinventory. Inventory turnover ratio indicates the number otimes the stock has turned, over a period of one year. More

the number of times. More efficient the organization is.The inventory conversion period shows the number of day

the stock is blocked.


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29926935 presentation of inventory system new

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