inventory management

TOPICS

Meaning and definition of inventories

Characteristics of inventories

Types of inventories

Functions of inventories

Need to inventories

Factors affecting the volume of inventories

Advantages of inventory

Disadvantages of Excessive inventories

INVENTORY

MEANING

Inventory means the aggregateinvestment of items of tangible personalproperty that (i) are held for sale inordinary course of business(ii)are in theprocess of production for sale or (iii)are tobe currently consumed in the productionof goods or services to be available forsales.

DEFINITION

Inventory may be defined as the physical stock of items

that a business or production organization keeps in hand

for efficient running of affairs of its production.

Inventories consists of raw materials, component part

supplies and finished assemblies which an organization

purchases from an outside source and parts, assemblies

and finished products which the company manufactures

itself.

TYPES OF INVENTORIES

Various types of inventories for a manufacturing or trading organization are:-

1. Raw materials and consumable stores

2. Work-in-progress

3. finished goods inventories

RAW MATERIALS

These materials refer to all commodities or components which are consumed in the process of manufacture.

Eg:- Cotton used in textile mils.

timber used in furniture industries

WORK-IN-PROGRESS

Work in progress otherwise known as semi-finished goods or process inventories or convertible inventories.

These are processed or semi-finished products manufactured at various stages during the production cycles.

Eg:-bicycle factory-frames, pedals, rims, axies.

FINISHED GOODS INVENTORIES

Finished goods inventories are final or completedproducts ready to sent away to the market orconsumers. These products have been fabricatedor manufactured or assembled from productionand in process inventories.

FUNCTIONS OF INVENTORIES

Ensure continuity of supply of uniform quality goods

Help to prevent excessive investment

Ensure continuous flow of production

Maximum service and satisfaction to the customer

Helps to achieve the overall company objectives

Helps in avoiding unnecessary wastages or losses

Avoiding unnecessary wastages or losses.

Optimum investment in materials

Ensure availability of all types of materials

Provide necessary information to the manangement

NEED/MOTIVES FOR HOLDING INVENTORIES

Transaction motives

It expresses the need to maintain inventories to facilitate production and sales operation smoothly. The cycle of production involves a steady and smooth flow of raw materials for conversion into finished product which is meant for sale and conversion into cash

Precautionary motives

It necessitates holding of inventories to guard against the risk of unpredictable change in demand and supply forces.

speculative motives

It influences the decision to increase or reduce inventory levels to take advantages of price fluctuations

FACTORS AFFECTING THE VOLUME OF INVENTORIES

Availability of finance

Storage space available

Ordering cost

Risk of loss due to price fluctuations

Risk of loss due to evaporation, obsolescence, theft,

deterioration etc.

Economic ordering quantity

Time to obtain delivery or lead time

ADVANTAGES OF INVENTORY Avoid over investment or under investment in

inventories

Reducing carrying cost.

Maintain the optimum level of inventory investment

Ensures uninterrupted production

effective material handling

Manual work may be eliminated

Ensure minimum wastages

facilitates prompt flow of finished goods

effective utilization of floor space

better forecasting

reduce the risk of closing down the plant

DISADVANTAGES OF EXCESSIVE INVENTORIES

Consumes funds of the firm

Increase cost of storage, materials handling, insurance and transportation and inspection

Delay and inconvenience

High risk of liquidity

Inadequate inventories

Failure to meet delivery commitments

Mishandling and improper storage facilities

Greater risk of loss due to devaluation changes in price

INVENTORY CONTROL

MEANING

Inventory control means control over materials lying in store. It aims to achieve maximum possible inventory turnover.

DEFINITION

Inventory control may be defined as “the systematic control over the procurement, storage and usage of materials so as to maintain an even flow of materials and at the same time avoiding excessive investment in inventories.”

OBJECTIVES OF INVENTORY CONTROL MANAGEMENT

Availability of Materials

Minimizing the wastage

Better services to Customers

Increase operational efficiency

Achieving efficient production levels

Optimum level of inventories

Economy in purchasing

Optimum level investment in raw materials

Optimum level investment in work-in-progress

Optimum level investment in finished goods

REFERENCES

FINANCIAL MANAGEMENT

I.M.PANDEY

WORKING CAPITAL MANAGEMENT

CONCLUSION