Inventory ManagementLess emphasis on inventories may tend to dampen business cycles, because business cycles are typically in the grasp of inventory cycles…

Less emphasis on inventories may tend to dampen business cycles, because business cycles are typically in the grasp of inventory cycles…

Presentation by Group 3

What Is Inventory?

Stockpile of products for sale Components which make up the products Stock of items kept to meet future demand

Inventory includes…

Raw materials Purchased parts, spares and supplies Work-in-process (partially completed) products

(WIP) Finished goods Items being transported Tools and equipment

Factors influencing inventory…

Lead time Reorder

Point Variety

Reduction Service

Level Quantity

Discount

Cost of Holding Inventory

Stock Materials Planning Obsolete

inventory and Scrap

Why Inventory Management…

To minimize investments in inventoryTo meet demand by efficiently

organizing production & sales

Purpose of inventory management When to order How much to order

Stores record

The record of stores may be maintained in three forms

i. Bin Cards ii. Stock Control Cards iii. Stores Ledger

Bin Cards and Stock Control cards

These are essentially similar, being only quantitative records of stores. Bin cards are kept attached to the bins or receptacles or quite near thereto so that these also assist in the identification of the stock. stock control cards, on the other hand, are kept in cabinets or trays or loose binders.

Advantages

i. There would be less chances of mistakes being made as entries would be made at the same time as goods are received or issued by the person actually handling the materials

ii. Control over stock can be more effective, in as much as comparison of the actual quantity in hand at any time with the book balance is possible.

Stores Ledger

stores ledger is a collection of cards or loose leaves specially ruled for maintaining a record of both quantity and cost of stores received, issued and those in stock. It being a subsidiary ledger to maintain the main cost ledger, it is maintained by a Cost Accountant. It is posted form the Goods Received Note and the Materials requisition.

Advantages

i. It enables the stock records to be centralized in case of an organization having a number of depots.

ii. The records are clearer and neater. Also the recurring cost of maintaining them is much less than those kept manually.

iii. If up to date records are available the management will be able to exercise a greater control over quantities held in stock from time to time which may result in a great deal of saving in both the amount of investment in stock and their cost.

Store keeping

• Store-keeping means the activities relating to purchasing, issuing, protecting, storing and recording of the materials.

• Store-keeping includes the receipts and issues of materials, their recording, movements in and out of the store and safeguarding of materials.

Objectives

i. To avoid over and under-stocking of materials.

ii. To maintain systematic records of materials.

iii. To protect materials from losses and damages.

iv. To minimize the storage costs of materials

Codification of material

The process of giving distinct names and symbols to different items of materials is called codification of materials.

Types

• Numerical Codification System

• Alpha-numeric Codification System

• Decimal Codification System

ABC Technique

The ABC approach is a means of categorizing inventory items into 3 classes A,B AND C according to the potential amount to be controlled. For this annual consumption value is calculated by

Annual usage value=annual requirement x

per unit cost.

The following procedure is selected for developing an ABC analysis:

• List each item carried in inventory by number or some other designation,

• Determine the annual volume of usage and rupee value of each item,

• Multiple each items annual volume of usage by its rupee value,

• compute each items percentage of the total inventory in terms of annual usage in rupees.

Cont…

• select the top 10% of all items which have the highest rupee percentages and classify them as A items.

• select the next 20% of all items with the next highest rupee value percentages anddesignate them as B items.

• The next 70% of all items with the lowest rupee percentages are C items

VED Classification

• VED: Vital, Essential & Desirable classification

• VED classification is based on the criticality of the inventories.

• Vital items – Its shortage may cause havoc & stop the work in organization. They are stocked adequately to ensure smooth operation.

Cont…

• Essential items - Here, reasonable risk can be taken. If not available, the plant does not stop; but the efficiency of operations is adversely affected due to expediting expenses. They should be sufficiently stocked to ensure regular flow of work.

• Desirable items – Its non availability does not stop the work because they can be easily purchased from the market as & when needed. They may be stocked very low or not stocked.

FSN Analysis

• FSN: Fast moving, slow moving & non moving• Classification is based on the pattern of issues

from stores & is useful in controlling obsolescence.

• Date of receipt or last date of issue, whichever is later, is taken to determine the no. of months which have lapsed since the last transaction.

• The items are usually grouped in periods of 12 months.

• It helps to avoid investments in non moving or slow items. It is also useful in facilitating timely control.

• A business needs inventory, similar to cash and receivable.

• Inventory is often inevitable given purchasing lead time &unexpected delay in arrival of materials.

• Investment in inventories are ideal funds on which a business does not earn any profit, so need to optimise investment in inventories.

Inventory Turnover Ratio

Inventory turnover ratio is a measure of the efficiency in inventory management

COGS is taken as sum of all excluding interest charges and income tax.

Cont..

A ratio showing how many times a company's inventory is sold and replaced over a period Assume ITR is X, it means inventories have been turned over or rotated X times during the period.

Av. Inventories Holding Period= (1/ITR)*360 daysA high ITR implies rapid movement of merchandise leading to lower investment in inventory and vice - versa.

Cont..

PURCHASE OF MATERIALS

• Just in Time (JIT) Purchases• Centralised Purchasing• Decentralised Purchasing

PURCHASE PROCEDURE

• Purchase Requisition• Selection of Supplier• Purchase Order• Receipt of Materials• Inspection of Materials• Return to Supplier• Approval of Invoices and Payment

VALUATION OF MATERIALS PURCHASED

• Quantity discount• Trade Discount• Cash Discount• Sales Tax and Other Levies• Transport Charges• Cost of Containers

METHODS OF PRICING MATERIAL ISSUES

• First-in First-out (FIFO)• Last-in First-out (LIFO)• Simple Average Price• Weighted Average Price• Replacement Price• Standard Price• Base Stock Method

Store/Material Ledger card in FIFO format

Store/Material Ledger card in LIFO format

Store/Material Ledger card in Weighted Average

STOCK LEVEL

Fixation of various stock levels is an important part of material control.

It is the duty of the storekeeper to give order for material if the stock reaches ‘Minimum stock level’, the stock level never exceeds the ‘Maximum stock level’.

In addition at a particular level ‘Re-order for

material’ is needed.

RE-ODERING LEVEL

It is the level at which a fresh order for supply of material is placed.

It is usually between minimum and maximum stock level.

Order is placed in such a way that the fresh material reaches before the stock level reaches a minimum point.

Re-order level = Min level + Consumption during the time required for fresh delivery

Re-order level = Max consumption Maximum Reorder period

MINIMUM STOCK LEVEL

This represents the minimum quantity of material which must be maintained at all times.

It is to avoid the stoppage in production due to delay in obtaining fresh delivery of material.

This level is fixed by considering the time required for fresh supply and the rate of consumption during the lead time.

Minimum stock level = Reorder level – (Normal consumption Normal re-order period)

MAXIMUM STOCK LEVEL

It represents the maximum quantity of material that can be stocked.

Stock should not exceed this quantity. This stock is fixed for avoiding over stocking

of material.Maximum stock level = Re-ordering level +

Reordering quantity – (Minimum consumption

Minimum reorder period)

Maximum stock level is fixed by considering the following aspects

1. Amount of capital available2. Go-down space available3. Time for fresh supply of material after placing the

order4. Rate of consumption during the period5. Cost of maintaining stores6. Likely fluctuation in prices7. Seasonal nature of supply of material8. Possibility change in fashion

How is Maximum stock level fixed

Disadvantages of Over stocking

1. Over stocking blocks working capital2. It needs more go-down space3. There may be a loss due to obsolescence4. There may be a chance of deterioration in

quantity5. There may be a fear of depreciation in the

market value

EOQ MODEL

There are 2 questions related to inventory management:-

• What should be the size of order?

• At what level should the order be placed?

TYPES OF COSTS IN INVENTORY MANANGEMENT

• Ordering Cost

• Carrying Cost

• Shortage Cost

Graphical representation of EOQ

Order Quantity Size (Q)

Cos

t (R

s.)

EOQ

Tc (Total Cost)

Carrying Cost (Q/2)H

DS/Q (Ordering Cost)

ASSUMPTIONS OF EOQ MODEL

• The demand for a given period, usually 1 year, is known

• The demand is even throughout the period• Inventory orders can be replenished

immediately(there is no delay in placing and receiving orders)

• There are 2 distinguishable costs associated with inventories: costs of ordering and costs of carrying

• The cost per order is constant regardless of the size of order

• The cost of carrying is a fixed percentage of the average value of inventory

EOQ FORMULA

TC=U/Q*F+Q/2*P*CWhere TC=total costs of ordering and carrying

U=annual demandQ=quantity orderedF=cost per orderC=percentage carrying costP=price per unit

U/Q*F=ORDERING COSTQ/2*P*C=CARRYING COST

Inventory Systems

An inventory system is a system used to keep track of a businesses products and supplies.

Function:• An inventory system must balance having enough

inventories on hand to meet the demand of customers while investing as little money as possible in inventory.

Benefits:• Every business with inventory can benefit from the use of

an inventory system.

• These systems help keep personnel from wasting their time counting supplies and trying to manually determine which products to buy and sell.

Types Of Inventory Systems

Inventory systems are broadly classified into 2 types respectively, they are:-

Periodic Inventory System

Perpetual Inventory System

Periodic Inventory Systems

In this system stock-taking is undertaken at the end of accounting year.

Advantages: Suits businesses where it is difficult or not feasible to

determine the cost of individual items owing to the low value of items and the

high volume of turnover. Simple to record – when goods are sold, only the sale is

recorded. No entry is made for cost of sales. Cost of sales need not be brought into account for each sales

transaction. Suits businesses which sell large quantities of goods of low

value.

Periodic inventory system

 Disadvantages:

The value of stock on hand at any time cannot be verified. 

Not possible to calculate trading stock deficit without physical stock-take and calculation of cost of sales.

Less control over stock. Not suited to businesses dealing in valuable items. Record of movement is not kept of specific stock items

into and out of the Examples of companies using this system are like clothing stores , grocery stores , convenience stores , etc.

Perpetual Inventory System

“The method of recording stores balances after each receipt & issue to facilitate regular checking & anticipate closing down for stock-taking.”

-Wheldon

It is generally carried out by the following 2 steps, they are:- Reconciliation of bin cards & stores

ledger accounts. Continuous stock-taking.

Advantages:

The system helps in long & costly work of physical checking of all the stocks each year

It also avoids dislocation in production which arises in the case of periodic stock-taking at the end.

As stock figures are readily available at all times, the profit & loss account & balance sheet can be prepared easily prepared at interim periods.

A system of internal check remains in operation all the time.

A detailed & reliable check on stores is obtained.

Disadvantages:

High set-up cost. Training on equipment False reliability Increased monitoring

Bill of Materials (BOM)

Def:Basically, a bill of material (BOM) is a complete list of the components making up an object or assembly.

It is also part of material requirements planning (MRP)

Processes that utilize a BOM

• Production• Materials planning• Product costing• Plant maintenance

How can a BOM be used in an organization

Several software programs are available that store item information and prepare bill of materials automatically

What information is on a BOM?

1. Quantity2. Item ID#3. Description of Item4. Cost of Item5. Total Project Cost

Benefits of a BOM

• Improve material management by responding to changes in production.

• Reduce inventory levels.

• Reduce manufacturing costs.

BOM Example

Quantity ID# Description Unit Price Total Cost

1 6TU8 Back 5/Unit 5.00

4 5DR Legs 5/Unit 20.00

1 2PC Seat 10/Unit 10.00

5 1” Nails 0.50/Unit 2.50

Screenshots of BOM Software