INVENTORY MANAGEMENT byDr.K.P.Malathi ShiriInventory = raw material work-in -progress + finished goods

Fundamentals of Inventory Management Maintaining sufficient stock levels for

uninterrupted production schedule. Maintaining sufficient supply of finished

goods for unaffected sales. Minimising the total cost of inventory

maintenance.

Motives for holding Inventory

Transaction Motive – to match the time lag

between demand and supply of raw materials.

Precautionary Motive – to hold inventory against

unpredictable risks like strike, short supply, power

cuts, lengthy import procedures

Speculative Motive – to benefit from quantity

discounts due to bulk purchasing or anticipated price

hikes

Benefits of holding inventory Avoiding loss of sales Trade discounts Reducing ordering costs Uninterrupted production Reducing the risks of production

shortages

Risks of holding excessive inventory Price decline Obsolescence Increased Costs of purchase, ordering and

carrying Quality costs like cost of replacing products

after shipment; cost of defective parts; cost of vendor development, and inspection costs

Objective of Inventory Management To determine the optimum level of

inventory, by considering the costs:- Carrying cost – is the cost per unit of

holding/maintaining raw material/WIP/FG(a) Storage costs – the cost of storing one

unit of raw material by the firm.(eg) rent of space occupied; air-conditioning costs; insurance costs; warehousing and handling costs; cost of pilferage

Contd…. (b) Cost of financing

It includes funds used to purchase/ production of inventory, including any explicit costs like interest on borrowings.Total carrying cost is variable and varies with the level of inventory carried.

Techniques of Inventory Management EOQ Model which is based on the

following assumptions:- The usage rate is even throughout the year There is no time gap between placing an

order and getting its supply The cost per order and cost of carrying

inventory are fixed The only 2 costs involved are the cost of

carrying the inventory and ordering costs.

ABC Analysis (Always Better Control) Category A – 10% of the items covering 75%

of the value Category B – Lies between A and C - 20%

items representing 15% of the value Category C – large number of items of small

value – 70% of the items covering 10% of the value

Merits of ABC Analysis Better control on costly items Helps to control the Stock Turnover

Ratio between 6 to 12 times in a year. Inventory maintained at optimum level Storage costs are reduced

Contd… Determination of Stock Levels – like re-order level Minimum level Maximum level Average level EOQ Danger level

JIT (Just in Time) System Minimises stock holding Creates a good rapport with the

suppliers Results in savings in cost and

investment Reduces the clerical costs of recording

stores

VED ANALYSIS Vital- stock out costs very high Essential – stock out can be managed

for a few hours only- cost of loss is high Desirable - will not lead to production

stoppage- can hold up to a week

FSN ANALYSIS Classification based on material

consumption Also based on inventory turnover Fast moving Slow moving Non- moving

Others Min Max Method Perpetual Inventory System Bin card and Stores Ledger updated Continuous stock verification with Bin

Card Reconciliation of discrepancies Remedial measures Stock records corrected

Others Automatic Order System – done with

the help of technology to fix an “Order Point Quantity”.

Input –Output Ratio Input –output Ratio = Input in units/ output in units x 100 (answer will be in %)