it 314 lecture 3 inventory

7/31/2019 IT 314 Lecture 3 Inventory

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Accounts with inventory

Definition of Inventory

Inventory is an idle stock of physical goods that contain economic

value, and are held in various forms by an organization in its

custody awaiting packing, processing, transformation, use or sale

in a future point of time.


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definition

Any organization which is into production, trading, sale and

service of a product will necessarily hold stock of various

physical resources to aid in future consumption and sale.

While inventory is a necessary evil of any such business, it may

be noted that organizations hold inventories for variousreasons, which include

speculative purposes

functional purposes

physical necessities etc.


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contd

From the above definition the following points stand out with

reference to inventory:

All organizations engaged in production or sale of products

hold inventory in one form or other.

Inventory can be in complete state or incomplete state.

Inventory is held to facilitate future consumption, sale or

further processing/value addition.

All inventoried resources have economic value and can be

considered as assets of the organization.


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Contd

The raw materials, work-in-process goods and completely

finished goods that are considered to be the portion of a

business's assets that is ready or will be ready for sale.

Inventory represents one of the most important assets

that most businesses possess, because the turnover ofinventory represents one of the primary sources

of revenue generation and subsequent earnings for the

company's shareholders/owners.


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Inventory Management

Inventory management is a very important function that

determines the health of the supply chain as well as the

impacts the financial health of the balance sheet.

Every organization constantly strives to maintain optimum

inventory to be able to meet its requirements and avoid overor under inventory that can impact the financial figures.


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Contd

Inventory is always dynamic. Inventory management requires

constant and careful evaluation of external and internal

factors and control through planning and review.

Most of the organizations have a separate department or job

function called inventory planners who continuously monitor,control and review inventory and interface with production,

procurement and finance departments


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Inventory Control Methods

Basics

Many small businesses use a basic method of inventory control

called minimum stock levels.

With this form of control, additional stock gets ordered when the

existing stock has reached a certain level. For example, a small business sets a minimum stock level of 40

units on an item that sells at an average rate of 100 units every

five days.

When the inventory reaches 40 units at the end of day three, the

company orders additional stock.


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Inventory control methods

Just In Time

One of the most popular methods for controlling inventory in the

manufacturing environment remains just in time, or JIT, inventory

control.

JIT seeks to deliver inventory to the production floor just in timefor use.

The JIT method delivers only the exact quantities required to

complete current production, no more, no less. JIT inventory

control is highly dependent on the ability of the company

suppliers to deliver on demand. In most manufacturing environments utilizing JIT delivery, the

supplier has a warehouse very close to the manufacturing facility


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Methods Contd

Safety Stock

Safety stock refers to an additional amount of stock carried over

the normal stocking level requirements as a buffer against

uncertainty.

Some reasons for using safety stock as an inventory controlmethod include supplier performance problems, long lead times

and material uncertainty


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Methods..

Min-Max System

After a careful examination of your inventory needs, you set two

lines one at the top and one at the bottom of how much of

each product you must keep on hand.

When you reach the bottom line, you order enough of thatproduct so you wont go above the top line.

As long as youre somewhere in the middle, youre okay

Other methods are, Two bin system, ABC analysis, Economic

order quantity etc


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Supply chain Management

Definition

SCM is the management of a network of all business processes

and activities involving procurement of raw materials,

manufacturing and distribution management of Finished Goods.

SCM is also called the art of management of providing the RightProduct, At the Right Time, Right Place and at the Right Cost to

the Customer.

Effectiveness and efficiency of Inventory management depend

also on SCM


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Advantages of Inventory

control Capture Sales Opportunity

Cost Effective, it reduce labor cost, administrative and running costs

Proper Utilization of Resources

Awareness of discrepancies-look at physical inventory count and

the figure in the system

Quick decision making

Good customer service

Competitive edge over other competitors

Equity and fair prices to customers

Customer retention and royalty


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Inventory in Tally

Stock Groups

As per requirement of the business numerous items can be

created, but to generate a report on similar types of stock items

you need the classification of stock items.

So items of the same nature, characteristics and corefunctionality can be grouped together as stock group.

This classification will help you to get stock report in an

organized manner.

For example, Raw Material, WIP, Finished Goods, Hardware,

Software, Electronics, Phones, Laptops etc


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Contd

Stock Category

Stock Category offers a parallel classification of stock items. Like

stock Groups, classification is done based on similarity in

behavior.

The advantage of Categorizing items is that you can classify thestock items (based on functionality) together across different

stock groups, which will enable you to obtain reports on

alternatives or substitutes for a stock items.

Example, Under a stock group phones, we can have categories as

Nokia, Samsung, Sony Erickson, Sagem, Apple, Blackberry etc


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Unit of Measure

You can measure the Stock Item by Units, like money is

measured in Currency. For example, Liters, Meters, Kilograms,

Pieces, Box, Dozen, etc.

Units can be classified under the following types :

Single Units : When only one Unit is used for receipt and issueof stock items. Above units mentioned are all example of

Single Units.


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Units of measure

Compound Units: When two different types of Units can be

used for receipt and issue of the Stock item is called

compound unit. Example 1 crate of 24 bottles

First Unit Conversion Factor Second Unit

Dozen 12 Pcs.

Meter 1000 Millimeters.

Box 30 Pcs.


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Contd

Stock Items

Stock items are the primary inventory entity, like Ledgers.

Usually it means Item or Product, which can be buying, selling or

issue for production purpose.

Each item is required to be accounted for, and receipt or issueneeds to be created.

In fact, you will create a stock ledger account for each item and

Tally calls this account Stock Item.

Example Nokia N 70,N 90,Nokia 6600, etc;

acer, toshiba, dell etc


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Contd

Location for International and Godown for SAARC

Locations/ Godowns are places where Stock Items are stored.

You can monitor the location-wise movementof stock by

creating multiple Godowns.

Tally.ERP 9 permits the creation of any number of godowns,

under groups and subgroups to match the structure you need.


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Locations

Main location- Within the main premises where the business

is located and operating.

It can be a mega one and divided in different parts according

to the nature of the organizations.

Primary location- is a location outside the premises and itsapplicable for big businesses which can source different

inventory from different regions and transfer them in different

locations.

Example Azam company can have location at Babati, Kampala,

Nairobi, Lubumbashi, Buguruni, mwanza etc


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Conclusion

Possessing a high amount of inventory for long periods of

time is not usually good for a business because of inventory

storage, obsolescence and spoilage costs.

However, possessing too little inventory isn't good either,

because the business runs the risk of losing out on potentialsales and potential market share as well.

Inventory management forecasts and strategies, such as a

just-in-time inventory system, can help minimize inventory

costs because goods are created or received as inventory

only when needed


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it 314 lecture 3 inventory

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