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INVENTORY MANAGEMENT
Inventories According to IASC, inventories are “Tangible property
held for sale in the ordinary course of business in the process of production for such sale or to be consumed in the process of production of goods or services
for sale. ” It constitute the largest components of current assets in
many organizations. Inventory turnover ratio is obtained by annual demand
dividing by average inventory & it shows efficiency of the firm having higher turnover ratio.
Includes the following categories of items- Forms of Inventories Production inventories (Raw materials, parts,
components which enter the firm’s product in the production process)
Work in progress inventories (Semi finished products found at various stages in the production operation )
M.R.O. inventories / Spare part inventories (Maintenance, repair and operating supplies which are consumed in the production process but do not become a part of the product)
Finished inventories (Complete products ready for shipment)
Objectives of Inventory Control To ensure smooth flow of stock To provide for required quality of
material To control investment in stock Protecting against Fluctuating Demand Minimisation of risk & uncertainty Risk of obsolescence Minimisation of storage cost
Inventory Costs
Purchase Cost : price for purchase from outside the firm. It include transportation cost, tariffs, taxes, & any other costs incurs to make the item available at that point
Ordering Cost : In addition to the per unit purchase cost, there is usually an additional cost which is incurred whenever we order, reorder, or replenish the inventory. It is known as ordering costs
Cost of placing an order with a vendor of materialsPreparing a purchase orderProcessing paymentsReceiving and inspecting the material
Carrying Cost/ Holding Cost : The cost that accrues due to the actual holding of inventory over a time period is known as holding cost Costs connected directly with materials
○ Obsolescence○ Deterioration○ Pilferage
Financial Costs○ Taxes○ Insurance○ Storage○ Interest on cost of capital borrowed to acquire and
maintain the inventories
Shortage Cost : This cost is incurred for not having the inventory or not having enough inventory at the right place or at the be incurred Such as:
1. Backorders occurs when customer is willing to wait for inventory to be made available.
2. Lost sales occur when the customer responds to an out of stock situation by canceling the demand.
3. Lost customer cost 4. Disruption cost is that cost which results in delay in doing
the job.
Inventory Management & Control
Inventory Management- Involves the development and administration of policies. Systems and procedures which will minimize total costs relative to inventory decisions and related functions such as customer service requirements , production scheduling and purchasing
Inventory Control- pertains primarily to the administration of established policies, systems and procedures
Factors affecting Inventory Management & Control
Type of product
Type of Manufacture
Volume of production
Type of product If the materials used have high unit value,
closer control is required If the material used is in short supply or is
rationed by the government, this will influence the purchase of this material
Materails required to manufacture a standard product is easy to obtain and a close control is not necessary . Customized items need strict control to ensure no item is lost in the process of manufacture
Type of Manufacture Continuous manufacture requires
uninterrupted supply of inventories
Intermittent manufacture permits greater flexibility in the control of matetrial
Volume of production
Other factors Objectives of the company Qualifications of the staff personnel who
will design and coordinated the system Capability of present and future data
processing equipment
Inventory Control Techniques
ABC Inventory Analysis
1 2 3 4 5 6 7 8 9 10
1009080706050403020100
Percent of Inventory Items
Perc
ent o
f Ann
ual
Dol
lar U
sage
AItems
B Items C Items
ABC Inventory PoliciesPolicies for ‘A’ group items : 1. They should be ordered more frequently to
reduce capital lock up at a time in inventories as 10% of items cost 70% of total value
2. The stock report should be sent more frequently at least once in 15 days
3. The purchase of items should be with in the hands of top officials
Policies for ‘B’ group items: 1. This items should be ordered less frequently
than ‘A’ type items Policies for ‘C’ group items :1. Large quantities can be brought at a times
the total investment will be least2. Paper work can be reduced if orders are
once or twice a year
Advantages Of A B C Analysis1. This helps the manager to exercise
selective control & focus attention only on few items
2. Reduced losses arising out of obsolescence
3. Sufficient safety of low value or C group of items
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Economic Order Quantity (Model Assumptions)
Demand rate known and constant Item produced in lots, or purchased in orders Each lot or order received in single delivery Inventory holding cost based on average inventory Ordering, or setup costs are constant
EOQ
Order quantity
Annual costs
Holding Cost CurveTotal Cost Curve
Order (Setup) Cost Curve
Optimal Order Quantity (Q*)
Minimum
total cost
Replenishment i.e. Supply of item is instantaneous
There is no time lag between the placement of the order & its supply. The order is immediately supplied
Size of Inventory q
Time Period
C0 = procurement cost per order C = per unit cost of the item order Cs = per unit storage cost D = total demand in time t
q0 = 2DC0
Cs
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