IntroductionEvery concern constitute inventories as a part of

its working capital. It fluctuate from time to time. It requires proper control and management of inventories. The purpose of inventory mgt is to ensure availability of materials in sufficient quantity as and when required a d also to minimise investment in inventories.

Module –IIINVENTORY MANAGEMENT

Meaning and nature of inventory

• Inventory means “stock of goods” or “list of goods”.In a manufacturing concern, it includes

• raw materials, • work-in-progress, • Consumables,• Finished goods, and • Spares.

Defining InventoryInventory 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.

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.

Purpose of holding inventory

• The purpose of storing inventory is to make the finished products available for sale. Selling activity in no scenario should be stopped for want or shortage of inventory. Hence, businesses store inventory despite the costs of holding inventory.

Functions and purpose of inventory:

The basic function of inventories is to act as a buffer to decouple or uncouple the various activities of a firm so that all do not have to be pursued at exactly the same rate. The key activities are:

• Purchasing• Production and• Selling.• Inventory storage functions in such a way that these

activities can be carried on independently.

Risk and Costs of holding Inventories.

1.Capital costs:-maintaining of inventories results in blocking of the firm’s financial resources.The funds of the firm may be arranged from outside source, it requires a cost.

2.Storage and handling costs:-It involves storage costs like godown rent, insurance charges etc. and also cost of handling materials.

3.Risk of price decline:-For holding inventories, suppliers may give price reduction. This may be due to increased market supplies, competition and depression in the market.

4.Risk deterioration in quality:-the quality of the materials may also deteriorate while the inventories are kept in stores.

Definition of Inventory Management.

• Inventory management refers mainly to when a firm strives to attain and uphold an optimal inventory of goods while also taking note of all orders, shipping and handling, and other associated costs.

• Inventory management is mainly about identifying the amount and the position of the goods that a firm has in their inventory. Inventory management is imperative as it helps to defend the intended course of production against the chance of running out of important materials or goods.

• Inventory management also includes making essential connections between the replenishment lead time of goods, asset management, the carrying costs of inventory, future inventory price forecasting, physical inventory, available space for inventory, demand forecasting and much more.

Objectives of inventory management.

The main objective of inventory management is to maintain inventory at appropriate level to avoid excessive or shortage of inventory because both the cases are undesirable for business. Thus, management is faced with the following conflicting objectives:1. To keep inventory at sufficiently high level to perform production and sales activities smoothly.

2. To minimize investment in inventory at minimum level to maximize profitability.

Other objectives of inventory management are explained as under:-

1. To ensure that the supply of raw material & finished goods will remain continuous so that production process is not halted and demands of customers are duly met.

2. To minimize carrying cost of inventory.

3. To keep investment in inventory at optimum level.

4. To reduce the losses of theft, obsolescence & wastage etc.

5. To make arrangement for sale of slow moving items.

6. To minimize inventory ordering costs.

Tools and techniques of Inventory management

• Determination of Stock levels• determination of Safety stocks• Selecting a proper system of Ordering for inventory• Determination of Economic Order Quantity• ABC Analysis• VED Analysis• Inventory Turnover ratio• Aging Schedule of Inventories• Preparation of Inventory Reports• Lead time• Perpectual Inventory System &• JIT Control System

1.Determination of stock levels.

• a).Minimum level:-the quantity which must be maintained in hand at all times.If stocks are less than the minimum level then the work will stop due to shortage of materials.It depends upon the factors like lead time, rate of consumption and nature of materials.

• Min.Stock level= Re-order level-(Normal consumption x Normal Re-order period)

• b) Re-order level:-It represents the level of order sent before the materials reach minimum stock-level.

Maximum Consumption x Max. re-order period.

c) Maximum stock level:-it is the quantity of materials beyond which a firm should not exceed its stocks.if the quantity exceeds max.level limit then it will be overstocking.

Overstocking will mean blocking of more working cpl, more space for

storing the materials, more wastage of materials and more chances of losses from obsolescence.

Re-ordering level+Re-order qty-(Min.consumption x Min.re-ordering period)

Max. stock level will depends upon the following factors; i-The availability of cpl for the purchase of materials. ii- Max. requirements of materials at any point of time.

iii- Availability of space for storing the materials.iv- the rate of consumption of materials during lead time.v- the cost of maintaining the stores.vi- the possibility of fluctuations in prices.vii-the nature of material(if perishable goods cannot

stored for long)viii-Availability of materials (seasonal-it stored for long)ix- Restrictions imposed by govt.x-Changing fashions will affect the calculations of

max.level.

d) Danger level:- It is the level beyond which materials should not fall in any case.If danger level arises then it leads more costs in arranging materials and if not , there is a possibility of stoppage of works.

Ave.comsumption x Max.re-order period for emergency purchases.

e) Ave. stock level Min.Stock level + ½ of re-order qty OR Min.Stock level +Max.stock level 2

2.Determination of safety stocks.

• Safety stock is a stock which is maintained by an organisation in order to meet out any of the unanticipated increase in the usage of materials.

The basic problem for inventory management is to determine the level of qty of safety stocks to be maintained by the organisation at all times.

3.Selecting a proper system of Ordering for inventory

The basic problem of inventory is to decide the re-order point. This point indicates when an order should be placed. The re-order point is determined with the help of these things-

a)Average consumption rate b) duration of lead time c)Economic Order Quantity.

4.Economic Order Quantity(EOQ)

It refers to that size of the lot to be purchased at a minimum cost. For this, ordering cost and carrying cost should be considered.

a) ordering cost-which can be incurred for placing an order and securing the supplies.

It consists-Cost of ordering goods, exps.incurred for transportation of goods, inspection costs, stationery etc. b) carrying cost-which can be incurred for holding inventories.It

consists- capital invested in inventories, storage-costs, loss of materials

due to deterioration and obsolescence, insurance cost, cost of spoilage in handling of materials.

safety stock levels• Safety stock is a term to describe a level of

extra stock that is maintained to mitigate risk of stockouts (shortfall in raw material or packaging) due to uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans. They serve as an insurance against stockouts.

Ordering system of Inventory

• For a systematic approach of ordering system is that to decide the re-order point.(when an order should be placed)For this,

Average consumption rate, duration of lead time, and EOQ should be considered. There are three systems of ordering and a concern can choose any one of there,

EOQ(Fixed order qty system) Periodic re-ordering system Single or scheduled part delivery system.