PRESENTED BY:- SARITA PRESENTED BY:- SARITA MALVIYAMALVIYA

BHARAT BALDUA BHARAT BALDUA MONIKA GHODKI MONIKA GHODKI ANAMIKA BHARGAV ANAMIKA BHARGAV

INTRODUCTIONINTRODUCTION

Inventories constitute a major component in current Inventories constitute a major component in current assets. It constitutes around 60% in the public limited assets. It constitutes around 60% in the public limited

companies, in India. For the smooth running, every companies, in India. For the smooth running, every enterprises needs inventory. Inventory serve as a link enterprises needs inventory. Inventory serve as a link

between production processes. Due to its major between production processes. Due to its major composition in current assets, the management of composition in current assets, the management of inventories occupies a key role in working capital inventories occupies a key role in working capital

management.management.

So, inventory management is essential to allow the firm So, inventory management is essential to allow the firm to avail the opportunities to improve and at the time does to avail the opportunities to improve and at the time does

not impair its liquidity, with excessive or unproductive not impair its liquidity, with excessive or unproductive investment.investment.

Inventory ManagementInventory Management

Inventory is any stored resource that is Inventory is any stored resource that is used to satisfy a current or future need.used to satisfy a current or future need.

Raw materials, work-in-process, and Raw materials, work-in-process, and finished goods are examples of inventory.finished goods are examples of inventory.

Two basic questions in inventory Two basic questions in inventory management are (1) how much to order management are (1) how much to order (or produce), and (2) when to order (or (or produce), and (2) when to order (or produce).produce).

Inventory ManagementInventory Management

Inventory is one of Inventory is one of the most expensive the most expensive assets of many assets of many companies.companies.

It represents as It represents as much as 40% of much as 40% of total invested total invested capital.capital.

SOME IMAGESSOME IMAGES

MEANING AND NATURE OF INVENTORYMEANING AND NATURE OF INVENTORY

Inventory means stock of finished goods, in accounting Inventory means stock of finished goods, in accounting language. However, it includes raw materials, work in language. However, it includes raw materials, work in process, finished goods and stores in a manufacturing process, finished goods and stores in a manufacturing

organization.organization.

Inventory management

system

Warehousemanagement

ProductionPlanningcontrol

Sales &marketing

Customerrelationship

Decision support/Businessanalysis

Resourcemanagement

Accountingmanagement

Purchase management

Inventory management

TYPES OF INVENTORYTYPES OF INVENTORY

RAW MATERIALSRAW MATERIALS

WORK IN PROCESSWORK IN PROCESS

FINISHED GOODSFINISHED GOODS

CASH AND MARKETABLE SECURITIESCASH AND MARKETABLE SECURITIES

MOTIVES FOR HOLDING INVENTORIESMOTIVES FOR HOLDING INVENTORIESHolding of inventories is expensive in the form of storage Holding of inventories is expensive in the form of storage costs, interest charges, deterioration of quality in holding costs, interest charges, deterioration of quality in holding

stocks, theft and pilferage. Firms hold inventories, stocks, theft and pilferage. Firms hold inventories, basically, for the following reasonsbasically, for the following reasons

TRANSACTION MOTIVESTRANSACTION MOTIVES

PRECAUTION MOTIVESPRECAUTION MOTIVES

SPECULATIVE MOTIVESPECULATIVE MOTIVE

ORDERING COST ORDERING COST Every time an order is placed stock replenishment, Every time an order is placed stock replenishment,

certain costs are involved. The ordering cost may vary, certain costs are involved. The ordering cost may vary, dependent upon the type of item. However, an estimated dependent upon the type of item. However, an estimated

of ordering cost can be obtained for a given range of of ordering cost can be obtained for a given range of item.item.

THIS COST OF ORDERING INCLUDES:-THIS COST OF ORDERING INCLUDES:-

1.PAPER WORK COST1.PAPER WORK COST2.FOLLOW UP COST2.FOLLOW UP COST

3.COST INVOLVED IN RECEIVING THE ORDER INSPECTION3.COST INVOLVED IN RECEIVING THE ORDER INSPECTION4.ANY SET UP COST OF MACHINES4.ANY SET UP COST OF MACHINES

5.SALARIES AND WAGES TO THE PURCHASE DEPARTMENT5.SALARIES AND WAGES TO THE PURCHASE DEPARTMENT

CARRYING COSTCARRYING COSTCarrying cost constitute all the costs of holding items in Carrying cost constitute all the costs of holding items in inventory for a given period of time. They are expressed inventory for a given period of time. They are expressed either in rupees per unit per period or as a percentage of either in rupees per unit per period or as a percentage of the inventory value per period. components of this cost the inventory value per period. components of this cost

include the following…include the following…

STORAGE AND HANDLING COSTSTORAGE AND HANDLING COST

OBSOLESCENCE AND DETERIOTION COSTSOBSOLESCENCE AND DETERIOTION COSTS

INSURANCEINSURANCE

TAXES THE COST OF THE FUNDS INVESTED TAXES THE COST OF THE FUNDS INVESTED IN INVENTORIESIN INVENTORIES

STOCK OUT COSTSSTOCK OUT COSTS

stock out costs are incurred whenever a business stock out costs are incurred whenever a business is unable to fill orders because the demand for an is unable to fill orders because the demand for an

item is greater than the amount currently item is greater than the amount currently available in inventory.available in inventory.

EXAMPLE:-stock out costs include the expenses of EXAMPLE:-stock out costs include the expenses of placing special orders and expediting incoming placing special orders and expediting incoming

orders.orders.

OTHER CHARACTERSTICS OF OTHER CHARACTERSTICS OF INVENTORY SITUATIONSINVENTORY SITUATIONS

LEAD TIMESLEAD TIMES

SOURCE AND LEVELS OF RISKSOURCE AND LEVELS OF RISK

STATIC VERSUS DYNAMIC PROBLEMSSTATIC VERSUS DYNAMIC PROBLEMS

REPLESHMENT RATEREPLESHMENT RATE

OBJECTIVES OF INVENTORYOBJECTIVES OF INVENTORYMANAGEMENTMANAGEMENT

The primary objective of inventory management The primary objective of inventory management is to maintain the quantity of stocks, in right is to maintain the quantity of stocks, in right

location, at right time to ensure the uninterrupted location, at right time to ensure the uninterrupted and, at the same time, minimize the investment and, at the same time, minimize the investment

in stock holding. Every firm is faced with two in stock holding. Every firm is faced with two conflicting issues:conflicting issues:

1.Maximize investment, by maintaining excessive 1.Maximize investment, by maintaining excessive quantity so that production is not affected and quantity so that production is not affected and business opportunities are not lost, for want of business opportunities are not lost, for want of

stocks.stocks.

2.Minimize investment in inventories as they 2.Minimize investment in inventories as they involve costs and affect profitability, adversely.involve costs and affect profitability, adversely.

TO SUM.THE OBJECTIVE OF TO SUM.THE OBJECTIVE OF INVENTORY MANAGEMENT CAN BE INVENTORY MANAGEMENT CAN BE

SUMMARIZED:-SUMMARIZED:-

Minimize the carrying costs and lead time in Minimize the carrying costs and lead time in suppliessupplies

Maintain the sufficient stocks of finished goods Maintain the sufficient stocks of finished goods for smooth sales operations.for smooth sales operations.

Ensure perpetual inventory control so that Ensure perpetual inventory control so that physical stocks are always in agreement, with physical stocks are always in agreement, with stocks shown in recordsstocks shown in records

Facilitate furnishing of data for short term and Facilitate furnishing of data for short term and long term planning and inventory control.long term planning and inventory control.

TOOLS AND TECHNIQUES OF TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENTINVENTORY MANAGEMENT

A.A. Determination of stock levelsDetermination of stock levels

B.B. Determination of economic order quantityDetermination of economic order quantity

C.C. A.B.C analysisA.B.C analysis

D.D. V E D Analysis V E D Analysis

E.E. Perpetual inventory systemPerpetual inventory system

F.F. JIT control systemJIT control system

G.G. Inventory turnover ratiosInventory turnover ratios

DETERMINATION OF STOCK LEVELSDETERMINATION OF STOCK LEVELS

Minimum levelMinimum level

Minimum level quantity that must be maintained, Minimum level quantity that must be maintained, at all times if the stock holding falls below this at all times if the stock holding falls below this level, production stops due to shortage of level, production stops due to shortage of materials. This level is fixed, considering the materials. This level is fixed, considering the following factorsfollowing factors

1.Lead time1.Lead time

2.Rate of consumption. Nature of materials2.Rate of consumption. Nature of materials

•FORMULA FOR COMPUTATION OF MINIMUM STOCK IS:-minimum stock level-

•Re ordering level-(normal consumption*Maximum re order period)

B)B)REORDER LEVEL:-REORDER LEVEL:-When the stock level When the stock level reaches the re ordering level, the order is placed reaches the re ordering level, the order is placed

for replenishment of stocks. This level is fixed for replenishment of stocks. This level is fixed between the maximum stock and minimum stock.between the maximum stock and minimum stock.

THE FORMULA FOR CALCULATION IS:-THE FORMULA FOR CALCULATION IS:-

REORDERING STOCK LEVEL: Maximum consumption per day * Maximum re order period

MAXIMUM LEVELMAXIMUM LEVEL: : It is the level, beyond which It is the level, beyond which the stock level should not exceed. If this level is the stock level should not exceed. If this level is exceeded, there would be blockage of working exceeded, there would be blockage of working

capital, loss due to wastage, risk of obsolescence capital, loss due to wastage, risk of obsolescence and more rent for storage space etcand more rent for storage space etc

FORMULA IS:FORMULA IS:

Maximum stock level= Re ordering level+ Reordering quantity-(minimum consumption*Minimum reordering period)

SAFETY STOCKSAFETY STOCK

There should be safety stock to take care of There should be safety stock to take care of fluctuations in consumptions pattern of raw fluctuations in consumptions pattern of raw

materials. safety stock is to meet unforeseen materials. safety stock is to meet unforeseen contingencies.contingencies.

DETERMINATION OF ECONOMIC ORDER DETERMINATION OF ECONOMIC ORDER QUANTITYQUANTITY

1.Ordering cost: 1.Ordering cost: The costs that are associated The costs that are associated with purchasing and placing an order is called with purchasing and placing an order is called

ordering costs.ordering costs.

2.2.Carrying costs: Carrying costs: These are the costs for These are the costs for holding inventories. Higher the stock holding, holding inventories. Higher the stock holding,

larger would be carrying costs and they would be larger would be carrying costs and they would be lower if the stocks are lower.lower if the stocks are lower.

The economic order size of inventory The economic order size of inventory brings a trade off between carrying costs brings a trade off between carrying costs

and ordering costs.and ordering costs.FORMULA:FORMULA:

EOQ=(2AO/C)

WHERE A= Annual consumption of unit ,in rupeesO= Cost of placing order

C= Inventory carrying costs, per one unit

GRAPHICAL PRESENTATION OF EOQGRAPHICAL PRESENTATION OF EOQ

The EOQ model can be presented graphically. To The EOQ model can be presented graphically. To explain it, there is example of placing an order of explain it, there is example of placing an order of mangoes. if annual consumption of an item is mangoes. if annual consumption of an item is 1000 units and order is placed for 200 units, each 1000 units and order is placed for 200 units, each time, orders have to be placed five times in a time, orders have to be placed five times in a year. If we increase the size of the order from 200 year. If we increase the size of the order from 200 to 500 units, the number of orders has to be to 500 units, the number of orders has to be reduced from 5 to 2. The ordering costs would be reduced from 5 to 2. The ordering costs would be lower for two orders, compared to five orders. In lower for two orders, compared to five orders. In other words, with the increase in size of the other words, with the increase in size of the order, total ordering cost would reduce..order, total ordering cost would reduce..

total cost

carrying cost

carrying cost

size of order

•Graphical presentation of EOQ

THE ABC ANALYSIS IS BASED ON THE THE ABC ANALYSIS IS BASED ON THE FOLLOWING PRESUMPTIONS:FOLLOWING PRESUMPTIONS:

1.Managerial time and efforts is scare and 1.Managerial time and efforts is scare and limited and limited limited and limited

2. Some items of inventory are more 2. Some items of inventory are more important than othersimportant than others

ABC ANALYSISABC ANALYSIS

Under ABC analysis, the item is allocated to the Under ABC analysis, the item is allocated to the group, depending on the amount of attention it group, depending on the amount of attention it

deserves. ‘A’ group requires the maximum deserves. ‘A’ group requires the maximum concentrations of the finance manager. This concentrations of the finance manager. This

group constitutes a higher % in terms of value, group constitutes a higher % in terms of value, while it occupies lesser significance, in terms of while it occupies lesser significance, in terms of

number of units. ‘B’ group requires lesser number of units. ‘B’ group requires lesser attention, compared to ‘A’ group. The last group attention, compared to ‘A’ group. The last group

“C” has to be given the least attention, as it “C” has to be given the least attention, as it constitutes less value in the total annual constitutes less value in the total annual

consumptions.consumptions.

The following is the consumption of Dimpy & The following is the consumption of Dimpy & different items of inventory. Calculated the items as different items of inventory. Calculated the items as

per ABC analysis and advice the group, Where per ABC analysis and advice the group, Where concentration is required mostconcentration is required most

IteItem m No.No.

Annual Annual consumptionconsumption

In terms of unitsIn terms of units

Rate Rate (per (per unit)rs.unit)rs.

Total value of Total value of consumptions(Rs.consumptions(Rs.))

11 60006000 100100 600000600000

22 1000010000 6565 650000650000

33 50005000 5050 250000250000

44 2500025000 22 5000050000

55 40004000 2525 100000100000

66 1500015000 1010 150000150000

77 2500025000 66 150000150000

88 1000010000 55 5000050000

ToTotaltal

100000100000 20 00 00020 00 000

PrioriPriority ty orderorder

IteItem m no.no.

% each item % each item in total no. in total no. of unitsof units

Total value Total value of of consumpconsump

% of each item % of each item in total valuein total value

cumulativecumulative

11 10%10% 650000650000 33%33% 33%33%

22 6%6% 600000600000 30%30% 63%63%

33 5%5% 250000250000 12%12% 75%75%

44 15%15% 150000150000 8%8% 83%83%

55 25%25% 150000150000 8%8% 91%91%

66 4%4% 100000100000 5%5% 96%96%

77 25%25% 5000050000 2%2% 98%98%

88 10%10% 5000050000 2%2% 100%100%

TotTotalal

100%100% 20000020000000

GROUPGROUP ITEM NO.ITEM NO. % ITEMS% ITEMS

(IN UNITS)(IN UNITS)% ITEMS % ITEMS

(In value)(In value)

A.)A.) 2,1,32,1,3 21%21% 75%75%

B)B) 6,76,7 40%40% 16%16%

C)C) 5,4,85,4,8 39%39% 9%9%

VED ANALYSISVED ANALYSIS

The VED analysis is used for control of spare The VED analysis is used for control of spare parts. A-B-C analysis is concerned with materials parts. A-B-C analysis is concerned with materials

and is not totally and properly suitable for and is not totally and properly suitable for spares. So, the spares are divided are into three spares. So, the spares are divided are into three

categories. Vital, desirable and essentialscategories. Vital, desirable and essentials. .

PERPETUAL INVENTORY SYSTEMPERPETUAL INVENTORY SYSTEMTHE PROCEDURE IS AS UNDERTHE PROCEDURE IS AS UNDER

A). Stock taking team selects the storerooms, A). Stock taking team selects the storerooms, where stock taking is to be done, on a random where stock taking is to be done, on a random basis.basis.B). All the bins in that storeroom are checked.B). All the bins in that storeroom are checked.C). The physical balances in the bins is countered C). The physical balances in the bins is countered or measured , dependent on the type of the or measured , dependent on the type of the material.material.D). The actual stock is recorded in the sheets D). The actual stock is recorded in the sheets provided for this purposes.provided for this purposes.E). There is no prior intimation to the stores E). There is no prior intimation to the stores department to maintain surprise element.department to maintain surprise element.F) .All the stores are checked, at least, three or F) .All the stores are checked, at least, three or four times in a year.four times in a year.

JUST IN TIME INVENTORY CONTROL JUST IN TIME INVENTORY CONTROL SYSTEMSYSTEM

The basic philosophy of JIT is to keep only The basic philosophy of JIT is to keep only enough quantity of stock on hand to meet the enough quantity of stock on hand to meet the

immediate production requirements. This immediate production requirements. This concepts relies on the suppliers to furnish ‘stock’ concepts relies on the suppliers to furnish ‘stock’

‘just in time’, as and when needed.‘just in time’, as and when needed.Just in Time inventory control system aims at Just in Time inventory control system aims at eliminating wastages, from every aspect of eliminating wastages, from every aspect of

manufacturing. This was first introduced in Japan manufacturing. This was first introduced in Japan in 1950. Toyota was the first company to in 1950. Toyota was the first company to

practice this technique.practice this technique.

OBJECTIVES OF JITOBJECTIVES OF JIT

Minimum/Zero inventory and associated costs.Minimum/Zero inventory and associated costs.

Zero breakdown and continuous productions.Zero breakdown and continuous productions.

Manufacturing the right quantity, at right timeManufacturing the right quantity, at right time

Ensure timely delivery of inputs as well as Ensure timely delivery of inputs as well as outputs.outputs.

MAJOR ADVANTAGES OF JITMAJOR ADVANTAGES OF JIT

Right quantities are purchased and produced, in Right quantities are purchased and produced, in right timeright time

Wastage are eliminated, totallyWastage are eliminated, totally

Investment in inventory is controlledInvestment in inventory is controlled

Carrying cost is reduced.Carrying cost is reduced.

INVENTORY TURNOVER RATIOSINVENTORY TURNOVER RATIOS

Inventory turnover ratio indicate the efficiency in Inventory turnover ratio indicate the efficiency in using the inventory. Inventory turnover ratio using the inventory. Inventory turnover ratio indicates the number of times the stock has indicates the number of times the stock has turned, over a period of one year. More the turned, over a period of one year. More the

number of times. More efficient the organization number of times. More efficient the organization is.is.

The inventory conversion period shows the The inventory conversion period shows the number of days the stock is blocked.number of days the stock is blocked.