INVENTORY MANANGEMENT

RENUKA MEHRALECTURER IN B.B.A.III

GCCBA-42

INTORDUCTION

• Inventory constitutes one of the most important elements of any system dealing with supply, manufacturing, and distribution of goods.

• In simple words, inventory implies the stock of goods held over a period of time for meeting the consumer needs both business and final.

The term inventory means-:

• Blocked working capital of an organization

• The stock in hand of material at a given time

• A physical resource that a firm holds in stock with the intent of selling it

Contd.

• An itemized list of all physical assets.• The value of the stock of goods owned by

an organization at a particular time.

Functions of Inventory

I. Balancing demand and SupplyII. Geographical SpecializationIII.Periodic variation

Reasons for keeping inventory

• Meet demand• Keep operation running• Lead time• Hedge against inflation• Quantity discount• Smoothly requirement

Types of Inventory

1) In Transit Inventory- it refers to inventory in the pipe line and represents the total quantum of inventory moving through the distribution system at a point of time.

2) Base Stock- it represents the quantum of inventory required to meet the average level of demand during the average lead time.

Types of Inventory (continue)

3) MRO Inventories- maintenance, repairs and operating supplies which are used in production process but do not become a part of product are called MRO Inventory.

4) Speculative Inventory- the shocking of material as a measure of speculation to get more prices of goods in future.

5) Safety Stock- is held in stock to protect against the uncertainties of demand and supply

Factors determining Inventory Level

I. Accuracy of sales forecastingII. Cost of inventoryIII.Customer servicesIV.Ability of distributionV. Mode of transport usedVI.Lead time involved

Elements of Inventory Cost • Procurement Cost- it includes the

following-i. Cost of order processing from the

indenting stage to accounts and finally to purchase.

ii. Expenses incurred on transportation of goods purchased.

iii. The cost of receiving, handling, inspecting, and processing material at the receiving end.

Contd.

• Carrying cost- is the total cost of all expenses involved in maintaining inventory. It includes the following-

i. The cost of capital invested in inventories.

ii. Space rent paid for storage of goods

Contd.

Iii The loss of material due to deteriorations and obsolescence.

Iv Cost of breakage in handling of material.

Contd.

• Out-of Stock Costs- occurs when demand is normal but ordered goods are received later.

Inventory Management

• It involves the following decisions-I. Which goods should be purchased?II. When should be purchased?III.At what frequency should be purchased?IV.In what quantity should they be

purchased each time?

Goals of Inventory Management

• Providing adequate consumer service• Minimizing the firm’s Investment in

Inventory

Inventory Control

• Is a Supervisory of supply storage and accessibility of items in order to ensure an adequate supply without excessive over supply.

• Management has to keep a constant watch on the inventory movement , so as to see that they conform to pre-determined levels.

Methods of Inventory Control

1) Setting stock levels-it refers to the level of stock that should be maintained.

a) Minimum stock level- it is that stock below which the stock is not allowed to fall.

Minimum Stock level= Reorder level- ( Average rate of Consumption* Average lead time)

Contd.

b) Reorder Level-it is that level of stock that lies between the minimum stock and the maximum stock to be held. It is the level of inventory at which purchase requisition should be issued and purchase order made.

c) Maximum level

• It is that level beyond which the stock shall not stretch at any time.

• Maximum stock level= Reorder level+ Reorder quantity –( Minimum rate of consumption *minimum lead time)

2) Economic Order quantity• Is the quantity at which the sum of inventory

carrying cost and order-processing costs are minimum.

• Q= 2*D*S/C( Under root)• Q = Economic quantity per order• D= Annual requirement of an item in term of units• S = cost of placement of an order in rupee• C= inventory carrying costs per unit per year in

rupee

Contd.

• The basic assumptions are-i. The supply of goods is satisfactoryii. The prices of goods are stable iii. The quantity to be purchased by concern

is certainiv. The usage is at the constant rate

throughout the year

3) ABC Analysis

• The items in the store are divided into three categories namely A, B and C.

• ‘A’ class items are going to be stocked always.

• ‘B’ category items slightly lesser stock• ‘C’ minimum stock shall be held

Application of ABC analysis

• Inventory Control• Price control• Consumption control

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