INVENTORY MANAGEMENT

CONTENTS:

1)Executive summary
2)Introduction to the concept
3)Industry profile
4)Company profile
a) Back ground and inception of the company
b) Nature of the business carried
c) Vision , mission and quality policy
d)Product/services profile
e) Area of operation global/national/regional
ownership pattern
f) Competitors information
g)Infrastructural facilities
h) Achievement award
i) Workflow model (end to end)
5)Mckinseys seven S Model
a) Structure
b)Skill
c) Style
d)Strategy
e) System
f) Staf
g)Shared value
6)Research methodology
a) Title of the project
b)Statement of the problem
c) Objectives
d)Operational definitions

e) Data collection
f) Statistical tools used for research
g)Sampling techniques sampling unit, sample size
and sampling method.
h) Plan of analysis
i) Limitations
7)Data analysis and interpretation
8)Summary of the findings
9)Suggestions
10) Conclusions future growth
11) Learning experience
12) Annexure
a) Financial statements
b)Questionnaires
c) Bibliography.

EXECUTIVE SUMMARY

EXECUTIVE SUMMARY
Title of the project

A STUDY ON INVENTORY MANAGEMENT

STATEMENT OF PROBLEM
A study of inventory management at ABB LTD is undertaken in order to know
the inventory performance and position of the company and to know the
strength and weakness and to assess the profitability of the company.
Inventories constitute most significant part of assets of large majority of the
companies in India. Inventory a double edged sword is usually an asset of an
organization, if not used properly it will become liability. It is therefore
absolutely very important to manage inventories efficiently and effectively in
order

to

overcome

unnecessary

investment.

And

To

identify

the

problems/challenges involved in the Inventory Management process at ABB

ltd.

OBJECTIVES OF THE STUDY

The main objectives of the study are:-

OBJECTIVES:
1. To study the tools and techniques of inventory
management adopted at ABB Ltd.
2. To study the inventory control measures in
inventory management.
3. To study the demand forecast of inventory
management at ABB Ltd.
4. To study how ABC analysis and aging schedule
is implemented in inventory management.
5. To determine the stock level in inventory
management at ABB Ltd.
6. To identify problems related to inventory
management and to find out suitable measures to
overcome them.

7. To study the methods of valuation of inventory

on ABB Ltd.
8. To study the inventory management procedure.
9. To make a comparative study of inventory
management in last 5 years using ratio analysis
technique.
Methodology of data collection
a) Primary data
The primary data is collected by personal interviews with officials.
b) Secondary data
Files, annual reports, periodicals, manuals and text book. Which have already
been passed through the statistical process are the secondary data used.
c) Field work
This was under taken individually to collect various information regarding the
study by visiting following sections.
Stores department
Information regarding stocking of materials receipts and issues to workshops.
Inventory control procedures in various wards inside the department were
obtained.
Accounts department
Remaining all the information was obtained from accounts department through
personal interviews with section officials.
Plan of analysis
The analysis and interpretation was collected from finance department thus
processed and tabulated is in the form of tables and graphs. The table thus

obtained by calculating average, percentage, turnover ratio, graphs and diagram

in respect of the stock of raw materials sales & inventory control procedures
and thus to draw conclusion from the analysis done.

Scope of the study

This study is to find the facts and opinions of inventory management and
control at ABB plant.
In accordance with the present trends it aims mainly at finding out the
inventory control procedures at ABB.
This study gives the brief information about the inventory management of
the indo ABB ltd
The study was done by using annual reports, inventory manualetc.

Limitation of the study

Time restriction was only 30 days of project work in the organization.
The information, which was needed, could not be made public by the
organization.
The study are related to ABB ltd Bangalore only
The finding and suggestion cannot be generalized.
The study covered a wide concept hence wide collection and coverage of
information was not easily possible.

INTRODUCTION TO THE
CONCEPT

INTRODUCTION:

Every enterprise needs inventory for smooth running of its

activities. It server as a

link between the production and

distribution process. The greater a time lag, the higher the

requirement of inventory the unforeseen fluctuation of inventory
demand

and

supply

of

goods,

fluctuating

inventory

prices,

necessitate the need for inventory management.

The investment inventory constitutes the most significant

part of the current assets inventory of the under taking. Thus it is
very essential to have a proper control and management

of

inventory.

Meaning and nature of inventory

The general meaning of inventory is stock of goods or list of goods

inventory. In accounting language it means stock of finished goods.
For inventory manufacturing concern it includes raw materials, work
in progress, consumables finished goods and spares etc.

1) Raw materials:

If forms a major input inventory in organization. The quantity

of

raw materials required will be determined by the rate of

consumption.

2) Work in Progress :
The work in progress is that stage of stocks, which are in
between raw materials and finished goods.

3) Consumables :
These are the material, which are needed to smoothen, the
process of production.

These do not directly go into

production, but act as catalyst.

4) Finished Goods :
These are the goods, which are ready to sale for the
consumers.

The stock of finished goods provides as bufer

between production and market.

5) Spares:
Spares also from a part of inventory.

The stocking policies

difer from industry to industry.

Inventories cost account for nearly 55 percent of the cost of

production, as it is clear from an analysis of financial statements of
large number of private and public sector organizations. So, It

essential to establish suitable procedures for proper control of

materials from the time of purchase order placed with supplier until
they have been consumed properly and accounted for.

Definition:

The term inventory refers to assets, which will be sold in future

in the normal course of business operations. The assets, which
the firm stores as inventory in anticipation of need, are raw
materials, work-in-progress/process, and finished goods.

Inventory often constitute a major element of a total working

capital and hence ft has been correctly observed, 'Good
inventory management is good financial management.

Inventory control is a system, which ensures the provision of

the required quantity at the required time with the minimum
amount of capital.

Inventories are the second largest asset category for the

manufacturing firms next to plant and equipment.

Inventory

control

includes

scheduling,

the

requirements,

purchasing, receiving and inspecting, maintaining stock records

and stock control. Inventory control is a matter of coordination.

A proper material control helps in improving the input-output
ratio.

Objective of inventory management

The main objective of inventory management are operational and
financial. The operational object means availability of materials and
spares in sufficient quantities for undisturbed

flow of production.

The financial objective means investments in inventories should not

remain idle and minimum working capital should be locked in it.
THE OTHER OBJECTIVES ARE:

1) To ensure continues supply of inventories to the production.

2) To avoid over stocking and under stocking.

3) To maintain optimum level of investment in inventories.

4) To keep material cost under control, to keep low cost of

production.

5) To eliminate duplication in ordering or replacing stocks.

6) To minimize losses through, deterioration, pilferage, wastage and

damages.

7) Designing structures for good inventory management.

8) Perpetual inventory control of materials.

9) To ensure right quality of goods at reasonable prices. Analysis of

prices cost

and value.

10) To facilitate data for short and long term planning and control of
inventory.
NEED FOR INVENTORY CONTROL:

If a cost accounting system is to be efective there must be a

proper control of inventory and supplies form the time orders
are placed with suppliers until they have been efectively
utilized in production.

Materials are equivalent to cash and they make up an important

part of the total cost. It is essential that materials should be
properly safeguarded and correctly accounted. Proper control of
material can make a substantial contribution to the effi ciency of
a business. The success of a business concern largely depends
upon

effi cient

accounting.

purchasing,

storage,

consumption

and

In

large

firm

the

planning

and

routing

department

is

responsible for arranging how and where the work is to be done

and issue instructions. It sets definite time schedules so that
necessary materials are delivered to the proper department in
proper time not too long before hand neither lest it should
interfere with other work nor after they are required as this
result in idle time.

Business firm keep inventories for diferent purposes. Every

firm big or small trading or manufacturing has to maintain some
minimum level of inventories. Based on some motives the
inventories are maintained.
a.

Transaction motives:

Every firm has to maintain some level of inventory to meet the

day-to-day requirements of sales, production process, customer
demand etc. In this finished goods as well as raw material are
kept as inventories for smooth production process of the firm.

b.
A

Precautionary motive:
firm

should

keep

some

inventory

for

unforeseen

circumstances also like loss due to natural calamities in a

particular area, strikes, lay outs etc so the firm must have some
finished goods as well as raw-materials tc meet circumstances.

c.

Speculative motive:

The firm may be made to keep some inventory in order to

capitalize

an

opportunity

to

make

profit

due

to

price

fluctuations.

REASONS AND BENEFITS OF INVENTORY:

The optimal level of maintaining inventory is a subjective

matter and depends upon the features of a particular firm,

(i)

Trading firm:

In case of a trading firm there may be several reasons for

holding inventories because of sales activities that should not
be interrupted. More over it is not always possible to procure
the goods whenever there is a sales opportunity as there is
always a time gap required between purchase and sale of
goods. Thus trading concern should have some stock of finished

goods in order to under take sales activities independent of the

procurement schedule.

Similarly, a firm may have several incentives being ofered in

terms of quantity discounts or lower price etc by the supplier of
goods. There is trading concern inventory helps in a de-inking
between sales activity and also to capitalize a profit of
opportunity due to purchase made at a discount will result in
lowering the total cost resulting in higher profits for the firm.

(ii)

Manufacturing firm:

A manufacturing firm should have inventory of not only the

finished goods, but also of raw materials and work-in-progress
for following reasons.

(a)

Uninterrupted production schedule:

Every manufacturing firm must have suffi cient stock of raw

materials in order to have the regular and uninterrupted
production schedule. If there is stock out of raw materials in
order

to

have

the

regular

and

uninterrupted

production

schedule. If there is stock out of raw material at any stage of

production process then the whole production may come to a
half. This may result in custom dissatisfaction as the goods
cannot be delivered in time more over the fixed cost will
continue to be incurred even f there is no production.

Further work-in-progress would let the production process run

smooth.

In

most of

manufacturing

concerns

the

work

in

progress is a natural outcome of the production schedule and it

also helps in fulfilling when some sales orders, even if the
supply of raw-materials have stopped.

(b)

Independent sales activity:

Inventory of finished goods is required not only in trading

concern but manufacturing firms should also have suffi cient
stock of finished goods. The production schedule is a time
consuming process and in most of the cases goods cannot be
produced just after receiving orders. Therefore, every firm has
to maintain minimum level of finished goods in order to deliver
the goods as soon as the order is received.
Costs involved in inventory:
Every firms maintains inventory depending upon requirement
and other features of firm for holding such inventory some cost
will be incurred there are as follows:

(a)

Carrying Cost;

This is the cost incurred in Keeping or maintaining an inventory

of one unit of raw materials, work-in -process or finished goods.
Here there are two basic cost involved.

(i)

Cost of storage:

It includes cost of storing one unit of raw materials by the firm.

This cost may be for the storage of materials. Like rent of
spaces

occupied

infrastructure,

by

cost

stock,
of

stock

insurance,

for
and

security,
cost

of

cost

of

pilferage,

warehousing costs, handling cost etc.

(ii)

Cost of financing:

This

cost

includes

the

cost

of

funds

invested

in

the

inventories .It includes the required rate of return on the

investments in inventory in addition to storage cost etc. The
Carrying cost include there fore both real cost and opportunity
cost associated with the funds invested in the inventories.
The total carrying cost is entirely variable and rise in directly
proportion to the level of inventories carried.

Total carrying cost = (carrying Cost per unit) x (Average

inventory)

(b)

Cost of ordering:

The cost of ordering includes the cost of acquisitions of

inventories. It is the cost of preparation and execution of an
order including cost of paper work and Communicating with the
supplier.
The total ordering cost is inversely proportion to annual
inventory

of

firm.

The

ordering

cost

may

have

fixed

component, which is not afected by the order size: and a

variable component, which changes with the order size.

Total Ordering Cost = (No.Of orders) x (cost per order).

(c)

Cost of stock out:

It is also called as Hidden cost. The stock out is the situation

when the firm is not having units of an item in stores but there
is a demand for that Item either for the customers or the
production department .The stock out refers to zero level
inventory .So there is a cost of stock out in the sense that the
firm face a situation of lost sales or back orders .The stock outs
are quite often expensive. Even the good will of firm also be
efected

due

to

customers

dissatisfaction

and

may

lose

business in case of finished goods, where as in raw materials or

work in process can cause the production process to stop and it

is expensive because employees will be paid for the time not
spend in producing goods.

The carrying cost and the ordering cost are opposite forces and
collectively. They determine the level of inventors in a firm.

Total cost =(cost of items purchased) +(Total Carrying

and ordering cost)

Valuation of Inventory:

The methods of valuing inventory are combination of the actual

cost and replacement cost plans. The chief advantage of the
cost or net realizable value rule is that it is conservative. Hence
the methods of Valuation of inventory are quite independent of
system of mincing.

In balance sheet closing stock is shown under current assets

and is also credited to manufacturing or trading accounts. The
inventories are valued on the basis as follows.

 Cost of raw materials in stock may include freight charges

and carrying cost. But such cost should not exceed market
price,

Work -in -process is generally valued at cost, which includes

cost of materials, labor. And the proportionate factory
overhead, as it is reasonable according to degree of
completion,

Cost of finished goods wound normally to be total or full

cost it includes prime cost plus appropriate amount of the

overhead. Selling and distribution cost is deducted on the
other hand work in progress may be valued at work in
progress may be Valued at work cost, marginal cost, prime
cost or, even at direct materials.

ISSUE PRICING METHODS:

There are two categories:

(i)

Cost prices:

(a)

FIFO (First in First out)

(b)

LIFO (last in first out)

(c)

Specific price

(d)

Base stock price

(e)

HIFO (highest in first out)

(ii)

Derived from cost prices:

(a)

Simple average price

(b)

Weighted average price

(c)

Periodic simple average price

(d)

Periodic weighted average price

(e)

Moving simple average price

(f)

Moving weighted average price

(iii) Notional prices:

(a)

Standard price

(b)

Inflated price

(c)

Re-use price

(d)

Replacement price

First in First out (FIFO)

This is the price paid for the material first taken into stock from
which the material to be priced could have been drawn.

Under this method stocks of materials may not be used up in

chronological order but for pricing purpose it is assumed that
items longest in stock are used up first. The method is most
suitable

for

use

where

in

material

is

slow-moving

and

comparatively high unit cost.

Advantages:

i.

Price is based on actual cost and not on basis of

approximations such as no profits or losses arises by
reasons of adopting this method.

ii.

The resulting stock balance generally represents fair

commercial valuation of stock.

iii.

It is based on traditional principles.

Disadvantages:

i.

The number of calculations in the stores ledger involved

tends to be complicated with increase in clerical error.

ii.

The cost of consecutive similar jobs will difer if the

price changes suddenly,

iii.

In times of rising prices, the charge to production is

unduly low as the cost of replacing the material will be
higher.

Last in first out (LIFO)

This is the price paid for the material last taken into stock from
which the materials to be priced could have been drawn. This
method also ensure material being issued at the actual cost. Its
use is based on the principle that costs should be as closely as
possible related to current price level. Under this method
production cost is calculated on basis on replacement cost.

Advantages:

i.

Production is charged at the most recent prices so that it is

based on the principle that cost should be related to current
price levels.

ii.

It obviates the necessity for continuously ascertaining the

replacement price.

iii.

Neither profit nor loss is usually made by using this method.

iv.

In the times of rising prices there is no wind fall profit as

would have been obtained under FIFO method.

Disadvantages:

i.
ii.

Needs more clerical work.

Compassion among similar jobs is very diffi cult.

iii.

Stock valves relating to prices of the oldest cost on hand

may be entirely out of the current replacement prices.

Weighted average price:

This is the price which is calculated by dividing the total cost of

material in the stock from which the material to be priced have
been drawn, by the total quantity of material in the stock. This
method difers from all other methods because here issue
prices are calculated on receipts of materials and not on issue
of materials. Thus as soon as new lot is received a new price is
calculated and issues are then taken.
Advantages:

i.

This method is advantageous where the price varies

widely as its use even out the efect of these wide
variations.

ii.

The basis of price calculations is a simple one involving

only the division of total amount of material in stock by
quantity in stock.

iii.

Calculation of new prices arises only when receipt of

stocks are received.

iv.

Stock records under this method give a fair indication of

the

stock values, which

analysis.

can be used

in

financial

Disadvantages:

This method is completed than simple average because it takes

into consideration the total quantities and total costs in stock.
i.

Profit or loss may be incurred as in simple average

price,

ii.

As LIFO or FIFO this method calls for many calculations,

iii.

In order to calculate the accurate value of issues the

average price must normally be calculated to four to
five decimal places.
Standard price:

It

is

the

predetermination

of

fixed

price

on

basis

of

specification of all factors afecting price like the quantity of

materials in hand and to be normally purchased and rate of
discount compared with existing price including or excluding
freight and ware housing expense.

A standard price for each material is set and the actual price
paid is compared with standard. It is paid exceeds the standard
a loss will be realized if not profit will be obtained.

Advantages:
i.
ii.

This method is easy to operate.

Comparing the actual prices with the standard price will
determine the effi ciency of purchase department.

iii.

The efect of price variations is eliminated from job

costs.
iv.

It reduces classical costs by eliminating detailed cost

records.

v.

In times of inflation or price fluctuations is very diffi cult

to fix a standard price.

vi.

This method also incurs a profit or loss on issues and

closing stock.

Inflated price:
This is the price, which includes a charge designed to cover

the cost
of contingencies or related costs
This price includes not only the cost involved in bringing
the material
to the purchases premises but also the loss due to
evaporation and
Breakage etc. as well as carrying costs.

MATERIAL PURCHASING AND PURCHASING PROCEDURE

Purchase of material is one of the important function of material

management. At times more than 50% of the total product cost is
material.

Functions of Purchase Department

1. Deciding the items to be purchased based on demand.

2.

Selection of sources of supply.

3. Collection the price information.

4. Placing the ordered.
5. Follow-up the ordered.
6. Checking the invoices.
7. Maintenance of purchase records.
8. Maintenance of vendors relations.

PURCHASE PROCEDURE
Purchasing

procedure

start

with

the

initiation

of

purchase

requisitions and ends with the receipt of materials in the stores.

CENTERIZED PURCHASING
It is most important and relevant to large organizations operating
deferent plants may or may not be located at diferent places. For a
single place organization decentralization might be feasible on a
very limited place. But where as M & M Ltd., is a multiple plants
operating organization.

In Mahindra and Mahindra Centralized purchasing procedure is

following to purchase of materials.

Centralized purchasing avoids duplications of eforts and

working at cross purpose from one plant to another.

Centralized purchasing permits consolidation of order of

materials commonly used for two or more plants.
ultimately

results

in

greater

buying

power,

The

favorable

contracts and trade agreements.

Easier to maintain the quality of purchased parts / items

through centralized testing and inspection.

It is also

possible to conduct testing and inspection facilities.

Centralized

purchasing

permits

to

avail

facilities

like

quantity discounts and cash discounts thus its helps to

reduce cost.

It is beneficial to vendor also in case the size of order

constituted major proportion of his total production capacity

INVENTORY MANAGEMENT
TECHNIQUES
Based on order
quantity

Based on the
classification

ABC
analysis

Determinati
on of stock

Determinati
on of stock

VED
analysis

Economic
order

Based on the
records

HML
analysis

Aging
schedule

Inventor
y report

Inventor
y budget

ABC ANALYSIS:

ABC analysis classifies various inventory into three sets or

groups of priority and allocates managerial eforts in proportion
of the priority the most important item are classified into classA, those of intermediate importance are classified as "class-B"
and remaining items are classified into class-C'.
The financial manager has to monitor the items belonging to
monitor the items belonging to diferent groups in that order of
priority and depending upon the consumptions.

The items with the highest value is given top priority and soon
and are more controlled then low value item. The re-rational
limits are as follows.

Category

% of Items

% of total materials

5-10

70-85

10-20

10-20

70-85

5-10

Procedure:

(i)

Items with the highest value is given top priority and

soon.

(ii)

There

after

cumulative

totals

of

annual

value

of

consumption are expressed as percentage of total

value of consumptions,
(iii)

Then these percentage values are divided into three

categories.

ABC analysis helps in allocating managerial eforts in proportion

to importance of various items of inventory.

ECONOMIC ORDER QUANTITY:

After various inventory items are classified on the basis of the

ABC analysis the management becomes aware of the type of
control that would be appropriate for each of the three
categories of the inventory items.

The determination of the appropriate quantity to be purchased

in each lot to replenish stock as a solution to the order quantity
problems necessitates resolution of conflicting goals. Buying in
a higher average inventory level will assure.

(i)

Smooth production / sale operation and

(ii)

Lower ordering or setup costs. But it will involve higher

carrying costs. On the other hand small orders would reduce

the

carrying

cost

of

inventory

by

reducing

the

average

inventory level but the ordering costs would increase, as there

is a likelihood of interruption in operations due to stock-outs. A
firm should not place either too high or small orders on the
basis

of

trade

of

between

benefits

derived

from

the

availability of inventory and the cost of carrying that level of

inventory, appropriate or optimum level of order to be placed
should be determined. The optimum level of inventory is
popularly

referred

to

as

the

economic

order

quantity

or

economic lot size. It may be defined as that level of inventory

order that minimizes the total lost associated with inventory
management. It is based on some assumptions, which are
restrictive.

a.

The firm knows with certainty the annual usage of a

particular item of inventory.

b.

Rate at which the firm uses inventory is steady over time.

c.

The orders placed to replenish inventory stocks are

received at exactly that point in time when inventories
reach zero.

d.

EOQ can be illustrated by

(i)

Trial and error approach,

(ii)

Mathematical approach.

Trial and Error approach:

In this approach the procedure of procuring the inventory is

assumed the smaller the lot the lower is average inventory and
vice versa and high average inventory would involve high
carrying costs. This approach is used for determination of EOQ
uses

diferent

permutations

and

combinations

of

lots

of

inventory purchases so as to find out the least ordering and

carrying cost combinations. The carrying cost and acquisition
cost for diferent sizes of order to purchase inventories are
computed and the order size with lowest total cost of inventory
is EOQ.

Mathematical Approach:

The EOQ quantity can use a short-cut method calculated by

following
EOQ= EOQ

2AB
C

Where,

A = Annual usage of inventory

B = Buying cost per order
C = carrying cost per unit

Limitations:

While using EOQ it should be noted that it sufers from

shortcomings, which are mainly due to the restrictive nature of
the assumptions on which it is based.

The

important

limitation

is

assumption

of

constant

consumption usage and, the instant replenishment of inventory

is of doubtful validity

There may be unusual and unexpected demand for stocks to

meet such [contingencies the firm has to keen additional
inventories like safety stocks. Another weakness is to assume
known annual inventories is open to question and there is
likelihood of a discrepancy between the actual and expected
demand leading to wrong estimate of EOQ.

VED ANALYSIS:

Vital Essential and Desirable analysis is done mainly for

control of spare parts keeping in view of the criticality to
production.

Vital spares are spare the stock-out of which even for a short
time will stop production for quite sometime. Essential spares
are spares the absence of which cannot be tolerated for more
than a few hours a day. Desirable spares are those, which are
needed, but their absence for even a week or so will lead to
stoppage of production.

THE RE-ORDER LEVEL:

The re-order level is the level of inventory at which the fresh

order for that item must be placed to procure fresh supply. The
re-order level depends upon

a)

Length of time between the placement of an order

and receiving the supply.

b)

The usage rate of the item. The inventory is

constantly being used up. The rate at which the

inventory is being used up. The rate at which the
inventory is being used up is called the usage
rate.

The reorder level can be determined as follows:

R = M+tu
R = Reorder level
M = Minimum level of inventory
T = Time gap / delivery time
U = Usage rate

The reorder level and inventory patterns have be shown as

follows:

The figure shows that if the usage rate is constant, the orders
are made at even intervals for the same amounts each time
and the inventory goes to zero just before an order is received.

Safety Stock:

The

safety

unanticipated

stock

protects

demand

for

firm
the

from

Trade

ofs

items

level

of

due

to

inventory

investment is however increased by the amount of safety stock.

Safety level is ascertained in inventory as a part because there
is always an uncertainty involved in time lag usage rate or
other factor.

Usually smaller the safety level greater the risk of stock-outs. If

stock-levels are predictable then there is a chance of stock out
occurring.

However

unpredictable

or

stock

lesser

inflows

predictable

and
it

outflows

becomes

to

are
carry

additional safety stock to prevent unexpected stock outs so

usage rate is estimated if cost is low then no safety stock is
needed.

JUST-IN-TIME INVENTORY:

The basic concept is that every firm should keep a minimum

level of inventory on hand, relying suppliers to furnish stock
just in time as and when required. JIT helps in emphasizing
suffi cient levels of stocks to ensure that production will not be
interrupted. Although the large inventories may be bad idea

due to heavy carrying JIT is a modern approach to inventory

management and the goal is essentially to minimize such
inventories and there by maximizing the turnover.

JIT system significantly reduces inventory-carrying cost by

requiring that the raw materials be procured just in time to be
placed

into

production.

Additionally

the

work

in

process

inventory is minimized by eliminating inventory is minimized by

eliminating

inventory

bufers

between

diferent

production

departments.

If JIT is to be implemented successfully there must be a high

degree of coordination and co-operation between the supplier
and manufacturer and among diferent production centers. JIT
does not appear to have any relation with EOQ however it is in
fact alters some of the assumptions of EOQ model. The average
inventory level under the EOQ model is defined as

Average inventory= 1/2 EOQ + safety level JIT attacks this

equation in two ways.
(i)

By reducing the ordering cost

(ii)

By reducing the safety stock.

The basic philosophy in JIT is that the benefits, associated with

reducing inventory and delivery time to a bare minimum
through adjustment in the EOQ model; will more than ofset the
costs associated with the increased possibility of stock-outs.