INVENTORY

MANAGEMENT
Seminar taken by

Jagan. P
Suresh Rao
vijayKumar. A
Vinoth. G
 INTRODUCTION

MEANING OF INVENTORY:
 The meaning of inventory is ‘stock of goods’. In
accounting language it may include:
1.RAW MATERIAL: They are required to carry out
production activities uninterruptedly.

2.WORK-IN-PROGRESS: It is a stage of stocks between

raw material & finished goods.
3.CONSUMABLES: These are needed to smoothen
the process of production.

4.FINISHED GOODS: These are the goods which

are ready for the consumers.

5.SPARES: Form a part of inventory.

 Purpose/ Benefits of Holding Inventories

• Transaction Motive – to facilitate Continuous

Production.
• Speculative Motive – for taking advantage of price
fluctuations, saving in re-ordering costs and quantity
discounts, etc.
• Precaution Motive – for meeting unpredictable
changes in demand and supplies of materials
 Inventory Management
• An efficient system of inventory management
will determine

What to purchase
How much to purchase
From where to purchase
Where to store
 Objectives Of Inventory Management
 To ensure continuous supply of raw material, spares
and finished goods.

 To avoid both overstocking and under stocking of

inventory.

 To maintain investments in inventories at optimum

level.
OBJECTIVES OF INVENTORY
MANAGEMENT(cntd…)

 To eliminate duplications in orders

 To keep material cost under control.

 To minimize losses through wastage and

damages .
Tools of Inventory Management

1. Stock Levels

2. Safety Stocks

3. Ordering System of Inventory

4. Determination of EOQ

5. ABC Analysis
6.VED Analysis

7.Inventory Turnover Ratio

8.Aging Schedule of Inventories

9.Classification & Codification on Inventories

10.Inventory Reports
Techniques of inventory management

Determination of stock level:

Minimum level=rerdering level-(normal
consumption * normal reordering period )

Maximum level=reordering level+ reordering

quantity – (minimum consumption * minimum
reordering period )

Danger level=consumption * maximum

reorder period
Determination safety stocks:
 Safety stock is a buffer to meet some unanticipated
increase in usage.

TWO COST ARE INVOLVED IN THE DETERMINATION

1.OPPORTUNITY COST OF STOCK OUTS

2.CARRYING COST

 INVENTORY TURNOVER RATIO:

 INVENTORY TURNOVER RATIO=COST OF GOOD

SOLD /AVERAGE INVENTRY AT COST
Economic Order Quantity:

 Economic order quantity is the size of the lot to be

purchased which is economically viable.

EOQ IS MADE UP OF TWO PARTS :

1.ORDERING COST: These cost are associated with the

purchasing or ordering of materials.

2.CARRYING COST: These are the costs for holding the

inventories.
A-B-C ANALYSIS:
 The materials are divided into three categories viz,
A ,B &C

Group-A:

 Under this almost 10% of the items contribute to

70% of value of consumption.
Group-B:
 Under this category 20% of the items contribute
about 20% of value of consumption.

Group-C:
 Under this category about 70% of items of
material contribute only 10% of value of
consumption.
VED ANALYSIS:
 The VED analysis is used generally for spare parts. The
requirements and urgency of spare parts is different
from that of materials. Spare parts are classified as
vital(V),essential(E),desirable(D).
 VITAL SPARE PARTS:

 These are must for running the concern smoothly.

 ESSENTIAL SPARE PARTS:

 Necessary but stock kept at low figures.

 DESIRABLE SPARE PARTS:

 May be avoided at times.

INVENTORY REPORTS:
 The management is kept informed with the
latest stock position of different items by
preparing periodical inventory reports. on the
basis of these reports management takes
corrective action wherever necessary.
 ORDERING SYSTEMS OF INVENTORY:

 There are three prevalent systems of ordering and a

concern can choose any one of these:
1.Fixed order quantity system generally known as economic order
quantity system.

2.Fixed period order system or periodic re-ordering system or

periodic review systems.

3.Single order and scheduled part delivery system.

LEAD TIME:

 Lead time is the period that elapses between the

recognition of a need and its fulfillment. There is a
direct relationship between lead time and inventories.

 Lead time has two components:

1.administrative lead time

2.delivery lead time

 INVENTORY TURNOVER RATIO

 Inventory turnover ratio=cost of good sold*average

inventory at cost or

=net sales*(average inventory)

Valuation of Inventory

 FIFO
 LIFO
 Average Price Method
 Base Stock
 Standard Price & Market Price