INVENTORY MANAGEMENT

By

sujith.m & jithin mohan. p

Meaning and kinds of inventories

inventories are the stock of goods kept in business and meant either for sale or for consumption in the production process. It includes : Raw materials Work in progress Finished goods

Need /purpose of holding inventories

Transaction motive Precautionary motive Speculative motive Benefits : Avoiding loss of sales Availing quantity discount Reducing ordering costs Smooth running of business

Risk and cost of holding inventories

Risk of price decline Risk of obsolescence Risk of deterioration Capital costs Storage and handling costs

Inventory management
Inventory management simply refers to management of inventory. It can be defined as the overall way a company manages its inventory and its control system to manage the benefit of carrying inventory against cost.. It aims to manage inventory efficiently and effectively..

Objectives of Inventory Management

To ensure continuous supply of materials , spares and finished goods so that production may not be held up for want of supply of materials. To avoid over stocking and under stocking of inventories. To avoid wastage like theft , pilferage , leakage, spoilage etc.. To promote manufacturing efficiency and promote execution of orders to ensure better service to customers. ctd..

Ctd..
To maintain inventories at optimum level keeping in view the operational requirements. To eliminate duplication in ordering or replenishing stock. To have optimum investment in inventories, thus ensuring efficient use of capital. To purchase raw materials in bulk to avail quantity discount and to take advantage of favorable market conditions. To ensure supply of raw materials at a reasonable price without sacrificing the quantity.

Techniques Of Inventory Manangement

Order cycling system Two bin system ABC analysis Stock or inventory turnover Min max plan Kardex system JIT inventory system VED analysis Economic order quantity Fixation of various stock levels

Order cycling system

It is a technique of inventory control in which inventory of materials is reviewed periodically, like 30, 60 or 90 days. If in the course of periodic review it is observed that stock level of an item is not sufficient to meet its consumption , an order is placed to replenish its supply. The objectives is to maintain the inventory to a desired level..

Two Bin System

Two bin system is commonly used when material are relatively inexpensive or non essential. Under this system , two bins are maintained- smaller or larger. In the smaller bin , the minimum quantity is kept and the remaining quantity is kept in the larger bin. The quantity in the smaller bin is not issued as larger bin has materials ..

ABC Analysis
ABC analysis is known as always better control or control according to values or proportional parts value analysis ABC , analysis is a technique of inventory control which is aimed at directing control activities to such of categories of material as demand particular attention, It is also known as selective method of control For effective and proper control all items of stores should be classified on the basis of investment involved . A , B & C.

Stock or inventory turnover

In The words oh Kohler . Inventory turnover is defined as a ratio which measures the number of times a firms average inventory is sold during a year.

Inventory turnover = cost of materials consumed/ Average stock of materials

Min Max Plan

It is one of the oldest methods of inventory control. Under this system , minimum level and maximum level for every material are fixed . The minimum level serves as the re-order point. As soon as the stock of material comes down to minimum level , order is placed for that quantity of material which will bring the stock to the max level., it is very simple to operate and easy to understand.

Economic Order Quantity (EOQ)

EOQ

Optimal quantity that will minimize total inventory costs

D = demand in units per year C = holding cost in dollars/unit/year S = cost of placing an order in dollars Q = order quantity in units

Fixing stock levels

Quantitative limit which is something standard that does not permit to exceed the limits Maximum level Minimum level Re-order level Average stock level

Maximum level
Indicates the maximum quantity of an item of inventory which can be held in store at any time Maximum level=(re-orde level + re-order quantity) minimum consumption rate * minimum re order period)

Minimum level
Minimum level indicates the quantity balance of an item of inventory which must be maintained in hand at all times Minimum level = re order level (normal usage rate * normal re order period )

Reorder level
Level where the stock level reaches a stage indicating the replenishment of the stock as there is always a gap between placing an order and actually getting the stock Re order level = maximum usage rate* maximum reorder period

Average stock level

There are basically two stock Minimum stock Maximum /reorder quantity has to be considered Average stock level = (maximum stock level + minimum stock level)/2

VED Analysis
Inventory items are grouped into vital, essential and desirable Vital items items of inventory whose inaddequate supply may substantially damage the productive activities essential items whose non availability can not be tolerated for few hours or one day and the cost of production lost is high

 Desirable items which do not have any immedite impact on production , hence these may or may not be maintained Thus , VED analysis does not consider the utility of the inventory items on the basis of value but on their impact on the production

JIT
Just in Time Inventory is the minimum inventory that is necessary to keep a system perfectly running. With just in time (JIT) inventory, The exact amount of items arrive at the moment they are needed, Not a minute before OR not a minute after.

Ctd..
To achieve JIT inventory, Managers should Reduce the Variability Caused by some Internal and External Factors. (Goldratts boys scout example Apply the pace of the slowest boy). Existence of Inventory hides the variability Most variability is caused by tolerating waste (inventory). The variability is influenced by both internal and external factors

Inventory systems

Periodic inventory system

Periodic inventory system defined as the method of recording inventory at the end of the accounting year after making a physical verification of the quantity in hand . Following steps are taken to ascertain the value of inventory Individual items of the inventory are taken by one by one and weighted , measured or counted All items are listed , priced and added so as to get the figure of inventory It is very simple and does not need various records to be maintained and some disadvantages are it involves stoppage of business operations for a number of days till stock taking is complete, it does not provide the information regarding inventory in hand on a continuous basis

Perpetual inventory system

It is defined as the system of recording inventory after each receipt and issue. Under this system , stock registers are regularly maintained . Stock registers give the balance of inventory at any time desired. Some of the advantages are it does not require stoppage of business operations for inventory valuation , Discrepancies are easily located and , thus , corrective actions can be taken promptly , The system facilitates inventory control and avoids over investments in inventories through continuous stock taking And some of the disadvantages are it requires elaborate organization and records , it is an expensive system

Tools of perpetual inventory system

Bin card Stores ledger Continuous stock-taking

Bin card
Bin means container , rack , space or shelf where goods are stored by the storekeeper . To each bin a card is attached to show the stock position of the bin , It is known as bin card. It may defined as a quantitative record which shows information relating to the physical movement of material ,i.e. receipt , issue and balance of materials minimum levels , maximum level ordering level etc..

Stores ledger
Stores ledger is akin to bin card . Stores ledger may be defined as a record which shows information relating to movements of material in quantity as well as in value i.e. receipts issues and closing balances of materials at a particular point of time . Stores ledger is one of the basic records for material accounting. For each kind and class of material, a stores ledger is maintained .

Continuous stock taking

It may defined as a process of physical verifications of each and every item of stores a number of times of each year . The times of stores are verified by counting , weighting or measuring and compared with bin card balances.

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