Meaning of Inventories

Inventory represents aggregate of those items which

are either held for sale in ordinary course of business
or are in the process of production for sale (i.e work in
progress) or yet to be utilised/consumed in the
production of goods and services.
 ITEMS OF INVENTORIES

• Raw Material : basic raw material from which

components, parts and products to be
manufactured
• Finish Parts : Bought-out parts, Parts
manufactured from raw material.
• Work in progress: Materials in partially
completed conditions.
• Finish goods: final product to be sent to market
• Tools : Used on machine or hand tools.
• Machine Spares: Consumable spares,
Replacement spares, Rotable spares, insurance
spares.
 Reason of carrying inventories
• To economies on buying/Manufacturing
cost.
• To keep pace with changing marketing
conditions.
• To satisfy demand during period of
replenishment.
• To take care of contingencies( Prevent
stock outs).
• To stabilize production
• To prevent loss of sale: Finish good
availability in market.
• Other business constraint: suppliers
condition of min qty, Government
regulations, seasonal availability.
 Objectives of Scientific inventories
control.
• Continuity of productive operations
• Effective use of capital
• Reduction of administrative workload
• Service to customers
• Economy in purchasing
• Reduction of risk of loss
• Practical system
• Zero discrepancy between physical stock and
book balance
• Administrative simplicity.
 Scientific Inventory Management
systems.
• ABC ANALYSIS
• HML ANALYSIS
• VED ANALYSIS
• SDE ANALYSIS
• FSN ANALYSIS
• XYZ ANALYSIS
• S-OS ANALYSIS
 ABC ANALYSIS
• Based on Principle : Vital few : Trivial many.

• A items: Statistically can be found that 5-10% of

total item account for 70-75% of total money
spent on materials. These items require rigid
control and to be stocked in smaller quantity.
B- Items: These items are generally 10-15% of total
items and represent 10-15% of total expenditure on
materials. The control need not to be rigid and detailed
as compared to A

C-Items: These counts to 70-80% of items and 5-10%

of total annual expenditure, hence insignificant items.
The procurement policy reverse to A class items.
 Steps in ABC Analysis
1)Prepare list of items and estimate annual
consumption.
2) Determine Unit Price (Cost) of each item.
3)Multiply each annual consumption by its unit
price to obtain its annual consumption in rupees
(Annual usage).
4)Arrange items in the descending order of their
annual usage starting with highest usage down
to smallest usage.
5)Calculate annual usages and express the same as
cumulative usages percentage. Also express the
number of items into cumulative items percentage.

6)Graph cumulative usage percentage against

cumulative item percentages and segregate items
into A,B and C categories.

7)Decide the policies of control for three categories.

ITEM ANNUAL PRICE(COSTPER
DESCRIPTION CONSUMPTION UNIT)
NITRIC ACID 4000 10/LITRE
XYLENE 600 10/KG
DRUMS 2000 16/NO
PARAFFIN WAX 3500 1/KG
BIOLAC 50 8/KG
METHYLENE 6000 6/KG
ETHYL A 2400 5/KG
D' SPIRIT 4200 1/LITRE
HANDRAST 50 10/KG
CASTOR OIL 100 7/KG
CAMPHOR 80 40/KG
EASTERGUM 50 8/KG
AMYL A 20 10/KG
CARTONS 2000 0.15/PCS
LINSEED OIL 30 6/KG
TALC POWDER 80 0.25/KG
RED OXIDE 200 0.5/KG
TOLUENE 750 4/KG
BUTYLE ACETATE 350 6/KG
ALSAT 20 10/KG
ITEM ANNUAL PRICE(COSTPER ANNUAL RA
DESCRIPTION CONSUMPTION UNIT) USAGE NK
NITRIC ACID 4000 10/LITRE 40000 1
XYLENE 600 10/KG 6000 5
DRUMS 2000 16/NO 32000 3
PARAFFIN WAX 3500 1/KG 3500 7
BIOLAC 50 8/KG 400 13
METHYLENE 6000 6/KG 36000 2
ETHYL A 2400 5/KG 12000 4
D' SPIRIT 4200 1/LITRE 4200 6
HANDRAST 50 10/KG 500 12
CASTOR OIL 100 7/KG 700 11
CAMPHOR 80 40/KG 3200 8
EASTERGUM 50 8/KG 400 14
AMYL A 20 10/KG 200 16
CARTONS 2000 0.15/PCS 300 15
LINSEED OIL 30 6/KG 180 18
TALC POWDER 80 0.25/KG 20 20
RED OXIDE 200 0.5/KG 100 19
TOLUENE 750 4/KG 3000 9
BUTYLE ACETATE 350 6/KG 2100 10
ALSAT 20 10/KG 200 17
ITEM ANNUAL PRICE(COSTPER ANNUAL CUMULATIVE ANNUAL CUM CATEGOR
DESCRIPTION CONSUMPTION UNIT) USAGE USAGE % Y
NITRIC ACID 4000 10/LITRE 40000 40000 27.5 A
METHYLENE 6000 6/KG 36000 76000 52.3 A
DRUMS 2000 16/NO 32000 108000 74.5 A
ETHYL A 2400 5/KG 12000 120000 82.7 B
XYLENE 600 10/KG 6000 126000 86.8 B
D' SPIRIT 4200 1/LITRE 4200 130200 89.9 B
PARAFFIN WAX 3500 1/KG 3500 133700 92.2 C
CAMPHOR 80 40/KG 3200 136900 94.4 C
TOLUENE 750 4/KG 3000 139900 96.2 C
BUTYLE ACETATE 350 6/KG 2100 142000 97.9 C
CASTOR OIL 100 7/KG 700 142700 98.4 C
HANDRAST 50 10/KG 500 143200 98.7 C
EASTERGUM 50 8/KG 400 143600 99 C
BIOLAC 50 8/KG 400 144000 99.3 C
CARTONS 2000 0.15/PCS 300 144300 99.5 C
AMYL A 20 10/KG 200 144500 99.7 C
ALSAT 20 10/KG 200 144700 99.8 C
LINSEED OIL 30 6/KG 180 144880 99.9 C
RED OXIDE 200 0.5/KG 100 144980 100 C
TALC POWDER 80 0.25/KG 20 145000 100 C
NO OF % OF RANGE OF ANNUAL TOTAL ANNUAL % ANNUAL
ITEMS ITEMS USAGE USAGE USAGE CATEGORY

3  15 ABOVE RS.30000 108000 74.5 A

3  15 BETWEEN 4000-30000 22200 15.4 B

14  70 BELOW RS 4000 14800 10.1 CATEGORY

POLICY OF CONTROL FOR A B C
ITEMS
• Degree of control
• Ordering procedures
• Staggering of delivery schedule
• Stock records
• Priority Treatment
• Safety of stocks
• Price Discount
• Stores layout
 H M L ANALYSIS
• Similar to ABC analysis except for the
difference that instead of usage value,
Price criterion is used. The items under
this analysis are classified into three types
which are called HIGH, MEDIUM and
LOW.
• Unit price is taken as the bases for
classification of these items.
 Application of H M L Analysis
• Assess storage and security requirements.
• Control over consumption at Dept Head
Level.
• Determine frequency of stock verification
• To evolve buying policies to control
purchase.
• Delegation of authorities to purchase.
 VED ANALYSIS
• VED analysis represents classification of item
based on criticality. The analysis classifies the
items into three group called VITAL,
ESSENTIAL AND DESIRABLE.
• Vital category include those items for want of which
production will come to halt. Essential group includes
those items whose stock out cost is high and Desirable
group comprises of items which do not cause immediate
loss of production and cause minor disruption for a short
durations.
• Item may be vital due to
a) Non availability can cause serious prod
loss
b) Lead time for Procurement is large
c) if it is non-standard item and is
procured to buyers decision.
d) the source of supply is one and remote
located.
 STEPS IN VED ANALYSIS
• Identify the factors to be considered for VED
analysis like Lead time, Stock out cost, source of
supply etc.
• Assign points/weightages to the factors
according to their imp in companies.
• Divide each factors into three category and
allocate point to each category. Usually the
weightages for three factors should be in
multiples.
• Prepare categorisation plan which provides
basis of classification.
• Evaluate items one by one against each
factor and assign points to the item
depending.
• Place the items into V, E, D categories
depending on points scored by them.
SR.
FACTOR FIRST DEGREE SECOND DEGREE THIRD DEGREE
NO
IN EVENT OF
NON- BETWEEN RS X TO Y
1 ABOVE RS X( 30 ) ABOVE RS Y( 90 )
AVAILABILTY ( 60 )
(30)
LEAD TIME FOR
2 PROCUREMENT 1-4WEEKS( 30 ) 4-8 WEEEKS( 60 ) OVER 8 WEEKS ( 90 )
(30)
PRODUCED TO STANDARD ITEMS
NATURE OF COMMERCIAL ITEMS PRODUCED TO PRODUCED TO BUYERS DESIGN
3
ITEM (20) OR OFF SHELF SUPPLIERS DESIGN ( ( 60 )
AVAILABILITY(20) 40 )
SOURCE OF
4 LOCAL(20) OUTSTATION ( 40 ) IMPORTED ITEM ( 60 )
SUPPLY(20)
POINTS CLASSIFICATION

100 - 160 DESIRABLE

161 - 230 ESSENTIAL

231 - 300 VITAL