A Presentation on INVENTORY MANAGEMENT

Presented by: Spandana Suman Srihari

 The

need for inventory. It also provides a cushion for future price fluctuations. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories.

 The

dictionary meaning of inventory is stock of goods, or a list of goods. The work Inventory is understood differently by various authors, in accounting language it may mean stock of finished goods only. In a manufacturing concerns, it may include raw materials, work in process and stores, etc.

Although holding inventories involves blocking of a firms funds and the cost of storage and handling, every business enterprise has to maintain a certain level of inventories to facilitate uninterrupted production and smooth running of business. There are two main purpose or motives of holding inventories. The Transaction Motive which facilitates continuous production and timely execution of sales orders. The Precaution Motive which necessitates the holding of inventories for meeting the unpredictable changes in demand and supplies of materials.

The various costs and risks involved in holding inventories are as below:
Capital Costs: Maintaining of inventories results in blocking of the firms financial resources. The funds may be arranged from own resources or from outsides. In the former case, there is an opportunity cost of investment while in the later case, the firm has to pay interest to the outsides.

i.

ii.

Storage and Handling costs: The storage costs include the rental of the godown, insurance charges, etc.
Risk of Price Decline: This may be due to increased market supplies, competition or general depression in the market. Risk of Obsolescence: The inventories may become obsolete due to improved technology, changes in requirements, change in customers tastes, etc. Risk Deterioration in Quality: The quality of the materials may also deteriorate while the inventories are kept in store.

iii.

iv.

v.

1.

To ensure continuous supply of materials, spares and finished goods so that production should not suffer at any time and the customers demand should also be met. To avoid both over-stocking and under-stocking of inventory.

2.

3.

To maintain investments in inventories at the optimum level as required by the operational and sales activities.
To keep material cost under control so that they contribute in reducing cost of production and overall costs. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases.

4.

5.


1. 2.

3.
4. 5. 6.

The following are the important tools and technique of inventory management and control. Determination of stock levels. Determination of safety stocks. Selecting a proper system of ordering for inventory. Determination of economic order quantity. A.B.C. Analysis. V.E.D. Analysis.

Carrying of too much and too little of inventories is detrimental to the firm. If the inventory level is too little, the firm will face frequent stock-outs involving heavy ordering cost and if the inventory level is too high it will be unnecessary tie-up of capital. Therefore, an affective inventory management requires that a firm should maintain an optimum level of inventory where inventory costs are the minimum and at the same time there is no stockout which may result in lost of sale or stoppage of production.

Safety stock is a buffer to meet some unanticipated increase in usage. The usage of inventory cannot be perfectly forecasted. It fluctuates over a period of time. The demand for materials may fluctuate and delivery of inventory may also be delayed and in such a situation the firm can face a problem of stock-out. The stock-out can prove costly by affecting the smooth working of the concern. In order to protect against the stock out arising out of usage fluctuations, firms usually maintain some margin of safety or safety stocks. The basic problem is to determine the level of quantity of safety stocks. Two costs are involved in the determination of this stock i.e. opportunity cost of stock-outs and the carrying costs.

 The

stock outs of raw materials cause production disruption resulting into higher cost of production. Similarly, the stock-out of finished goods result into the failure of the firm in competition as the firm cannot provide customer service. If a firm maintain low level of safety frequent stock-outs will occur resulting into the large opportunity costs. On the other hand, the larger quantity of safety stocks involve higher carrying costs.

 The

basic problem of inventory is to decide the reorder point. This point indicates when an order should be placed. The re-order point is determined with the help of these things: (a) average consumption rate, (b) duration of lead time, (c) economic order quantity, when the inventory is depleted to lead time consumption, the order should be placed.

 There

are three prevalent system of ordering and a concern can choose any one of these: a. Fixed order quantity system generally known as economic order quantity (EOQ) system; b. Fixed period order system or periodic reordering system or periodic review system; c. Single order and schedule part delivery system.

 Economic

order quantity is the size of the lot to be purchased which is economically viable. This is the quantity of materials which can be purchased at minimum costs. Generally, economic order quantity is the point at which inventory carrying costs are equal to order costs. In determining economic order quantity it is assumed that cost of managing inventory is made up solely of two parts i.e., ordering costs and carrying costs


1.

2.
3.

Assumptions of EOQ: While calculating EOQ the following assumptions are made. The supply of goods is satisfactory. The goods can be purchased whenever these are needed. The quantity to be purchased by the concern is certain. The prices of goods are stable. It results in stabilising carrying costs.

4. When above-mentioned conditions are satisfied, economic order quantity can be calculated with the help of the following formula: EOQ = Where
EOQ 2 AS I

unit.

A = Annual consumption in rupees. S = Cost of placing an order. I = Inventory carrying costs of one

 EOQ

and Quality Discount: Customer is offered some discount for bulk purchase or if the size of a single order is large. Thus, the price per unit of an item may decrease for buying larger quantities. The quantity discount affect inventory cost in three ways:

The quantity discount affect inventory cost in three ways: i. As the price per unit is reduced, the total price for the lot is reduced. ii. The lot size is increased, the number of offers is reduced and as a result the total ordering cost is reduced. iii. The average inventory holding increase and as a result the storage cost will increase.

 Thus,

to decide whether to avail the quantity discount or not, first of all EOQ is determined and then its total cost without quantity discount and with quantity discount is determined. In case, the total cost is less due to quantity discount the offer is accepted, other wise it is rejected.

 Classify

the items on the basis of importance and the technique of grouping is called as ABC analysis. To provide maximum overall protection against the stock outs for a given investment in safety stock.

 This

analysis prepared and checked weekly or monthly.

Category

% of items A (High Cost) 10 B (Medium Cost) 20 C (Low Cost) 70

ADVANDAGES: Preference for keeping inventory can be placed properly after ABC analysis. Store personnel are placed better with this analysis i.e their time can be utilized better. Storing, handling and delivery of materials to production department become better.

 This

classification is applicable only for spare parts. It based on the price, availability etc., For V items, a reasonable large volume of stocks might be necessary, while for D items, no Stocks are, perhaps, required be kept. For V items of A classification a close control should be kept on stock levels, but if it is a items, than large quantities mat be stored.

Thank You