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 purchaseHow much to purchaseFrom 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