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INVENTORY MANAGEMENT byDr.K.P.Malathi ShiriInventory = raw material work-in -progress + finished goods
Fundamentals of Inventory Management Maintaining sufficient stock levels for
uninterrupted production schedule. Maintaining sufficient supply of finished
goods for unaffected sales. Minimising the total cost of inventory
maintenance.
Motives for holding Inventory
Transaction Motive – to match the time lag
between demand and supply of raw materials.
Precautionary Motive – to hold inventory against
unpredictable risks like strike, short supply, power
cuts, lengthy import procedures
Speculative Motive – to benefit from quantity
discounts due to bulk purchasing or anticipated price
hikes
Benefits of holding inventory Avoiding loss of sales Trade discounts Reducing ordering costs Uninterrupted production Reducing the risks of production
shortages
Risks of holding excessive inventory Price decline Obsolescence Increased Costs of purchase, ordering and
carrying Quality costs like cost of replacing products
after shipment; cost of defective parts; cost of vendor development, and inspection costs
Objective of Inventory Management To determine the optimum level of
inventory, by considering the costs:- Carrying cost – is the cost per unit of
holding/maintaining raw material/WIP/FG(a) Storage costs – the cost of storing one
unit of raw material by the firm.(eg) rent of space occupied; air-conditioning costs; insurance costs; warehousing and handling costs; cost of pilferage
Contd…. (b) Cost of financing
It includes funds used to purchase/ production of inventory, including any explicit costs like interest on borrowings.Total carrying cost is variable and varies with the level of inventory carried.
Techniques of Inventory Management EOQ Model which is based on the
following assumptions:- The usage rate is even throughout the year There is no time gap between placing an
order and getting its supply The cost per order and cost of carrying
inventory are fixed The only 2 costs involved are the cost of
carrying the inventory and ordering costs.
ABC Analysis (Always Better Control) Category A – 10% of the items covering 75%
of the value Category B – Lies between A and C - 20%
items representing 15% of the value Category C – large number of items of small
value – 70% of the items covering 10% of the value
Merits of ABC Analysis Better control on costly items Helps to control the Stock Turnover
Ratio between 6 to 12 times in a year. Inventory maintained at optimum level Storage costs are reduced
Contd… Determination of Stock Levels – like re-order level Minimum level Maximum level Average level EOQ Danger level
JIT (Just in Time) System Minimises stock holding Creates a good rapport with the
suppliers Results in savings in cost and
investment Reduces the clerical costs of recording
stores
VED ANALYSIS Vital- stock out costs very high Essential – stock out can be managed
for a few hours only- cost of loss is high Desirable - will not lead to production
stoppage- can hold up to a week
FSN ANALYSIS Classification based on material
consumption Also based on inventory turnover Fast moving Slow moving Non- moving
Others Min Max Method Perpetual Inventory System Bin card and Stores Ledger updated Continuous stock verification with Bin
Card Reconciliation of discrepancies Remedial measures Stock records corrected
Others Automatic Order System – done with
the help of technology to fix an “Order Point Quantity”.
Input –Output Ratio Input –output Ratio = Input in units/ output in units x 100 (answer will be in %)