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INVENTORY

MANAGEMENT

Meaning and Definition


of Inventory
Management
Inventory is an idle stock of physical goods that
contain economic value, and are held in various
forms by an organization in its custody awaiting
packing, processing, transformation, use or sale in
a future point of time.
Inventory management is the overseeing and
controlling of the ordering, storage and use of
components that a company will use in the
production of the items it will sell as well as the
overseeing and controlling of quantities of finished
products for sale.

Forms of Inventory

The major forms of inventory are:


1. Raw Material.
2. Work in Progress.
3. Finished Goods.

Objectives of inventory
management
The major objectives of inventory
management are:
a. Maximum satisfaction to
customer.
b. Minimum investment in inventory.
c. Achieving low cost plant
operation.

Benefits and Costs of


Holding Inventory
Benefits : 1. Smooth production
2. Sales :
3. To avail quantity discounts
4. Reducing ordering Costs and time
5. Reduce risk of production stoppages

Costs associated with inventories


1. Material costs
2. Ordering Cost
3. Carrying Costs

Inventory Management
Techniques
There are many techniques of
management of inventory. Some of
them are:
1. ABC System
2. EOQ System
3. Material Levels etc.

Inventory Management
Techniques
1. ABC System: ABC analysis classifies all the inventory
items in an organization into three categories.
A: Items are of high value but small in number. A items
require strict control.
B: Items of moderate value and size which require
reasonable attention of the
management..
C: Items represent relatively small value items and require
simple control.
Since this method concentrates attention on the basis of
the relative importance of various items of inventory it is
also known as control by importance and exception. As the
items are classified in order of their relative importance in
terms of value, it is also known as proportional value
Analysis.

Inventory Management
Techniques
2.Economic Order Quantity:
EOQ refers to the optimal order size that will result in the lowest
ordering and carrying costs for an item of inventory based on its
expected usage.
EOQ is defined as the order quantity that minimizes the total cost
associated with inventory management.
It is based on the following assumptions:
1. Constant or uniform demand
2. Known demand or usage
3. Constant Unit price
4. Constant Carrying Costs
5. Constant ordering cost

Inventory Management
Techniques
Economic Order Quantity:
where,
C= Annual Consumption of materials in Units
O= Ordering Cost Per Order
i= Carrying Cost in %

Inventory Management
Techniques
3. Material Levels :
Maximum Level: Maximum level is that level above
which stock of inventory should never rise.
Maximum Level = Ordering level (MRC x MDP) +
standard ordering quantity.
Where, MRC = minimum rate of consumption, MDP=
minimum lead time.
Minimum Level: Minimum level is that level below
which stock of inventory should not normally fall.
Minimum level = OL (NRC x NLT)
Where, OL = ordering level, NRC = Normal rate of
consumption,
NLT = Normal Lead Time

Inventory Management
Techniques
Ordering Level: Ordering level is that level at which
action for replenishment of inventory is initiated.
Ordering Level = MRC X MLT
Where, MRC = Maximum rate of consumption, MLT =
Maximum lead time.
Average stock level
Average stock level can be computed in two ways
1. minimum level + maximum level
2. Minimum level + 1 /2 of reorder quantity
Re order Point: The re order point is that
inventory level at which an order should be placed to
replenish the inventory.
Re order point = lead time x Average usage

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