MODULE 6

Inventory Management
The term inventory includes materials. Raw, in process,
finished, packaging, spares and others stocked in order to
meet an unexpected demand or distribution in future

Objectives of Inventories

1.The nature of product, nature of customer demand, and

nature of manufacturing process determine the need for
finished goods inventories
2.They do not directly go into the product but facilitate
smooth operations
3.Inventory facilitates transit and handling
4.Inventory server to isolate the supplier
5.Inventories reduce material handling cost
Inventory Cost

vInventory Cost Money include

a)Ordering Cost
b)Carrying cost
c)Out of stock or shortage stock
d)Capacity stock
1.Ordering Costs
2.
C.Cost of placing an order with a vendor of materials:
D.
(a) Preparing a purchase order.
(b) Processing payments.
(c) Receiving and inspecting the material.

B. Ordering from the plant:

(a) Machine set-up.

(b) Start-up scrap generated from getting a production run
started.
2. Carrying Costs

A.Costs connected directly with materials:

B.
(a) Obsolescence.
(b) Deterioration.
(c) Pilferage.

B. Financial Costs

(a) Taxes
(b) Insurance.
(c) Storage
(d) Interest (as the cost of capital borrowed to acquire and
maintain the inventories).
3. Out-of-stock Costs
A. Back ordering.
B. Lost sales.

4. Capacity Costs
A. Overtime payments when capacity is too small.
B. Lay-offs and idle time when capacity is too large

Inventory Management and Control involves

1.Development and Administration policies
2.Systems and procedures
3.Customer service requirement
4.Production scheduling
5.Purchasing and traffic
Factors influencing Inventory Management & Control

1.Type of Product
2.Type of manufacture
3.Volume

Benefits of Inventory Management and Control :-

(i) Inventory control ensures an adequate supply of

materials and stores, minimizes stock-outs and shortages
and avoids costly interruptions in operations.
(ii) It keeps down investment in inventories, inventory
carrying costs and obsolescence losses to the minimum.
(iii) It facilitates purchasing economies through the
measurement of requirements on the basis of recorded
experience.
(iv) It eliminates duplication in ordering or in replenishing
stocks by centralizing the source from which purchase
requisitions emanate.
(v) It permits a better utilisation of available stocks by
facilitating inter-department transfers within a company.
statements.
(vi) It provides a check against the loss of materials through
carelessness or pilferage.
(vii) It facilitates cost accounting activities by providing a
means for allocating material costs to products, departments
or other operating accounts.
(viii) It enables the management to make cost and
consumption comparisons between operations and periods,
(ix) It serves as a means for the location and disposition of
inactive and obsolete items of stores.
(x) Perpetual inventory values provide a consistent and
reliable basis for preparing financial

Process of Inventory Management and Control

4 steps are involved
1.Determination of optimum inventory levels and
procedures of their review and adjustments
2.Determination of degree of control that is required for best
results
3.Planning and design of inventory control system
4.Planning of the inventory control organisations
a. Optimum Inventory Levels
vToo Much inventory locks working capital
vExcess Inventory Guarantee uninterrupted supply of
materials to meet the production schedule
vLess inventory causes risk of stock out

To over come these problems

vTrend of sales must be watched closely
vClose study of manufacturing cycle

b. Degree of control
vClassify inventory on the basis of value
vCalled ABC classification
A – Class Items – High in value – low in Quantity
B – Class Items – Low in value – High in Quantity
C – Class Items – More or Less equal in value and quantity

Class A Item – Tight control – Maintaining record of

purchases and delivery from inventory to production
department

Class C Item – Ordered in large amount and no records are

maintained for its movement

Class B Item – Not tightly controlled but are not neglected

C. Planning and design of the inventory system
Two approaches to inventory system
a.The fixed order quantity system (Q- System)
b.Fixed order periodic system(P- System)

Q System
vFixed quantity of materials are added when stock on
hand reaches re-order point
vThe Fixed quantity is called EOQ(Economic order
quantity)
v
Advantages
1.Each material is procured in the most economical
quantity
2.Drives the attention of purchasing personnel
3.Positive control is achieved to maintain total inventory
investment
Dis Advantages
1.Order are raised at irregular time intervals

Fixed order period system (or) P- System

vStock position of each item of material is regularly
reviewed
vWhen the stock is not sufficient until to meet production
operation until the next scheduled review. Then order is
placed
vFrequency of review differs from different firm
Advantages
1.Ordering and inventory costs are low
2.Supplies offer attractive discounts as sales are guaranteed
3.Useful for materials which are irregular or seasonal usage

Dis-Advantages
vPeriodic review to be conducted

d) Organizational Arrangement:-
vInventory control function is assigned to materials
management where integrated material management is in
practice
vAttaching inventory and control department so that timely
requisition for replenishment of stocks are used in
production operation
Inventory Control Techniques
1)Always better control(ABC) Classification
2)
3)High medium and low (HML) classification
4)
5)Vital, essential and desirable (VED) classification
6)
7)Scarce, difficult and easy to obtain(SDE)
8)
9)Fast moving, Slow moving and non-moving (FSN)
10)
11)Economic order quantity(EOQ)
12)
13)Max-Minimum System
14)
15)Two bin system
Material requirement Planning (MRP)
Just in Time (JIT)

Inventory Catalogue
vPrepared after all inventory items have been described
vTwo important purpose
a)Medium of communication
b)Inventory control operations staff
c)
1)ABC Analysis
vAlso called as selective inventory control
method(SIM)
vDerived from vilfredo pareto, Italian economist and
sociologist
Procedure of developing ABC analysis
1. List each item carried in inventory by number or some
other designation.
2. Determine the annual volume of usage and rupee value of
each item.
3. Multiply each item's annual volume of usage by its rupee
value.
4. Compute each item's percentage of the total inventory in
terms of annual usage in rupees.
5. Select the top 10 per cent of all items which have the
highest rupee percentages and classify them as 'A' items.
6. Select the next 20 per cent of all items with the next
highest rupee percentages and designate them 'B' items.
7 The next 70 percent of all items with the lowest rupee
percentages are 'C' items.
Items A Items B Item C
1. Very strict control 1. Moderate control 1. Loose control
2. No safety stocks (or very low) 2. Low safety stocks 2. High safety stocks
3. Frequent ordering or weekly 3. Ordering once in 3 months 3. Bulk ordering, once
deliveries in 6 months
4. Weekly control statements 4. Monthly control statements 4. Quarterly reports
5. Maximum follow-up and expediting 5. Periodic follow-up 5. Follow-up in
exceptional cases
6. Rigorous value analysis 6. Moderate value analysis 6. Minimum value
analysis.
7. As many sources as possible for each 7. Two or more reliable sources 7. Two sources for
item each item
8. Accurate forecasts in materials 8. Estimates based on past data 8. Rough estimates
planning
9. Minimisation of waste, obsolete, and 9. Quarterly review 9. Annual review
surplus (review every 15 days)
10. Individual postings 10.Small group postings 10. Group postings
11. Central purchasing and storage 11.Combination purchases 11. Decentralized
purchasing.
12. Maximum efforts to reduce lead 12.Moderate efforts 12. Minimum efforts
time
13. To be handled by senior officers 13.To be handled by middle 13. Can be fully
management delegated.
2) HML Classification

vHigh medium low classification same procedure as is

adopted in ABC classification
v
vUnit value is criterion and not annual consumption value
v
vItems are arranged in descending order, Management fixes
the value
v
vUseful for keeping control over consumption at
department levels, for deciding of physical verification and
for controlling purchase
3) VED Classification
vTo determine the criticality of an item and its effect on
production and other services
vClassification of spare parts
vV- Vital, E – Essential, D- Not so essential.
vV- Item – Large stock of inventory is maintained
vD – Item – Minimum stock is enough

4) SDE – Classification
vS – Scarce, D- Difficult items, E- easy to acquire
vUsed on purchasing strategies
5) FSN Analysis

vF – Fast moving, S- Slow Moving, N – Non Moving

vBased on the pattern of issues from stores
vControlling Obsolescence
vTo carry out this analysis , the date of receipt or the last
date of issues, whichever is later, is taken to determine
the no of months.
vUsually the items are grouped in periods of 12 months
vIdentifying active items which are to be reviewed
regularly and surplus items should be examined further
vNon-Moving item are to be examined further and their
disposal can be considered
6) Economic Order Quantity EOQ :-
vWhat should be the Order Size ?
vEOQ solves the problem of the materials manager
vEOQ or Opt Q is the order size at which the total cost
comprising cost plus carrying cost is the least
v
EOQ is calculated using the mathematical formula,
Following assumptions to be made

1. Demand for the product is constant and uniform

throughout the period,
2. Lead time (time from ordering to receipt) is constant,
3. Price per unit of product is constant,
4. Inventory holding cost is based on average inventory,
5. Ordering costs are constant, and
6. All demands for the product will be satisfied (no back
orders are allowed).

TC = DC + D S + Q H
Q 2
TC = Total Cost
D – Annual Demand
C- Purchase cost per unit
Q – Quantity to be ordered
S – Cost of planning an order
H – Holding cost per unit of average inventory

There fore EOQ =

vEOQ – Use full in deciding the order size

vFrequency at which it is placed
vApplicable for both single or group of stock items
v
Weakness of EOQ Formula :-
1.
2.Erratic usages
3.Faculty basic information
4.Costly calculation
5.No of Formula is a substitute for commonsense
6.EOQ ordering must be tempered with judgment

7) Minimum – Maximum Technique

vUsed in manual inventory control systems
vMinimum quantity = Same way as any re-order point
vMaximum Quantity = Minimum quantity + Optimum
lot-size
vOrder is placed when the inventory goes below the
minimum level
vEffectiveness depends on method and precision with
which Max and Min parameter are established

Two Bin Technique

vTwo bin’s are place
v1st bin contain stocks, enough to last from the date a new
order is placed until it is received in inventory
v2nd bin contains quantity of stock, enough to satisfy
probable demand during the period of replenishment
vFirst stocks in bin 1 is used and after it is finished, order
is placed and stock in bin 2 is used until we get the
materials
Advantages

1)Possesses a high degree of automacy

Disadvantages

vRequirement of additional storage

Facilities

vPractical difficulty in keeping the two stocks properly

separated
Material requirement planning – MRP

vHaving stock always in hand

vHighly dependent on computer system
10) Just in Time (JIT)

vKnown as ZIPS ( Zero Inventory production systems)

vOriginated from motomachi plant of Toyota in Japan
vIt reduces no of suppliers for an organization and long
time relationship is made with them
vCertain condition : all the required items should be
present near the organisation
Measurement of the effectiveness of inventory
management