Inventory management

Definition of Inventory
1. Inventories means the stock of the product of a
company and components thereof that makes up the
product. It includes the raw materials, work in progress
and finished goods.
2. It is the physical stock of items a business or
production organization kept in hand for the efficient
running of business or its production.

Inventories are :-
1. Items in stock.
2. Usable but idle resources.
Inventory control
Process of maintaining optimum needed quantity of
inventories for the smooth operation of organization.

Classification of inventories
Inventory
Indirect
inventory
In process
inventory
Raw material
inventory

Objectives of inventory
control
The basic managerial objectives are 2 fold:-
1. Avoid over/under investment in inventories.
2. To provide right quantity and quality goods at right time at
proper value.

Objectives
of
inventory
control
Operating
objectives
Financial
objectives

Operating objectives
1. Availability of Materials: All type of material available
at all time so that production may not be held up for
want of supply of materials.
2. Minimizing the wastage : permit only uncontrollable
wastage. Avoid wastage by leakage theft,
embezzlement, spoilage( rust, dust , dirt)

3. Promotion of manufacturing efficiency: When right
type of raw material is available at the right time.
4. Better service to the customers: Maintain proper
production flow to produce sufficient finished goods to
meet the demand of of the customers

5. Control of production level: To increase or decrease the
production as per the demand as well as to maintain proper
buffer stock to meet any eventuality in difficult times.
6. Optimal level of inventories: It is done in view as per the
operational requirements.it also avoids the out of stock
danger.

Financial objectives
1. Economy in purchasing: management makes every
attempt to purchase the raw materials in bulk quantity
and to take advantage of favorable market condition.
2. Optimum investment and efficient use of capital: The
finance management should set up maximum and
minimum levels of stocks to avoid deficiency or surplus
of stock position.

3. Reasonable price: Management should ensure supply
of raw materials at a reasonable low price without
sacrificing the quality of it thereby helping the cost of
production and quality of finished goods.

Advantages of inventory
1. Delivery in time: as inventory stored aids smooth production,
the manufacturing company can earn reputation as a reliable
supply.
- our finished goods can be raw materials for buyers.
- reputation can get more customers
2. Possibility of discount on bulk purchase
3. Efficiently handle unforeseen circumstances: harthal, bandh or
other transportation difficulties do not hinder production.
4. No idling of workers and machineries.

Disadvantages of inventory
1. Working capital tied up: cant utilize the amount for other
purposes nor it yield any interest.
2. More space required: more inventories more is the space needed
and space accounts for rent.
3. Increase insurance charges: Increased cost of handling and
manufacturing.
4. Increased over head expenses: Security personnel required to
guard inventory.
5. Chances of damage: Pilferage, replacement, etc more.

•Inventories constitute a significant part of the working
capital.
•Inventory control used in unit/physical control(
purchase and production unit) and value control
(Accounts unit)
•When a firm feel shortage of finance it should take
more care in its inventories rather than anything else.

Ordering cost or procurement
cost or purchasing cost
•The cost that has to be spent in making purchase order.
•Includes all the expenditure associated on placing an order.
- postal service expense
- expenditure on stationary and consumables.
- travelling expense.
- time spent by purchase department for order and its
equivalence in terms of money.
- expenses on supplies.
- rent for premises occupied by purchase department
- legal fee for lawyers in case such situations arises.

Inventory carrying cost
Cost of blocking material as inventory . This includes:-
1. Cost of interest for the value of items stored as inventory.
2. Salaries of personnel managing various position
including security personnel.
3. Rent for the space occupied by the inventories.
4. The potential scope of loss , pilferage, obsolescence, etc.
5. Cost involved in the insurance of inventories.
6. Stationeries and consumables used by the store people.

Under stocking or shortages.
It is the cost of not having an item when it is needed, thus
affecting the sales of the company.
This may lead to 2 situations:-
1. Back logging
2. Cancellation of orders.

Backlogging: work is delayed beyond its schedule and eats away
the schedule time of next order thereby delaying the next order.
Cancellation of order: When buyer is not in a position to wait .
Both the above results in:
1. Penality cost: Purchase order will have an in built provision for
penality eg, 20% payment reduced for 2 days delay, etc
2. Emergency replenishment: In an urgent situation if you want
good quality we may have to spent extra amount eg. Emergency
transportation cost,etc.
3. loss of good will

Over stocking cost
This results when stock is left on hand when the demand
for the item has ended.
The left over inventory may be
- Utilized at a later stage.
- Thrown out as scrap.

1. ABC analysis
2. VED analysis
3. SDE analysis
4. FSN analysis
5. HML analysis

ABC analysis
•Process of classifying items using values as measure.
•Process of excursing selective control over inventories.
Objectives of the analysis
1. Frame policy guidelines regarding control of items.
2. This policy enables material managers to exercise
selective control when he is confronted with large
number of items.
3. Expensive items are branded as A items(10%) the in
between as B(20%) and least expensive as C(70%)

The method.
1. All the item that are used in the industry are identified.
2. Items are listed as per the value.
3. The number of high valued items , medium valued and
low valued items are counted.
4. Their percentage is found out.
The concept
It is practically not feasible to exercise tight control
over all items in a large or in medium sized
organization. Hence we resort to classify the items
according to their importance.

VED analysis
•Based on the critical values and shortage cost of the item.
Thus helps focus on vital items.
•Based on criticality the item can be classified into 3
categories viz; Vital, Essential and Desirable.
•Vital items are critically needed in a manufacturing unit.
The items with lower criticality included in E and lowest
in D.
•The status of each item will be discussed with
justification by the material manager in consultation with
other departments of the manufacturing unit.

SDE analysis
Classification based on lead time/ availability
•S( Scarce) those item which are imported or which need
a lead time more than 6 months.
•D(Difficult): The items which require less than 6 months
but more than a fort night.
•E( easily available): Items which are available easily in
less than a fort night.
•Helps bring down lead time and out of stock cost.

FSN analysis
Classification based on frequency of issue or use.
• F = Fast moving items that are frequently issued in a
manufacturing unit.
•S = Slow moving items in a manufacturing unit.
•N = Non moving item
This classification helps in establishing most suitable
layout by locating all fast moving items near the
dispensing window to reduce the handling efforts.

HML analysis
Classification based on unit value.
H = high cost
M= medium cost
L= Low cost
This type of analysis helps in exercising control at the use
point . Proper authorization should be there for replacing
a high value item

Definition of EOQ
It is the particular quantity at which the sum of cost of
both the ordering and inventory carrying cost is minimum.
Total cost = carrying cost + procurement cost

Consumption rate
It is the rate at which the raw materials are consumed.
If we plot a graph between time and level of inventory the
slope of the graph gives the consumption rate
Constant consumption rate.
If the raw material is consumed at same rate over the same
period of time.
Actual / irregular consumption rate
There will be variation in the production which leads to
different consumption rates at different time intervals.
Also influenced by factors like power failure.

Replenishment.
The process of refilling the material as and when it is
consumed so that the inventory level is maintained within a
range .
Types:-
1. Instantaneous replenishment
2. Replenishment at constant rate
3. Replenishment at irregular rate.

1. Instantaneous replenishment: refilling is done at one
time, at one instant for the one full lot size.
2. Replenishment at constant rate: If we replenish the
used inventory at a constant rate . Usually practiced in
industries especially the ones which manufacture its
own raw material.
3. Replacement at irregular interval: The inventory is not
refilled at regular interval of time.

Lead time
Lead time is the time gap between starting or initiating
the process of ordering and receiving the ordered
quantity in stores.
This is estimated by the past experience.
Lead time includes the following:-
1. Time taken to prepare purchase requisition and placing
the order.
2. Time taken to deliver purchase order to vendor.
3. Time taken for the vendor to manufacture.
4. Time taken for transportation from vendors place to
the stores.

Reorder point
This is the point which indicate that it is high time we place
the order failing which the stokes may get exhausted.
Reorder point = lead time – predicted point of exhaustion.
Eg. If we order once in every 10 days and the lead time is 3
days then ROP = 10 – 3 = 7 days.

Lead time analysis.
Lead time depends on :-
1. The urgency or importance of the components in the
manufacturing process.
2. Reliability of the vendors.

Reserve stock(O-RS)/
Safety stock/Buffer stock
•To guard against disturbances of production process
either due to uncertainties in consumption rates or lead
time some extra stock is maintained.
•It serve the purpose of minimizing the chances of running
out of stock.
•It should not be very less or excess.

Safety stock come to play when there is :-
1. An excess rejection or wastage in production
process than normal.
2. Rejection at the time of receipt due to
-Poor production quality by vendor.
- Damage to raw material.

Factor of uncertainty
Uncertainty is the main reason for having safety stock.
It may be due to:-
1. Uncertainty of demand
2. Uncertainty of delivery.
3. Uncertainty of quantity.

•Uncertainty of demand: there will be a difference
between the expected demand and the actual demand
which is known as the forecast error. It is mainly
dependent on the buyers side.
•Uncertainty of delivery: depends on how long the lead
time is going to be. If something goes wrong with the
suppliers production the lead time may prolong.
•Uncertainty of quantity: this depends on how many
scrap or imperfect items the ordered quantity is going to
contain.

Determination of safety
stock
The level of safety stock to be maintained depends on
various factors like:-
-Cost of item in question
-Uncertainties in demand
-Negative fall out of stock of this item
-Spoilage due to long storage , etc
Optimum safety stock = maximum lead time in amount-
normal lead time in amount.

Max. lead time = the worst possible scenario
occurred. Found out in consultation with the
purchase department or past records.
Normal lead time = most expected lead time or the
average lead time.
e.g.. If the maximum lead time is 13 days and the
average lead time is 11.5 days then 13-11.5= 1.5, a
stock that last for 1.5 days is the optimum safety
stock.

Disposal of obsolete and surplus
material.
Obsolete material: Those materials or equipments which
are not damaged and which have economic work but are
no longer useful for the company’s operation due to
change in production line.
The term can be associated with equipments, materials,
stocks, techniques, etc.
It is very difficult to predict when the technology will
change leading to obsolescence. The company should
have sharp eye on the competition so that it can have more

Causes for Obsolescence
1. Adoption of standardization: lead to elimination of non standard
varieties.
2. Adoption of new technology.
3. Changes in production design
4. Cannibalization: when a machine breaks down, it is, sometimes
rectified by using components of an identical machine which is
already not functional.
5. Faulty purchases : it the purchases are made in bulk so that they
can last for a very long time.
Can be controlled by FSN analysis

Surplus material
Equipments which have no immediate use but had
accumulated due to faulty planning , forecasting and
purchasing. They have usage value in future.
•They are merely excess of what is in need.
•Easy to control compared to obsolete.
•Both surplus and obsolete materials are in good
condition.

Common causes for surplus and
obsolete materials
1. Over ordering
2. Faulty planning, purchasing and forecasting.
3. Reduced production.
4. Drastic reduction in wastage.
5. Modification of processes.
6. Faults in store keeping and record keeping.

They need to be disposed ?
1. Keeping them is a costly affair.
2. They need space.
3. More security personnel
4. Separate store for maintaining them.
5. More chances of pilferage, damage etc.

Stages of disposal of
obsolete and surplus.
1. Finding: Periodic study must be carried out of all
items stocked or staying as inventory.
2. Recrimination: Alternative ways of using these
items must be explored within the industry.
3. If they cannot be used any where then disposal act
is carried out.

Priorities in the process of
disposal.
1. Explore possibility of sending in bulk.
2. Dispose to original supplier if they show interest.
3. Preference may be given to buyers or vendors who
have long term relation with the company.
4. Then think of others who may buy at best possible
price.
5. If it cannot be pushed off at best possible price, sell at
scrap value.
6. If it is not possible dispose them off free of cost to
someone who can use them.
( sometimes when distribute to employers it may lead to

Process of disposal of
obsolete and surplus
material.
•By negotiation by which buyers approaches for the
purchase of such materials.
•Auction.
•Tenders.

Material handling
Moving physical objects from one place to another as
parts, components, sub –assemblies, raw materials, or
finished goods ready for shipment.
Defined as the function dealing with the preparation,
placing and positioning of materials to facilitate their
movement or storage.
The moving of materials from raw material store to
through production to ultimate consumer with least
expenditure of time, effort so as to produce maximum
productive efficiency and lowest handling cost

Salient principles of material
handling
1. Principles related to planning.
- Planning principle: All handling activities must be properly
planned. Eg, use of same container throughout a handling
process.
- System principle: Plan a system integrating as many handling
activities as is practical and coordinate full scope of operation.
- Material flow principle: Plan an operation sequence and
equipment arrangement optimizing material flow. e.g plan
related work areas together.
- Simplification principle: Reduce or eliminate unnecessary
movements.
- Gravity principle: wherever practicable utilize gravity to move
material

-Space utilization principle: Avoid keeping too much of
inventory at temporary store.
-Unit size principle: Increase the size , weight, quantity of the
load handled at a time.
-Safety principle: provide safe handling method. Highlight
handling hazards or danger zones in a manufacturing unit.
-Equipment selection principle: consider all the aspects of of the
material to be handled and the method to be utilized in terms of
the lowest overall cost. Eg. Select versatile equipments.
-Standardization principle. Standardize methods, as well as type
and size of handling equipment.

-Motion principle: fix minimum period for loading, unloading and
other idleness.
-Idle time principle: reduce the unproductive time of both handling
of equipment anf manpower
-Maintenance principle: Set up regular maintanance schedule
-Obsolescence principle: Identify and replace obsolete matrrials.
-Flexibility principle: purchase equipments that can perform a
variety of tasks.
Light weight principle: opt for equipment that have less dead
weight.

Principles related to operations.
- Control principle: use martial handling principles to
improve production and inventory control. Materials may
be moved as per schedule.
-Capacity principle: Production capacity should be fully
achieved.
- Performance efficiency principle: Determine efficiency of
handling performance in terms of expense per unit handled.

Kindly refer material handling and
modern material

Store keeping
Store keeping: custody of all materials stocked in stores
for which store keeper is the trustee.
Stores management responsible for proper receipt ,
custody and issue of materials.

Function of stores department
1. To receive materials and check them for identification
2. To correctly position all materials and supplies within
the stores
3. Maintain stock safely in good condition.
4. Issue material only on requisition by authorized
person.
5. Maintain up to date record
6. Make sure the store is clean and in good working
condition.
7. Optimum utilization of store space
8. Initiate process of purchasing at the right time.
9. Coordinate and cooperate with various departments
like purchase, production, etc.

Location of store
- Minimize total handling costs and other costs related
store operation.
-Location should be according to the nature and value
of materials to be stored.
-Raw materials are stored need to the first operation.
-In process material close to the next operation.
-Finished goods near the shipping area
-All departments should have easy assess.

List of available store space
1. Platform
2. Floor space
3. Rack
4. Shelves
5. Bins
6. Trays
7. Drums
8. Barrels
they can be stored as a unit, a tier, a row or a section

Stock verification
1. Annual physical verification:
- Verification officer individually or in team verifies
stocks in the stores once in a year checking all
relevant documents like bin cards, stores ledger, etc.
- After verification a list consisting of shortages,
damages, surplus is given to the management.
- During verification the stores wont be functioning.

2. Perpetual inventory control
-Continuous check through out the year in such a way
that each item is checked at least once in a year.
-‘A method of recording stores balances after every
receipt and issue to facilitate regular checking and to
obviate closing down for stock taking”
-Priority given to A items then B and least to C.
-Incidentally help continuous stock taking.

Errors in stores
1. Clerical mistakes.
2. Improper storage e.g, camphor – volatile.
3. Pilferage ( steal items that are not that valuable)
4. Leakage.
5. Careless handling
6. Handling loss.

Store layout
1. Section adjacent to store should be kept reserved for receipt of
materials and for its inspection before storage.
2. Minimize handling and transportation of materials.
3. Optimum utilization of floor space and height.
4. Shelves, racks etc should be situated in clearly defined leaves
so that he items are quickly stored and located for physical
counting and issuing.
5. Min lines should be between 1.5 to 3 m wide depending on the
type of material and amount of traffic involved.

6. Storage space should be clearly marked to ensure easy
and quick identification.
7. Storage space should be protected against waste
damages, pilferage, etc.
8. Place for storing material based on material
characteristics.
9. Lay out should be such hat it can make use of modern
material handling equipments like fork lifts, trucks,
conveyors, etc
10.Store keeper is not compelled to put newly arrived
material on the top of the old.
11. 20 to 25% due space in each portion of the store for
further expansion.

Records
Store
records.
Store ledger
BIN card

Bin card
• The document that records the exact quantity of
material available in the store at a give time.
• For each material a separate bin card is maintained.
• prepared by store keeper.
•Record of quantity only
•Entry made immediately after each transaction
•Kept inside store.

Stores ledger/ perpetual
inventory cards
• Identical to bin card but here the money value is also
shown.
• Entries are made periodically.
• Prepared by Accounts department
•Outside store.

Advantages of record.
1. Efficiency of economy.
2. Settlements of disputes with credits, debits, insurance
etc.
3. Check against under stocking/ over stocking.

Inventory management

More Related Content

What's hot (20)

Viewers also liked (7)

Similar to Inventory management (20)

More from KARTHIKA K.J (18)

Recently uploaded (20)

Inventory management