INVENTORY MANAGEMENT INTRODUCTION MEANING OF INVENTORY The meaning

INVENTORY MANAGEMENT

INTRODUCTION • MEANING OF INVENTORY • The meaning of inventory is ‘stock of goods’. In accounting language it may include: • (a)RAW MATERIAL: They are required to carry out production activities uninterruptedly. • (b)WORK-IN-PROGRESS: It is a stage of stocks between raw material & finished goods. • (c)CONSUMABLES: These are needed to smoothen the process of production. • (d)FINISHED GOODS: These are the goods which are ready for the consumers. • (e)SPARES: Form a part of inventory.

Purpose/ Benefits of Holding Inventories • Transaction Motive – to facilitate Continuous Production. • Precaution Motive – for meeting unpredictable changes in demand supplies of materials • Speculative Motive – for taking advantage of price fluctuations, saving in re-ordering costs and quantity discounts, etc.

Inventory Management • An efficient system of inventory management will determine (a) what to purchase (b)how much to purchase (c)from where to purchase (d) where to store • It is to ensure availability of materials in sufficient quantity as and when required and also minimize investment in inventories

OBJECTIVES OF INVENTORY MANAGEMENT • TO ENSURE CONTINUOUS SUPPLY OF RAW MATERIAL, SPARES AND FINISHED GOODS. • TO AVOID BOTH OVERSTOCKING AND UNDERSTOCKING OF INVENTRY. • TO MAINTAIN INVESTMENTS IN INVENTORIES AT OPTIMUM LEVEL. • TO ELIMINATE DUPLICATIONS IN ORDERS • TO KEEP MATERIAL COST UNDER CONTROL. • TO MINIMIZE LOSSES THROUGH WASTAGE AND DAMAGES.

Techniques and Tools of Inventory Management 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Stock Levels Safety Stocks Ordering System of Inventory Determination of EOQ ABC Analysis VED Analysis Inventory Turnover Ratio Aging Schedule of Inventories Classification & Codification on Inventories Inventory Reports

TECHNIQUES OF INVENTRY MANAGEMENT • DETERMINATION OF STOCK LEVEL: (a)MINIMUM LEVEL=RERDERING LEVEL-(NORMAL CONSUMPTION * NORMAL REORDERING PERIOD ) (b)MAXIMUM LEVEL=REORDERING LEVEL+ REORDERING QUANTITY – (MINIMUM CONSUMPTION * MINIMUM REORDERING PERIOD ) (C) DANGER LEVEL=CONSUMPTION * MAXIMUM REORDER PRIOD

• 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 • CATEGORY-A: • Under this almost 10% of the items contribute to 70% of value of consumption. • CATEGORY-B: • Under this category 20% of the items contribute about 20% of value of consumption. • CATEGORY-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: • Necessory 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: • (a)Fixed order quantity system generally known as economic order quantity system. • (b)Fixed period order system or periodic re-ordering system or periodic review systems. • (c)Single order and scheduled part delivery system.

• LEAD TIME: • Lead time is the period that elapses between the recognition of a need and its fulfilment. There is a direct relationship between lead time and inventories. • Lead time has two components: • (a)administrative lead time • (b)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