CONCEPTUAL REVIEW

“Inventory is a list of goods and materiais or those gords and materials

themselves, held available in stock by a. business, Inventory are held in order to manage and
hide from the customer (he ibm that manulhcture’supply delay is longer than delk cry delay,
and also to ease the offect of imperibetions in the manui during process that lower production
etIieieneies if production capacity stands idle for lack of materials.”

HE REASONS FOR KEEPING STOCK

All these stock reasons can apply to any owner or product stage.

BUFFER STOCK

‘lt is held in individual workstations against the possihtlity that the upstream
workstation may be a little delayed in providing the next item br processing. Whilst some
processes carry very large buffer stocks’. I ovota moved to one (or a tew items) and has now
moved to eliminate this stock type.

SAFETY STOCK

It is held against process or machine failure in the hope/belief that the thilure
can he repaired before the stock rms out. This type of stock can be eliminated by programmes
like ‘fatal Productive Maintenance.

AWERPRODUCTION

It is held because the forecast and the actual sales did not match. Making to
order and ill eliminates this stock type.

i. Financial Managemen - FM. Pandey 9 Edition tV kas Pnhlieaioni

2. Financial Management K han & Jam — 5 Edition

LOT DELAY STOCK

It is held because a part of the process is designed work on a batch basis whilst
only processing items individually. Therefore each item of the lot must vat for the whole lot
to he processed before moving to the next workstation. This can he eliminated by single piece
working or a lot size of one.
DEMAND FLUCTUATION STOCK

It is held where production capacity is unable to flex with demand. Therefore a

stock is built in times of lower utilisation to he supplied to customers when demand exceeds
production capacity. This can be eliminated by increasing the flexibility and capacity of a
production line or reduced by moving to item level load balancing. Line balance stock is held
because different sub—processes in a line work at different rates. Therefore stock will
accumulate after a fast sub process or before a large lot size sub- process Line balancing will
eliminate this stock type.

CHANGEOVER STOCK

It is held after a sub-process that has a long setup or change-over time, This
stock is then used while that change—over is happening. This stock can he eliminated h tools
like SMED.

Where these stocks contain the same or similar items it is often the work
practice to hold all these stocks mixed together before or after the sub—process to which they
relate. This reduces’ costs. Because they are mixed-up together there is no visual reminder to
operators of the adjacent sub—processes or line management of the stock which is due to a
particular cause and should he a particular individual’s responsibility with inevitable
consequences. Some plants have centralized stock holding across sub— processes which
makes the situation even more acute.

THE BASIS OF INVENTORY ACCOUNTING

Inventory needs to be accounted where it is held across accounting period

boundaries since general) expenses should he matched against the results of that expense
within the same period. When processes were simple and short then inventories were small
but with more complex presses then inventories became larger and valued unsold and
incomplete goods has driven many new behaviours into management practice. Perhaps most
significant of these are the complexities of fixed cost recovery, transfer pricing, and the
separation of direct from indirect costs. This, supposedly. Precluded ‘anticipating income” or
“declaring dividends out of capital”. It is one of the intangible benefits of lean and the ‘I’PS
that process times shorten and stock .revels decline to the point where the importance of this
activity is hugely reduced and therefore effort. Especially management to achieve it can he
minimised.

INVENTORY DECISIONS

These refer to means by which inventories are managed. Inventories exist at

every stage of the supply chain as either raw material semi—finished or finished goods. They
can also be in-process between locations. Their primary purpose of buffer against any
uncertainty that might exist in the supply chain. Since holding of inventories can Cost
anywhere between 20 to 40 percent of their value, their efficient management is critical in
supp1y chain operations. It is long term in the sense that top management sets goals.
INVENTORY CONTROL MANAGEMENT

INVENTORY DATA BASE

An important component of inventory planning involves access to an

inventory database It is a structured framework that contains the information needed to
effectively manage all items of inventory, from raw materials to finished goods.
This information includes the classification and amount of inventories,
demand for the items, and cost to the firm for each item. Ordering costs Carrying costs and
other data,
The EOQ (economic order quantity) refers to the optimal order size that will
result in the lowest total of order and carrying costs and ordering costs. By calculating the
economic order quantity the firm attempts to determine the order size that you minimize the
total inventory costs’

INVENTORY FLOW

The management of logistics is concerned with the movement and storage of

materials and finished products. Logistical operations start with the initial shipment of a
material or component part from a supplier and are finalized when a manufactured or
processed product is delivered to a customer. From the initial purchase of a material or
component. the Logistical process adds value. By moving inventory when and where needed,
Thus the material gains value at each step. For a large manufacturer, logistical operations ma
yconsist of thousands of movements, which ultimately culminate in the delivery of the
product to an industrial user. Wholesaler, dealer or customer.

INVENTORY RELATED COSTS

INVENTORY CARRYING COST (ICC):

 Tax
 Storage
  Capital
 Insurance
 Obsolescence
 Ordering:
 Communication
 Processing including material
 handling and packaging
 Update activities, including
 Receiving and date-processing.

BASIC INVENTORY DECISIONS

1 here are two basic decisions that must he made for every item that is
maintained in inventory. These decisions have to do with the timing of orders for the item
and the size of orders for the item.

RELEVANT INVENTORY COSTS

 Hem costs
 Holding Costs
 Ordering Costs
 Shortage Costs
 Direct cost for getting an item
 Purchase cost for outside orders. Manufacturing Cost for internal orders

Costs associated with carrying items in inventory. Storage and other related
costs. Fixed costs associated with placing an order. Costs associated with not having enough
inventories to meet demand,

E.OQ

The EOQ can be calculated with the help of a mathematical formula.

Following assumptions are implied in the calculation:

CONSTANT OR UNIFORM DEMANI)

 Although the FOQ model assumes constant demand. demand may vary from
day to day. If demand is not known in advance— the model must be modified through the
inclusion of safe stock.
Constant unit price— the EOQ model assumes that the purchase price per unit
of material will remain unaltered irrespective of the order offered by the suppliers to include
variable costs resulting from quantity discounts. The total costs in the EOQ model can be
redefined.
CONSTANT CARRYING COSTS

Unit carrying costs mar very substantially as the size of the inventory rises.
perhaps decreasing because of economies of scale or storage efficiency or increasing as
storage space runs out and ne warehouses have to he rented.

CONSTANT ORDERING COST

This assumption is generally valid. However any violation in this respect can
be accommodated by modifying the FOQ model in a manner similar to the one used for
variable unit price.

Instantaneous delivery - if delivery is not instantaneous. Which is general the

case: the original LOQ model must be modified through the inclusion of a safe stock.

INDEPENDENT ORDERS

If multiple orders result in cost saving by reducing paper work and the
transportation cost, the original EOQ model must be further modified, While this
modification is somewhat complicated, special EOQ models have been developed to deal
with it.

COST OF CARRYING INVENTORY

Carrying material in inventory is expensive .A number of studies indicated

that the annual cost of carrying a production inventory averaged approximately 25% of the
value of the inventory. The escalating and volatile cost of money has escalated the annual
inventory carrying cost to a figure between 25% - 35% of the value of the inventory. The
following five elements make up this cost.

 Opportunity cost (12% —20%)

 Insurance cost (2% — 4%)

 Property taxes (1% - 3%)

 Storage costs (1%— 3%

 Obsolescence and deterioration (4% — 10%)

 Total carrying cost (20% - 40%)

OPPORTUNITY COST OF IN VESTED FUNDS

When a firm uses money to buy production material and keeps it in the
inventory, it simply has this much less cash to spend for other purposes. Money invested in
external securities or in productive equipment earns a return for the company.

INSURANCE COST

Most firms insure the assets against possible losses from fire and other forms
of damage.

PROPERTY TAXES

This is levied on the assessed value of a firm’s assets, the greater the inventory
value the greater the asset value and consequently the higher the firm’s tax bill.

STORAGE COSTS

The warehouse is depreciated every year over the length of its life. This cost
can be charged against the inventory occupying the space.

THE ABC CLASSIFICATION

An indicator that classifies a material as an A.B or C part according to its

consumption value .The classification process is known as the ABC analysis.
 The ABC classification system is to grouping items according to annual sales
volume, in an attempt to identify the small number of items that will account for most of the
sales volume and that are the most important ones to control for effective inventory
management.
REORDER POINT

The inventory level R in which an order is placed where R D.L, D = demand

rate (demand rate period (day. week, etc). and I. lead time.

SAFETY STOCK

Remaining inventory between the times that an order is placed and when new
stock is received. I there are not enough inventories then a shortage may occur.
Safety stock is a hedge against running out tormentor; It is an extra inventory
to take care on unexpected events. It is often called butler stock. 1 he absence o inventory is
called a shortage.

ABC INVENTORY CLASSIFICATION

The ABQ classifications process is an analysis of a range of items, such as

finished products or customers into three categories.

 Outstandingly important
 B-of average importance
 C-relatively unimportant

As a basis for a control scheme each category can and sometimes should be
handled in a different way, with more attention being devoted to category A, less to 13, and
less to C.

BREAK-EVEN POINT

Number of units that must be sold in order to produce a profit of zero (hut will
recover all associated costs). In other words, the break—even point is the point at which your
product stops costing you money to produce and sell, and starts to generate a. profit for your
company.

Where:
Q = Break—even Point. i.e., Units of production (Q),
FC = Fixed Costs,
VC = Variable Costs per Unit
 UP = Unit Price

Therefore

Break Even Point Q = Fixed Cost / (Unit Price - Variable Unit Cost)

STOCK CONTROL AND INVENTORY

Stock control, otherwise known as inventory control is used to show how

much stock you have at any one time, and how you keep track of it.
Efficient stock control allows you to have the right amount of stock in the
right place at the right time. it ensures that capital is not tied up unnecessarily, and protects
production if problems arise with the supply chain.

INVENTORY CONTROL OVERVIEW

Normal Inventory

As it sounds, this type of inventory item will be used for the majority of your
parts. It will correctly track the inventory received and sold on a first in first out basis, will
handle cost of sales, and will warn you when you’re out of stock.
NON-INVENTORY TYPE

This is used for selling things that are not really inventory items. For example,
you could be selling warranty. But because you don’t have warranty in a box to sell, and
you’ll never run out of stock, you won’t need to keep inventory control on it. As welt there is
no cost of sale adjustments with non-stock items.
Labour Parts
You don’t have technicians hanging from hooks in your back room, so like
non inventory items. The system will not try to remove them from inventory when you sell a
labour item. The two differences between Non-Inventory items and Labour items are that you
can optionally have the system ask you for the technician code that did the work so that you
can print reports showing who did what work.
As well, the system will optionally ask for a comment to explain what was
done so that the description of the service work can he printed on the invoice.

Consignment items

Consignments can be used to keep track 01 inventory that you don’t own, but
at the time you sell it, you must pay for it. You’ll be able to generate several reports.
Including, a list of inventory that is on consignment but not sold and a list of inventory solo
on consignment but riot yet paid for.

Floor plan Inventory

Floor planning is very similar to consignment, except that you take possession
and own the inventory when you receive it. But you don’t have to pay for it until it’s sold, or
until it’s been in the store 11w a negotiated period of time.
Tire Inventory

Windward System Five has the ability to sort and categorize tires by their size,
aspect ratio and rim size. In addition, you will also be able to search for the tires by just
entering in some of the search criteria and having the system bring up a window of all
matches.

When the list brings up a list of tires that can all fit the vehicle, the system can
sort the list to show the items with the highest quantity in stock at the top of the list and the
items that are out of stock at the bottom of the list. This will help you sell what you actually
have to sell instead of creating special orders.
Product Inventory

Products are items such as vehicles that you might service or repair after
selling them to the customer. That is, they are an item in the database that can be sold, and
when sold, are automatically added to the customer’s list, of products that can be worked on.
 Windward System Five can also track whole goods such as recreational
vehicles by keeping, track of the cost of the item before the sale. add ones and pre-delivery
inspection items. In addition, the system can generate a “wash out” report one level deep to
show the costs and income associated with the trade in.

Seria1zed Inventory

Those items that need to be tracked by their serial numbers can he marked as
serialized inventory, For example. Fridges, stoves, Computers and chainsaws might all be
serialized. Note that if you plan on servicing these items in the figure and keeping trek of all
work you do on them. They should be entered as products instead of serial numbers.
TYPES OF INVENTORY

Several different types of inventories are conducted, depending upon the type
of materiel involved and type of information needed. Bulkhead-to Bulkhead Inventor

A bulkhead-to-bulkhead inventor is a physical count of all stock materiel

within the ship or within a specific storeroom’s bulkhead—to—bulkhead inventory of a
specific storeroom is taken when a random sampling inventory of that storeroom fails to meet
the inventory accuracy rate of 90 percent when directed as a result of a supply management
inspection (SMI). It is also taken when directed by the commanding officer or when
circumstances clearly indicate that it is essential to effective inventory control.

SPECIFIC COMMODITY INVENTORY

The specific commodity inventory is a physical Count of all items under the
same cognizance symbol, .FSC or that support the same operational function, such as boat
spares. electron tubes. boiler tubes. or lire brick. This inventory is taken under the same
conditions as a bulkhead- t-bulkhead inventory; however. Prior knowledge of specific stock
numbers and item location is required to conduct a specific commodity inventory.

SPECIAL MATERIEL INVENTORY

A special materiel inventory requires the physical count of all items that,
because of their physical characteristics, costs, mission essentiality, and criticality, are
specifically designated for separate identification and inventory Control.
ADVAP’TAGE INVENTORY CONTROL

The Inventor Control gives von the ability to handle our inventory your way.
As one of the most flexible and comprehensive modules in the Advantage, you can choose
the level of control that best suits your specific business needs. Your inventory can be valued
on a LIFO, FIFO or Average cost basis. ‘You can choose to use pails explosions. Serialized
inventory, parts allocations, Vendors, warehouses and an audit trail.

 Handles core pricing

 Produces a re order report based on minimum stock quantities
 Tracks unlimited vendors per item and recommends a best vendor
 Tracks allocations including explosion allocations
 Up to 254 discounts per item, including quantity break discounts
 Unit conversions can be defined for each item for both buying and selling quantities
 Allows for warehouse transfers and other adjustments
 Set up special sale dates for item discounting
 Reports the best and worst selling items in each of eight different categories
 Tracks items by location or quantity in multiple warehouses
 Can automatically generate items based on a template hem
 Utilizes Rapid Entry to facilitate entry of item data

INVENTORY MANAGEMENT AND CONTROL

Their proper management and control assume considerable Importance. In

fact, the management of inventory is given such an importance that it is often treated
synonymous with material management.
PROCESS OF INVENTORY MANAGEMENT

 Determination of optimum inventory levels and procedures of their review and

adjustments.
 Determination of the degree of control that is required for the best results.
 Planning and design of the inventory control system.
 Planning of the inventory control organization.

DETERMINATION OF OPTIMUM INVENTORY LEVEL

Determination of optimum inventory that an organization should hold is a

significant but difficult step. Too much of inventory results in locking out of working capital
accompanied by increased carrying costs.

DETERMINATION OF THE DEGREE OF CONTROL

The second aspect of inventory management is to decide just how much

control is needed to realise the objectives of inventory management. The difficulty is best
overcome by classification of inventory on the basis of value. Popularly called the ABC
classification, this approach is useful in degree of control
PLANNING AND DESIGN OF THE INVENTORY CONTROL SYSTEM

An inventory system provides the organizational structure and the operating

policies for maintaining controlling goods to be inventoried .The system is responsible for
ordering and receipt of goods, timing the order placement, and keeping track of what has
been ordered how much, and from whom.

 The fixed order quantity system

 The fixed order periodic system
DETERMINING ORGANIZATIONAL ARRANGEMENT STRUCTURE

Inventory management and control is to determine an organization structure to

handle inventory, organizationally speaking .inventory control function is assigned to
materials management, or production planning and control.

INVENTORY CONTROL TECHNIQUES

 Always better control classification

 High Medium, Low classification
 Vital, Essential and Desirable classification
 Scarce, Difficult and Easy to obtain
 Fast moving .Slow moving and Non moving
 Economic order quantity
 Max minimum system
 Two bin system

HML CLASSIFICATION

The high, medium and low classification follow the same procedure as is
adopted in ABC classification only difference is that in J-IML classification unit value is the
criterion and not the annual consumption value. The item of inventory should be listed in
descending order of unit value and it is up to the management to fix limits for three
categories.

VED CLASSIFICATION

While in ABC classification inventory are classified on the basis of their

consumption value in HML analysis, unit value is the basis, critically of inventories is the
basis for vital, essential and desirable categorization. The VED analysis is done to determine
the critically of an item and its effect on production and other services.

MINIMUM MAXIMUM TECHNIQUE

The minimum maximum technique is often used in connection with manual
inventory control system. The minimum quantity is established in the same way as any order
point. The maximum is the minimum quantity plus the optimum lot size. In practice a
requisition is initiated when a withdrawal reduces the inventory below the minimum level.
The order quantity is the maximum minus the inventory status after the withdrawal If the
final withdrawal reduces the stock level substantially below the minimum level, the order
quantity will be longer than the calculated EOQ.

COST OF HOLDING INVENTORY

One operating objective of inventory management is to minimize cost
.Excluding the cost of merchandise the associated with inventory fall in Iwo basic categories.

 Ordering or acquisition or set up costs

 Carrying costs

ORDERING COSTS
This category of cost is associated with the acquisition or ordering of
inventory. Firms have to place orders with suppliers to replenish inventory of raw materials,
the expenses involved are referred to as ordering costs. Apart from placing order outside, the
various production departments have to acquire material from the stores.
Receiving, impacting and recording the goods received to ensure both quantity
and Quality. The cost of acquiring material consists of clerical costs and cost of stationery.

CARRYING COSTS
Those that arise due to the storing of inventory the main components of this
category of carrying cost are storage cost that is tax, insurance, Depreciation, maintenance of
the building utilities and janitorial services.
 OBJECTIVES

 To analyze the cost of holding stock.

 To study the efficiency an inventory management

 To maintain sufficient stock of material in periods of short supply and anticipate price
changes.

 To reduce the manufacturing lead time.

 To maintain a minimum investment in inventories.

 To find out the current trend for the performance of the company.