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INTRODUCTION
Inventory, as a current asset, defers from other current asset because only financial
managers are not involved. Rather, all the functional areas, like finance, marketing
production and purchasing department are directly involved. The job of the financial manager
is to reconcile the conflicting view points of the various functional areas regarding the
appropriate inventory levels in order to fulfill the overall objective of maximizing owner’s
wealth.
1.2.1 Origin of the word inventory
The word inventory was first recorded in 1601. The French term inventory, or
‘detailed list of goods,’ dates back to 1415.
1.2.2 Meaning
Every firm, establishment, company carried many items for the purpose of producing goods
and services, which are either used directly or indirectly. These are called “stocks” generally,
which in true management sense is called as “inventory”.
1.2.3 Definition
Inventory has been defined as “the aggregate of those items of tangible personal
properties which are held for the sale in the ordinary course of business, or are in the process
of production for such sale or are to be currently consumed in the production of goods and
services to be available for sale”.
1.2.4 Objectives
To facilitate smooth operation of the manufacturing process.
To minimize investment in inventory.
To reduces the material handling cost.
To make proper utilisation of machinery.
Reasonable utilisation of people.
1.2.5 Classification
Inventories are classified according to the basis of their nature or usage, the most commonly
used method are:
Raw materials
Consumables
Brought out components
Tools
Hardware
Spare parts
Work in progress
Completely knocked items
Motors
Packing materials
Finished goods
1.2.6 Why Do We Need Inventory?
There are seven major reasons as to why manufacturing and retail operation carry
inventory.
Capital cost: this refers to the quantum of capital borrowed at a specified rate
of interest and which is converted into stock and is held by the company by
way of inventory. In simple term this refers to the opportunity cost of the
money.
Storage cost: this cost includes storage space (Annual rent or depreciation),
cost of maintenance and repairs, cost of storage facility, cost of preservation,
cost of record keeping and periodic/Annual stock verification etc.
Deterioration and obsolescence: deterioration is the from reduction of
inventory value due to any one of the following reasons
o Limited shelf life
o Inadequate and unsatisfactory storage conditions
o Unscientific handling of stores.
procurement cost
This cost is also called as Ordering cost, Replenishment cost or Recoupment cost.
This refers to the cost incurred to replenish the stock of an item at different stages.
The activities like requisitioning, order writing, follow up removing and inspection,
record keeping and bills payment per period by the number of order process.
Different basic elements of procurement cost are as below
Paper work cost
Postage carrying cost
Follow up cost
Cost of visit to the vendor plant
Operating cost of vehicle
Expediting cost
Inspection and testing cost
Administrative cost
set up cost
This is also called as preparatory cost and is incurred to replenishment the stock of an
item manufactured in the plant. Some of the major elements of this cost are as below
Idle time cost: Loss due to inability of the company to produce during the
period the machine is under set up.
Cost of idle wages: This refers to wages paid to direct workers when the
machine is under preparation.
Work order cost: This is the cost of raising a work order and other related
orders like store issue order, movement order, inspection order, etc. This
enables manufacturing activity to be taken up.
Foregone cost: This implies the loss and profits for the time the machine is
under preparation and is equal to the product of the sum of machine idle time
cost plus cost of idle wages multiple by Return on investment.
1. To keep inventory at sufficiently high level to perform production and sales activities
smoothly.
8. To achieve satisfactory level of customer service whilst keeping inventory costs within
reasonable bounds.
1.3.3 Advantages of Inventory Management
1. Inventory Balance. Good inventory management helps you figure out exactly how much
inventory you need. This makes it easier to prevent product shortages and keep just enough
inventories on hand without having too much.
2. Inventory Turnover. You need to keep a high inventory turnover ratio to ensure your
products aren’t spoiling, becoming obsolete or sucking up your working capital. Calculate
how many times your inventory sells in a year and see where you can make better use of your
resources.
3. Repeat Customers. Good inventory management leads to what every business owner
wants – repeat customers. You want your hard-earned customers to keep coming back to your
business to meet their needs. One way to do this is to make sure you have what they’re
looking for every time they come.
4. Accurate Planning. Using smart inventory management, you can stay ahead of the
demand curve, keep the right amount of products on hand and plan ahead for seasonal
changes. This goes back to keeping your customers happy all year long.
5. Warehouse Organization. If you know which products are your top sellers and what
combinations of products your customers often order together, you can optimize your
warehouse setup by putting those products close together and in easily accessible places. This
speeds up the picking, packing and shipping processes.
6. Employee Efficiency. You can empower your employees to help you manage inventory.
Training employees to use barcode scanners, inventory management software and other tools
helps them make better use of their time, and it helps your business make better use of its
resources, both human and technological.
7. Inventory Orders. If you have done a good job keeping track of how much inventory you
have on hand, you can make smarter decisions about when and what to order. Inventory
management software lets you speed up the ordering process. You can simply scan a product
barcode and type in some information to place an order and generate an invoice.
8. Inventory Tracking. If you have multiple locations, then inventory management becomes
even more important because you need to coordinate your supplies at each location
depending on differences in demand and other factors.
9. Time Saving. Inventory management is a great time-saving tool. By keeping track of all
the products you have on hand and on order, you can save yourself the hassle of doing
inventory recounts to make sure your records are accurate. This once again requires inventory
management software.
10. Cost Cutting. When your inventory is humming along efficiently through your facilities,
you can bet you will save a lot of money. Inventory management helps you avoid wasting
money on slow-moving products so you can put it to better use in other areas of your
business.
Type of production: this is very fundamental factor which determines the inventory level
and some of the elements are such as high/low value of raw material. The manufacture of
products i.e. standard or made to order items also plays a significant role.
Type of manufacture: in the case of continuous manufacture the rate of production is known
and the production cycle is planned well in advance facilitating effective control on
inventory. On the other hand if it is made to order production then inventory has to be
monitored very closely without locking up any additional money or excessive inventory.
Other factors:
Potentials of savings