Inventory means stock of goods or list of goods.

In the accounting language it may be a finished

good . But in the case of manufacturing concern
point of view it may be a raw material, work in
progress and finished goods.
Inventory is an important constituent of
working capital in most of the industrial under
taking. The organization must take care for the
proper control and management of inventories.
The main aim of inventory management to assume
adequate supply of materials as and when required
by the production department and also minimize
huge funds invested in inventories.
Todays inventory is tomorrows consumption. A
business cant maintain a given volume of sales
without maintaining sufficient inventory to satisfy
its customers.


Inventories may be classified on following
types:
Finished goods
Finished goods are those which are
completed from the production process and
also ready for the sale.
Work In-Progress
It is the stage of stock in between the
raw materials and finished goods. Simply it is
the semi finished products.




Raw materials
It is the basic input into the organization
for commencing the production activities. It
should be very essential for the continuous
flow of production.
Consumables and spares
It may be a part of inventories but these
materials do not directly enter into production
process.
Major objectives of inventory management are:
1. To provide regular supply of material and also
meet out the customers demand.
2. To minimize the investment in inventories and
also maximize profitability.
3. To employ suitable techniques to minimize
losses due to wastages and damages,
4. To ensure quality standards for the output.
5. Enable to minimize cost of production and
overall cost of the product.
Efficient and effective inventory
management requires an effective control
system over the inventories. The
techniques of inventory management and
control are as follows:











ABC Analysis:
ABC Analysis other ways known as
Always Better Control. It is one of the
technique a firm could not exercise the
same degree of control of inventory items
which are costly as compared to less
costly items. Under this approach the
inventory items may be of A,B and C.
Category A may include costly items, B
may include less costly items, C may
include least costly items.
Materials classified into three categories on their
value :
A category : Materials which are costly but
forms only a small part of total inventory. It
need greater care and control.
B category : Items of materials are those which
quantity and values are more or less same. It
need proper care.
C category : These are certain materials
constitute a major portion of the total inventory
but relatively of small value. It needs
comparatively less care.

VED Analysis
VED Analysis is known as Vital,
Essential and desirable. ABC analysis may
not be properly used for spare parts. In this
respect VED analysis is generally used
applicable for spare parts.
It includes three categories ;

Vital : Vital spare parts are those whose
non availability may lead to stoppage of
production.


Essential : Production may not interrupted
due to non availability of these spare part
for one hour or one day.
Desirable : Desirable spare parts are those
spares which are needed but their absence for a
week or so may not lead to the stoppage of
production.
Determination of stock levels
The organization has to maintain
sufficient levels of inventories in order to
meet out the continuous flow of production.
The firm must give more attention for
maintaining optimum level of inventory and
not only minimize inventory cost but also
minimize the loss of sale or stoppage of
production.
The stock levels are not fixed for a
permanent basis but are liable to revision
in accordance with the changes in the
factors determining the levels.
The various stock levels are:
Minimum level
Re- ordering level
Maximum level
Danger level


Equations
Re order level:

Maximum consumption * maximum re order
period

Minimum level:

Re- order level (normal consumption * normal
re-order period)

Maximum level:

Re- order level + re- order quantity (min.
consumption * min. re- order period)

Danger level:

Minimum consumption * emergence delivery
time


Q . Two components X and Y are used as follows:
Normal usage : 50 units each per week
Minimum usage : 25 units each per week
Maximum usage : 75 units each per week
Re order quantity : X 400 units Y 600 units
Re order period : X 4-6 weeks ; Y 2-4 weeks.
Emergency supply time :X 2 week ; Y 1week
Calculate :
1. Re order level
2. Minimum level
3. Maximum level
4. Danger level


Solution :
1. Re order level
= Maximum consumption * Maximum re order
period
X = 75 * 6 = 450 units
Y = 75 * 4 = 300 units
2. Minimum level
= Re order level ( average usage * average
re order period)
X = 450 50 * 4+6/2
= 450 250 = 200 units

Y = 300 50 *2+5/2
= 300 150 = 150 units
3. Maximum level
= Re order level + re order quantity- ( min.
consumption * min. re order period)
X = 450 + 400 ( 25 * 4)
= 850 100 = 750 units
Y = 300 + 600 (25 * 2)
= 900 50 = 850 units
4. Danger Level
= Average consumption * emergency supply
time
X = 50 units * 2 = 100 units
Y = 50 units * 1 = 50 units
Determination of safety stock
Safety stock is a stock which is
maintained by an organization in order to
meet out any of the unanticipated
increase in the usage of materials. Safety
stock refers to the extra inventory held as
a protection against the possibility of a
stock out.
The problem of safety stocks usually does
not occur with regard to certain items
which are readily available from the local
sources and those for which substitutes
are available.
Determination of EOQ
Economic Order Quantity refers to
that size of the lot to be purchased which
is economically viable. In other words it is
the quantity of material that should be
purchased by the organization at a
minimum cost. Simply EOQ is that
inventory level or quantity of material to
place an order at a point that minimizes
the total ordering cost and carrying cost. It
is fixed after considering the following two
aspects;

a) Carrying cost :
Carrying cost are those cost which can be
incurred for holding inventories.
b) Ordering cost :
Ordering costs are those which can be
incurred for placing an order and securing the
supplies.
Equation for calculating EOQ
2DCO
EOQ= CC
Q . Calculate EOQ?
Annual consumption = 6,000 units
Cost of ordering = Rs. 15 per order
Cost per unit = Rs. 2.50
Carrying cost 20% of average inventory.
Answer :
2DCO
EOQ = CC CC = 2.50* 20 / 100
= 0.5
= 2 * 6000* 15
0.5 = 600 units
Inventory turn over ratio
The purpose of calculating
inventory turnover ratio to find out
whether inventories have been used
efficiently or not.
The ultimate aim of this ratio is to
minimize the investment in inventories.
This ratio is an important parameter used to
evaluate the performance of the inventory
function.
ITR= cost of sales during the period
average stock held during the year
Just in time inventory
JIT inventory system means all the
inventories are received and maintained by
concern in time. The purpose behind the
technique is elimination of waste. The basic
principle of this philosophy is to produce at
each manufacturing stage , only the necessary
products at the necessary time in the necessary
quantity to hold the successive manufacturing
stages together.


Inventory reports
Inventory report is a statement
prepared by the organization to show the
latest stock position of different items. This
report should contain all the relevant
information for managerial administrative
action.
Classification and codification
Materials in stores are classified
either on the basis of their nature or on the
basis of their usage. Efficient store keeping is
essential for the effective inventory
management. This is possible only on the
scientific classification and codification of
various items of materials in the organization.
The five categories of cost holding inventories are;
Material cost :
These are the cost of purchasing the goods
including transportation and handling cost.
Ordering cost :
Any manufacturing organization has to
purchase materials. In that event the ordering cost
refer to the costs associated with the preparation of
purchase requisition by the user department,
preparation of purchase order and follow up
measures taken by the purchase department,
transportation etc.
Carrying cost :
These are the expenses of storing goods. Once
the goods have been accepted they become part of
the firms inventories. These cost include insurance,
rent / depreciation of warehouse, salaries of
storekeeper his assistance and security personnel,
financing cost of money locked up in inventories,
obsolescence etc.
Cost of goods tied up with inventories :
Whenever a firm commits its resources to
inventory, it is using funds that otherwise
might have been available for other purposes.


Cost of Running out of Goods :
These are costs associated with the
inability to provide materials to the production
department or inability to provide finished goods to
the marketing department as the requisite
inventories are not available.
Prepared by,
Shaludeen
Devipriya