Inventory Management

An Overview

Constitution
Inventory Constitutes a major portion of
the total current assets of most of the
manufacturing and trading concerns.

Constitution
a)
b)
c)
d)

Proper management of Inventory is a very important part of the

working capital management.
Inventory of a manufacturing concern is divided into four parts:
Raw materials including stores and other items used in the process of
manufacture.
Consumable spares,
Stocks in process,
Finished Goods.

Objectives

The Objectives of managing the above

four categories of inventories are:
i) Necessary arrangements to be made for
regular supply of raw materials to ensure a
smooth flow of production.

Objectives
ii ) Procurement of consumable spares should be
arranged to ensure uninterrupted running of the
plant.
Iii) Stocks in process should be kept at the minimum
level as per the requirements of the manufacturing
process.

Objectives
iv) Adequate stocks of finished goods
should be maintained to ensure smooth sales
operations and efficient customer services.
Investment in the Inventory and the period of
storage should be kept at minimum possible
level to minimize the cost.

Objectives
A

Balance should be maintained between

excess inventory and inadequate inventory.
Prudent Management of inventory can
reduce costs up to 10% without any
adverse effects on production and sales.

Techniques of Inventory Mgmt

ABC

Analysis of Inventories
Fixing Stock Levels
Purchase of Inventory
Coordination between Production and
Marketing Department.
Periodical Review

ABC Analysis
A Comparative study of inventory items
Indicates:
i) A Items ( 5-10%) Value( 70-75%)
ii) B Items(15-20%) Value ( 15-20%)
iii) C items(70-80%) Value ( 5-15%)
A items : Strict Control
Top Mgmt
B items : Moderate Control Middle Mgmt
C items : Less Control
Jr. Mgmt

Fixing Stock Level:

To avoid Over stacked and stock out
situations, max. and min. level is fixed
for each inventory item.
i) Max Level :
Finance Charges, Storage space required,
nature of item, Min. qty. required for
placing the order etc.

Fixing Stock Levels:

Min. Stock Level:
Mfg. Process, Sources of Supply, Lead
Time required for procurement etc.
Fixing Reorder Point for replenishment,
Fixing Danger Levels for replenishment
acquiring even at high cost to avoid any
stoppage in production.

Fixing Stock Levels

Stock

In Process:
Depends on production cycle, time taken
to convert RM into FG.
Can be reduced by improving Mfg Process,
Technology, design of tools etc.

Fixing Stock Levels

Finished

Goods:
Depends upon the coordination between
Production and Marketing Departments.
An organization having a large variety of
goods and/or a large no. of marketing
outlets may be required to keep higher
level of finished goods. Similarly in case of
seasonal industry the level of FG will be
higher at the peak season time.

Fixing Levels of Inventory :

General Guidelines.
Following aspects may be kept in view :
Rate of Consumption required for
production,
Time required for procurement,
Economic Order Quantity,
Seasonal Considerations of availability and price,
Nature of materials, perish ability
Obsolescence risks,

Fixing Stock Levels:

General Guidelines
Requirement and availability of funds,
Cost of funds,
Availability of storage space,
Storage Costs,
Insurance Costs,
Marketing Strategy of the Company for
deciding the level of finished goods,
Inventory Norms as prescribed for the
industry or as per industry standards
Statutory Restriction if any.

Fixing Stock Levels

An organization should decide the min.
and max. levels of stocks keeping in view the
above points. Normally the
stock of inventory should not exceed the
norms suggested by RBI unless there are
cogent reasons justifying the same.
It is necessary to maintain the records of
inventories acquired, utilized/sold and
stock available to keep a proper control.

Purchase of Inventories

Each Company should keep the names

and addresses of the parties who can supply
the various items of inventory
required by it. Efforts should be made
to place an order, at the right time for
the right quantity and quality with the
right source which may supply at most
favorable terms.

Purchase of Inventory :
Economic Order Quantity,
Fixed Order System,
Single Order System

Economic Order Quantity

Generally,

if an order is given for the

purchase of large quantity, the cost incurred
in procuring these goods is low, but at the
same time, carrying cost of the bulk order
is high.
It is therefore necessary to strike a balance
between the ordering cost and
carrying cost keeping in view the total
requirements of the material.

Economic Order Quantity

The quantity of the order where annual
total costs for both ordering and carrying
inventories are minimum, is called as
EOC., which is also called the optimum
size of the purchase order. EOC is decided keeping
in view:
i) Consumption of materials during the given period,
ii) Cost of placing an order,
iii ) Cost of carrying the inventories.

Fixed Order System

Under this system, an order is placed for

a fixed quantity as soon as the stock position
comes to a particular level.
Criteria: Total Quantity of material required for
production and lead time taken for replenishment
of the stock.
Periodical review should be done to decide the
level of fixed quantity to be purchased and also
the level of the stock when purchase order should
be placed.

Single Order System

Under this system, a single order is placed for materials
required for a long period, say for 6m to 12m with
instructions to make supply in certain installments at special
intervals.
This system ensures regular supply of materials without
incurring carrying cost
and provides the advantage of bulk order without storing
the goods.
In this process, regular supply of raw materials
is ensured to the large mfg. unit and the demand
for its products is ensured to trhe ancillary units.

Coordination in Production and

Marketing Departments.
In order to control the level of FG, it is
essential to have perfect coordination
between the production and marketing
departments.
Marketing Department should give feedback to
production department on the sizes and quality of the
products.
Similarly Production department to give feed back on its
production plans and any accumulated / slow moving FG
for their speedy disposal by marketing department.

Periodical Review
It is necessary to take a periodical review
of the inventory position to take corrective action wherever
necessary.
Min. and Max stock level and the size of purchase orders
should not be fixed on
a rigid or long term basis. They should be kept under
periodical review for taking
corrective actions according to the changing
circumstances. Norms of RBI may be kept in view. Besides
Physical Stock verification must be done with reference to
the stock register and corrective actions be taken in case of
slow/non moving items of inventory.

Periodical Review
It is necessary that the stock statement
submitted to the Bank every month should show
correct position in physical/
quantity terms and valuation.
Stock statements are subject to inspection by Bank
Officials for verifying the correctness of the
physical availability, quantity, quality and the
correctness of the Drawing Power and the security
position available to the Bank.

Conclusion

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