INVENTORY

MANAGEMENT
&
Its Techniques By: SHUBHAM MITTAL
ROLL NO. 55
MBA SFS
USM , Kurukshetra
University
INVENTORY
Inventory denotes the stock of goods . In
accounting terms inventory is treated as
stock of finished goods only, while in
manufacturing concern this may include
work in progress, stores, raw materials etc.
ELEMENTS OF INVENTORY
 RAW MATERIAL
 DIRECT MATERIAL: e.g wheat
 INDIRECT MATERIAL: e.g coal

 WORK-IN-PROGRESS

 FINISHED GOODS

 STORES AND SPARES: e.g nuts,bolts etc

INVENTORY MANAGEMENT
 Inventory management is the proper
planning related to purchasing, handling,
storing and accounting of goods.
 Inventory cost are generally very high for
business concerns, so the main motive of
the inventory management is to control
that cost in effective manner.
OBJECTIVES OF I.M.
 OPERATIONAL OBJECTIVES
1- Availability of material
2- Minimizing the wastage
3- Better service to customers
 FINANCIAL OBJECTIVES
1- Economy in purchasing
2- Minimizing Cost- carrying cost , ordering
cost
INVENTORY MANAGEMET
TECHNIQUES
 ECONOMIC ORDER QUANTITY
 REORDER LEVELS
 ABC ANALYSIS
 JUST IN TIME
 VED ANALYSIS
 INVENTORY TURNOVER
ECONOMIC ORDER QUANTITY
 Ordering cost and carrying costs are taken
into consideration while determining EOQ.
Imbalance between these costs can affect
the profits.
The point at which ordering cost is equal to
carrying cost is called EOQ.
ASSUMPTIONS:
 Only one product is involved
 Quantity to be procured is pre-decided
 Prices of goods are constant
 Order received in single delivery
 When the size of the order is
increases, the ordering cost is
decreases. But at the same
time because of high
inventory level the carrying
cost is increases. The point of
intersection is EOQ and at
here both costs are equal and
total cost is at lowest level.

𝟐𝑫𝑶
EOQ EOQ=
𝑯
D= DEMAND ANNUAL
QUANTITY
O=COST OF ORDERING
H= ANNUAL CARRYING COST
RE-ORDER LEVEL
 The point at which the store-keeper
makes a fresh request for the purchase is
known as the reorder level.
Reorder level is that minimum level of
quantity of material / safety stock which
helps in production , up to when the new
stock will not come.
Reorder level=Maximum Consumption rate ×
Maximum reorder period

For e.g = (50 kg)/ day * (10 days)= 500kg

ABC ANALYSIS

 For material control purpose, the materials may be

divided in different categories. It is observed that
sometimes a small percentage of quantity of items
comprises of high value and other times large
percentage of quantity of material comprises of
lesser value. So the material may be classified into
category A,B,C
JUST IN TIME
 JIT is a Japanese management
philosophy of manufacturing, according
to which only the right quantity is
purchased at the right time and in the
right place.
The main focus is on eliminating waste by
purchasing or manufacturing of the right
items.
VED ANALYSIS
 In VED analysis, the items are classified on the
basis of their criticality to the production
process. Under this system of classification ‘V’
stands for vital, ‘E’ stands for Essential, ‘D’
stands for Desirable. Vital are those items
without which the production process can not
be completed, while Essential items are those
items, whose shortage may bring inefficient
production system . This efficiency may be
temporary in nature. Desirable items are those
items which are required but will not result in
the loss of production
INVENTORY TURNOVER
 This ratio is calculated by dividing the cost
of goods sold by the average inventory .
This ratio is usually expressed as ‘X’
number of times.

 INVENTORY TURNOVER RATIO=

𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦