ON

INVENTORY MANAGEMENT

What Is Inventory?
Stock of items kept to meet future demand
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It is most significant part of the current assets It serves as a link between production & distribution process.

Work in process

Vendors

Raw Materials
Work in process

Work in process

Finished goods

Customer

INVENTORY MANAGEMENT
A proper planning of purchasing of raw material , handling, storing and recording is to be considered by the inventory management.
Inventory management is considered: What to purchase? How to purchase? How much to purchase? Where to purchase? Where to store? When to use for product?

Why We Want to Hold Inventories

Improve customer service Reduce certain costs such as ordering costs Stock out costs acquisition costs Contribute to the efficient and effective operation of the production system

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Raw Materials :
materials and components scheduled for use in making a product

Works-in-Process WIP
materials and components that have begun their transformation to finished goods

Finished Goods
goods ready for sale to customers

Why We Do Not Want to Hold Inventories

Certain costs increase such as carrying costs cost of customer responsiveness cost of coordinating production cost of diluted return on investment reduced-capacity costs large-lot quality cost cost of production problems

Inventory Cost Structures

Carrying cost : Cost of holding an item in inventory Ordering cost : Cost of replenishing inventory Shortage cost : Temporary or permanent loss of sales when demand cannot be met

different stock levels

Maximum stock level Minimum stock level Reorder level Danger level

Economic Ordering Quantity

EOQ is the quantity of material which can be purchased at minimum cost.

EOQ is the point at which inventory carrying cost equal to order cost
Assumptions of Basic EOQ Model

Demand is known and is constant over time Lead time for the receipt of orders is constant Order quantity is received all at once

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Annual carrying cost = (average inventory level) x (carrying cost) = (Q/2)C Annual ordering cost = (average number of orders per year) x (ordering cost) = (D/Q)S Total annual stocking cost (TSC) = annual carrying cost + annual ordering cost = (Q/2)C + (D/Q)S

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EOQ = 2 DS / C

ABC Analysis(always best control )

The ABC analysis suggests that inventories of an organization are not of equal value. The inventory is grouped into three categories (A, B, and C) in order of their estimated importance

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'A' items are very important for an organization. Because of the high value of these A items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern to avoid excess capacity. 'B' items are important, but of course less important, than A items and more important than C items. Therefore B items are intergroup items. 'C' items are marginally important