Inventory Management

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INVENTORY

MANAGEMENT
By Rohit Dhiman
Assistant Professor
Uttaranchal University,UIM
WHAT IS INVENTORY? 
  A physical resource that a firm holds in stock with
the intent of selling it or transforming it into a
more valuable state.
 Purpose of inventory management
 How many units to order?
 when to order?
TYPES OF INVENTORIES 
 Raw materials
 Purchased parts and supplies Finished Goods
Work-in-process (partially completed products )
 Items being transported Tools and equipment
NATURE OF INVENTORIES RAW
MATERIALS
 Basic inputs that are converted into finished
product through the manufacturing process Work-
in-progress – Semi-manufactured products need
some more works before they become finished
goods for sale Finished Goods – Completely
manufactured products ready for sale Supplies –
Office and plant materials not directly enter
production but are necessary for production
process and do not involve significant investment.
INVENTORY AND SUPPLY CHAIN
MANAGEMENT BULLWHIP EFFECT 
 Demand information is distorted as it moves away
from the end-use customer(forecast) • higher
safety stock inventories are stored to compensate
Seasonal or cyclical demand Sale of umbrella ,
dominos sale in weekend Inventory provides
independence from vendors Take advantage of
price discounts Inventory provides independence
between stages and avoids work stoppages WIP
inventories
TWO FORMS OF DEMAND DEPENDENT
(NOT USED BY CUSTOMER DIRECTLY) • 
 Demand for items used to produce final products
 • Tires stored at a plant are an example of a
dependent demand item Independent • Demand for
items used by external customers
 • Cars, computers, and houses are examples of
independent demand inventory
CONTD:
 Inventory and Quality Management
Customers usually perceive quality service as
availability of goods when they want them
Inventory must be sufficient to provide high
quality customer service
INVENTORY COSTS 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
INVENTORY MANAGEMENT
 Inventory management is a systematic approach to sourcing, storing, and
selling inventory—both raw materials (components) and finished goods
(products).In business terms, inventory management means the right
stock, at the right levels, in the right place, at the right time, and at the
right cost as well as price.
 Inventory management refers to the process of ordering, storing and
using a company's inventory. This includes the management of raw
materials, components and finished products, as well as warehousing
and processing such items.
 For companies with complex supply chains and manufacturing
processes, balancing the risks of inventory gluts and shortages is
especially difficult. To achieve these balances, firms have developed two
major methods for inventory management:
OBJECTIVES OF INVENTORY
MANAGMENT
 To ensure a continuous supply of materials and
stock so that production should not suffer at the
time of customers demand.
 To avoid both overstocking and under-stocking of
inventory.
 To maintain the availability of materials whenever
and wherever required in enough quantity.
 To maintain minimum working capital as required
for operational and sales activities.
 To optimize various costs indulged with inventories
like purchase cost, carrying a cost, storage cost,
etc.
 To keep material cost under control as they
contribute to reducing the cost of production.
 To eliminate duplication in ordering stocks.
 To minimize loss through deterioration, pilferage,
wastages, and damages.
 To ensure everlasting inventory control so that
materials shown in stock ledgers should be
physically lying in the warehouse.
 To ensure the quality of goods at reasonable prices.
 To facilitate furnishing of data for short and
long-term planning with a controlled
inventory.
 To supply the required material
continuously.
 To maintain a systematic record of
inventory.
 To make stability in price.
TECHNIQUES OF THE INVENTORY
MANAGEMENT SYSTEM

 Many businesses select one inventory management


technique, and some prefer a unique blend of techniques,
that best suits their particular needs.
 However, what implements an integrated inventory
management software to your business is Asset Infinity.
 Nevertheless, the technique your business chooses to
employ, it if does not have the ability to track, trace and
account your inventory in real-time, anyhow it will run
into trouble.
 There are several inventory management techniques that
you can use to manage, track, and analyze your
production and sales
COMMON INVENTORY MANAGEMENT
TECHNIQUES ARE:

 Just-in-Time (JIT) Delivery –


 The Just-in-Time technique is a strategy to increase
efficiency and decrease waste by receiving goods in
the quantity as needed for the production process,
thereby decreasing inventory costs.  
 JIT delivery leads to reductions in costs and improves
efficiency and profit margins in the following ways:  
 Decreased inventory levels
 Reduced lab our costs
 Fewer factory spaces
 Stock reduction
CONTD:
 Increased productivity
 Improved quality
 Reduced throughput times
ABC ANALYSIS
 ABC Analysis allows you to characterize your product
according to their requirement. A few of the product
require more attention than others. In this add your
product to each category as per their requirement list.
 Category A — This includes the product of high quality
with a low frequency of sales.
 Category B — This includes the product of moderate
quality with a moderate frequency of sales.
 Category C — This includes the product of low quality
with a high frequency of sales.
DROP-SHIPPING

 Drops hipping technique is a retail fulfillment


method where a store does not keep the finished
products to sells in its stock.
 Instead, when a store had to sell a product, it
purchases the item from the third party, and it is
shipped directly to the customer. As a result, the
merchant never sees or handles the product.
ECONOMIC ORDER
QUANTITY
 The (EOQ) is the order quantity that minimizes total holding
and ordering costs for the year. Even if all the assumptions
don’t hold exactly, the EOQ gives us a good indication of
whether or not current order quantities are reasonable
 Importance of EOQ
 The Economic Order Quantity is a set point designed to help
companies minimize the cost of ordering and holding 
inventory. The cost of ordering inventory falls with the
increase in ordering volume due to purchasing on 
economies of scale. However, as the size of inventory grows,
the cost of holding the inventory rises. EOQ is the exact
point that minimizes both of these inversely related costs.
  
DETERMINATION OF EOQ
 Determination of the quantity for which the order to be
placed is one of the important problems concerned with
the efficient inventory management.
 EOQ refers to the size of the order which gives
maximum economy in purchasing any item of raw
material or finished products. It is fixed mainly after
taking into account the following cost.
 Ordering Cost: Ordering cost is also known as
acquisition and set up cost refer to the cost involved in
placement for order for purchase of raw material this
include expenses related to preparation of purchase
order , transporting ,Receiving inspecting and recording
of materials.
 Carrying Cost: Carrying cost refer to the cost
incurred for maintaining a given level of
inventory .These cost can normally be grouped
in four categories
 Storage cost
 Servicing cost
 Cost of deterioration
 Opportunity costs.
 Annual Carrying cost:q0/2*CH
 QO=quantity to be ordered
 Ch=Holding cost per unit per year
ASSUMPTIONS OF EOQ
 The total usage of a particular item for a given
period (Usually a year ) is known with the
certainty and that the usage rate is even through
out the period.
 That there is no time gap between placing an order
and getting its supply.
 There is no distinguishable cost associated with
inventories :Cost of ordering and cost of carrying
 The cost per order is constant regardless of the size
of order.
 The cost of carrying is fixed percentage of the
average value of inventory .
 The purchase price of the item is constant that is o
say no discount is available on purchase of large
lots.
 The EOQ model is a useful technique of inventory
management as it tells the quantity to order and
also the time to order. It helps in deciding when to
replenish the inventory and also the quantity to be
replenished.

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