Inventory Management PPT 1

Inventory
Management
CONTENT
 Introduction
 Forms of Demand
 Forms of Inventories
 Classification of Inventories Cost
 Inventory Control
 Objectives of Inventory Control

INTRODUCTION
Inventory is material that the firm obtains in

advance of need, holds until it is needed, and then
used, consumes, incorporates into a product, sells,
or otherwise disposes it of. A business inventory is
temporary in nature.
Inventories are stock of any kind like fuel and

lubricants, spare parts and semi-processed
materials to be stored for future use mainly in the
process of production or it can be known as the
ideal resource of any kind having some economic
INVENTORY VALUATION
INVOLVES TWO PROCESS
 Determination of quality of each type of

inventory held.
 Assignment of the values of the

units items of inventory
TWO FORMS OF DEMAND
 Dependent
 Demand for items used to produce final products
 Tires stored at a Goodyear plant are an example
of a dependent demand item
 Independent
 Demand for items used by external customers
 Cars, appliances, computers, and houses are
examples of independent demand inventory
FORMS OF
INVENTORIES
There are many types of

inventory. The form of inventories
depends upon the type of
concern. All types of inventory do
not require same treatment and
therefore policy with regard to
each may also differ.
RAW MATERIAL INVENTORIES:
There are raw materials and other supplies, parts and

components, which enter into the product during the
production process and generally form part of the product.
WORK IN PROCESS
INVENTORIES:
These are semi finished, work in progress and partly
finished products formed at the various stages of
production.
M.R.O INVENTORIES/ SPARE
PART INVENTORIES:
Maintenance, repairs and operating supplies which are
consumed during the production process and generally do
not form part of the product itself are referred to as spare
part inventories.
FINISHED INVENTORIES:
These are complete finished products ready for sales. In a
manufacturing unit, they are the
final output of the production process.
They can also be classified as:-
• Movement inventories
• Lot size inventories
• Anticipation inventories
• Fluctuation inventories
CYCLE STOCK AND SAFETY
STOCK
CYCLE STOCK AND SAFETY STOCK
ON
HAND
INVENTOR
Y
CLASSIFICATION OF
INVENTORIES COST:
Inventories’ cost are

traditionally categorized into
four basic types:
PURCHASE COST:
For items that are purchased from outside the firms, this is
usually the unit price that the firm pays to its vendor. As an
item moves through the logistics system of the firms, it
purchase cost in the inventory analysis should reflect its
fully landed cost, by which is meant the cost to acquire
and moves the item to that point in the system.
ORDERING COST:
In addition to the per unit purchase cost, there is usually an

additional cost which is incurred whenever we order, reorder or
replenish the inventory. If we produce items internally then there
will be an organization set up cost. This happens because we
have to shut down the manufacturing line and change over,
reconfigure the line to make a specific item.
This is the cost involved with processing the order, involving
paying the bill, auditing, and so forth.
HOLDING COST:
The cost that accrue due to the actual holding of the inventory over
a time period. Many different kinds of cost can be considered as
holding cost. The key characteristics of holding cost varies with the
amount of inventory being held and the time that the inventory is
held. The holding cost can further be classified as follows:
• Storage cost
• Service cost
• Risk cost
•Capital cost.
SHORTAGE COST:
When a demand arises which cannot be satisfied from available

inventory an inventory shortage occurs. Purchase, ordering and
holding cost can be thought of as the cost of having inventories,
while shortage cost result for not having inventory, or for not
having enough inventory at the right place at the right time
FOUR SPECIFIC CASE WHERE
SHORTAGE COST MAY EXIST ARE:
 Back orders
 Lost sales
 Lost customer cost
 Disruption cost
INVENTORY CONTROL:
Inventory control is the means by which

materials of the correct quality and in
correct quantity are made available as
and when required with due regard to
economic in storage and ordering cost.
Hear the desired level of inventory can
neither be high or low because high level
inventory will lead to increase in carrying
cost while low level of inventory will
lead to increase in ordering cost
THE ACTIVITIES OF INVENTORY
CONTROL NORMALLY INCLUDE THE
FOLLOWING:
• Determination of the limits of the inventories to be

held.
• Determination of inventory policies.
• Selling out of investments pattern and its regulations

as per individual and collective requirements.
• Follow up to examine the work of inventory policy

and effect change as and when needed.
SCOPE OF INVENTORY CONTROL:
SCOPE OF INVENTORY CONTROL
Determinati Determining Determining

on of economic order lead time
inventory size Examining
policies. the work
Determini of
ng various Safety or
inventory
stock buffer stock
policy
levels
OBJECTIVES OF INVENTORY
CONTROL:
• To ensure smooth flow of stock.
• To provide for required quality of materials.
•To control investments in stock.
• Protection against fluctuating demand.
• Protection against fluctuations in output.
• Minimization of risk and uncertainty.
• Risk of obsolescence.
•Minimization of material cost.

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Inventory

 Classification of Inventories Cost

 Objectives of Inventory Control

Inventory is material that the firm obtains in

Inventories are stock of any kind like fuel and

 Determination of quality of each type of

 Assignment of the values of the

There are many types of

There are raw materials and other supplies, parts and

CYCLE STOCK AND SAFETY STOCK

Inventories’ cost are

In addition to the per unit purchase cost, there is usually an

When a demand arises which cannot be satisfied from available

 Lost customer cost

Inventory control is the means by which

• Determination of the limits of the inventories to be

• Determination of inventory policies.

• Selling out of investments pattern and its regulations

• Follow up to examine the work of inventory policy

SCOPE OF INVENTORY CONTROL

Determinati Determining Determining

• To provide for required quality of materials.

•To control investments in stock.

• Protection against fluctuating demand.

• Protection against fluctuations in output.

• Minimization of risk and uncertainty.

•Minimization of material cost.

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