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BY: Chanchal Agarwal

INVENTORY

MANAGEMENT

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INTRODUCTION

MEANING OF INVENTORY:

The meaning of inventory is s tock of goods. In

accounting language it may include:

1.RAW MATERIAL: They are required to carry out

production activities uninterruptedly.

2.WORK-IN-PROGRESS: It is a stage of stocks between

raw material & finished goods.

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3.CONSUMABLES: These are needed to smoothen

the process of production.

4.FINISHED GOODS: These are the goods which are

ready for the consumers.

5.SPARES: Form a part of inventory.

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Purpose/ Benefits of Holding

Inventories

Transaction Motive to facilitate Continuous

Production.

Speculative Motive for taking advantage of price

fluctuations, saving in re-ordering costs and quantity

discounts, etc.

Precaution Motive for meeting unpredictable

changes in demand and supplies of materials

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Inventory Management

An efficient system of inventory management

will determine

What to purchase

How much to purchase

From where to purchaseWhere to store

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Objectives Of Inventory Management To ensure continuous supply of raw material, spares

and finished goods.

To avoid both overstocking and under stocking of

inventory.

To maintain investments in inventories at optimum

level.

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OBJECTIVES OF INVENTORY

MANAGEMENT(cntd )

To eliminate duplications in orders

To keep material cost under control.

To minimize losses through wastage and damages.

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Tools of Inventory Management

1. Stock Levels

2. Safety Stocks

3. Ordering System of Inventory

4. Determination of EOQ

5. ABC Analysis

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6.VED Analysis

7.Inventory Turnover Ratio

8.Aging Schedule of Inventories

9.Classification & Codification on Inventories

10.Inventory Reports

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Techniques of inventory management

Determination of stock level:

Minimum level=reordering level-(normal

consumption * normal reordering period )

Maximum level=reordering level+ reordering

quantity (minimum consumption * minimum

reordering period )

Danger level=consumption * maximum

reorder period

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Determination safety stocks:

Safety stock is a buffer to meet some unanticipated

increase in usage.

TWO COST ARE INVOLVED IN THE DETERMINATION

1.OPPORTUNITY COST OF STOCK OUTS

2.CARRYING COST

INVENTORY TURNOVER RATIO:

INVENTORY TURNOVER RATIO=COST OF GOOD

SOLD /AVERAGE INVENTRY AT COST

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Economic Order Quantity:

Economic order quantity is the size of the lot to be

purchased which is economically viable.

EOQ IS MADE UP OF TWO PARTS :

1.ORDERING COST: These cost are associated with the

purchasing or ordering of materials.

2.CARRYING COST: These are the costs for holding the

inventories.

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Group-B:

Under this category 20% of the items contribute

about 20% of value of consumption.

Group-C:

Under this category about 70% of items of

material contribute only 10% of value of

consumption.

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VED ANALYSIS:

The VED analysis is used generally for spare parts. The

requirements and urgency of spare parts is different

from that of materials. Spare parts are classified asvital(V),essential(E),desirable(D).

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VITAL SPARE PARTS:

These are must for running the concern smoothly.

ESSENTIAL SPARE PARTS:

Necessary but stock kept at low figures.

DESIRABLE SPARE PARTS:

May be avoided at times.

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INVENTORY REPORTS:

The management is kept informed with the latest

stock position of different items by preparingperiodical inventory reports. on the basis of these

reports management takes corrective action

wherever necessary.

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