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INVENTORY MANAGEMENT

HYDERALI C.K106004

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INTRODUCTION

Significant part of the current asset

Large amount of inventory leads to

considerable lapse of fund Imperative to manage to avoid

unnecessary investment

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Cont..

Inventory Control measure andregulate to predetermine

-size for order or production,-safety stock

- minimum level of order

- maximum level of order

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Nature of inventories

Raw material

Work in process

Finished goods

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NEED TO HOLDINVENTORIES

Transaction motive(smoothproduction)

Precautionary motive(demand)

Production motive (price)

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PRODUCTION CYCLE

Time span between introduction rawmaterial to the conversion into thefinished product

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OBJECTIVE OF INVENTORYMANAGEMENT

To meet unforeseen future demanddue to variation in forecast figuresand actual figures.

To meet the customer requirementtimely, effectively, efficiently andsmoothly

To smoothen the production process.

To facilitate intermittent production

of several products on the samefacilit .

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Cont..

To gain economy of production orpurchase in lots.

To reduce loss due to changes inprices of inventory items.

To meet the time lag for

transportation of goods. To balance various costs of inventory

such as order cost or set up cost and

inventory carrying cost

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Cont..

To balance the stock outcost/opportunity cost due to loss ofsales against the costs of inventory.

To minimize losses due todeterioration, obsolescence, damageetc.

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Optimum level of inventory

It lies between two danger point,i.ebetween excessive and inadequate

level

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Major danger in theoverinvesment

Unnecessary tie-up of firms fund andloss of profit

Excessive carrying cost Risk of liquidity

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Major danger in theinadequate level

Production hold-up Failure to meet delivery commitment

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Effective inventorymanagement

Continues supply of raw material tofacilitate production

Maintain sufficient stock of rawmaterials in periods of short supplyand anticipate price changes

Maintain sufficient finished goodsinventory for smooth sales operation,and efficient customer service

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Cont..

Minimise the carrying cost and time Control investment in inventories and

keep it an optimum level

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Inventory managementtechniques

Aim to maximise the shareholderwealth

For efficient inventory management,we have to answer

-how much should be ordered ?(ans;EOQ)

-when should it be ordered ?(ans;reorder point)

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Economic order quantity

ordering materials whenever stockreaches the reorder point

It tells how production to be schedule

optimum level of inventoryinvolves two types of cost

1.ordering cost2.carrying cost

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Ordering cost

It is the entire cost to acquire the rawmaterial(supplies).

It include

-Requisitioning

-order placing

-Transportation

-Receiving, inspecting and storing

-clerical and staff

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Carrying cost

It is the cost incurred to maintain thegiven level of inventory

It include

-Warehousing

-Handling

-clerical and staff

-Insurance

-Deterioration and obsolescene

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Ordering and carrying costtrade off

Optimum level of inventory referredto EOQ

To determine EOQ-three approaches

-Trial and error approach

-Formula approach

-Graphical approach

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Trial and error approach

Assumptions

-known annual requirement

-steady usage-ordering and carrying cost to be

constant through the entire period

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Example illustrating thetrial and error approach

Estimated annual requirement, A=1200unit

Purchasing cost per unit, P(Rs)=50

Ordering cost (per order),O(Rs)=37.50

Carrying cost per unit,c(Re)

=1

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Total cost in the variousorders

Order size(Q) 1200 600 400 300 240 200 150 120 100

Averageinventory(Q/2)

600 300 200 150 120 100 75 60 50

No.of orders

(A/Q)

1 2 3 4 5 6 8 10 12

AnnualcarryingCost (Rs)(cQ/2)

600 300 200 150 120 100 75 60 50

Annualordering cost(Rs)(OA/Q)

37.5 75 112.5 150 187.5 225 300 375 450

Total annualcosts (Rs)

637.5 375 312.5 300 307.5 325 375 435 500

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Inference from the TC table

OrderTotal cost

1.For single order(once in year)637.5

2.12 order (once in a month)500

3.4 order(once in every 3 month)300

i.e.the third option is the most

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Order formula approach

It is more easier way compared totrial and error approach

Assumption

-carrying cost per unit constant

-ordering cost per order fixed

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Cont

O=ordering cost per order

A=Total annual requirement Q=order size

Per unit carrying cost=c

Number of order=A/Q

TOC(Total order cost)=(A/Q)XO

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Cont..

Average inventory =Q/2 TCC(Total carrying cost)=(Q/2)Xc

TC(Total cost) =TOC+TCC

TC =(A/Q)XO + (Q/2)Xc

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Inference from the equation

For larger quantity order =carryingcost increases

=ordering costdecreases

For lower quantity order=carryingcost decreases

=ordering costincrease

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Cont.

EOQ should lie between larger &lower quantity order

So EOQ = differentiate TC andequate to zero

TC =(A/Q)XO + (Q/2)Xc

EOQ=-(AO)/Q^2+c/2=0 c/2=(AO)/Q^2

EOQ=Q=((2AO)/c)^.5

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In the earlier problem

A=1200

O=37.5

c=1 EOQ=((2AO)/c)^.5

=((2X1200X37.5)/1)^.5

=300

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Graphical method

Vertical axis =costs

-carrying cost(TCC)

-ordering cost(TOC)

-Total cost (TC) Horizontal axis =order size (Q)

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Cont

Order Quantity Size (Q)

Cos

t(Rs.)

EOQ

Tc (TotalCost)

Carrying

Cost (Q/2)H

DS/Q (OrderingCost)

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Cont

Carrying cost increases with increaseorder size, because of large have tobe maintained

Ordering cost decline with increase inorder size, because larger order sizemeans lesser no of order

Total cost has the behaviour of bothordering cost and carrying cost

EOQ=deviating point of TC

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Quantity discount

Supplier offer discount for large ordersize (above EOQ)

Net return=discount savings additional carryingcost

If return +ve = can avail the discountoffer

If return ve= order size should beEOQ level

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Example

d=discount rate (.005)

Discount onsavings=dXPXA=(.005X50X1200)

=300

Savings on the ordering cost=(OA/Q)-(OA/q)

Here Q=EOQ & q=discount

quantity(400)

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Cont.

Additional carrying cost=(cq/2)-(cQ/2)

=c/2(q-Q)

=1/2(400-300)

=50

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Cont

Net return=[dPA+ savings on -additional

discount]carrying cost

=(300+37.5)-50

=287.5 Here net return is +ve= firm should

order 400

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Important Terms

Minimum Level It is the minimumstock to be maintained for smoothproduction.

Maximum Level It is the level ofstock, beyond which a firm shouldnot maintain the stock.

Reorder Level The stock level atwhich an order should be placed.

Safety Stock Stock for usage atnormal rate durin the extension of

C d f i

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Case study of inventorycontrol (ABC)

Several types of inventories are therein ABC

Classify the inventories into

-High value =A

-Least value =C

-reasonable attention=B(A&C)

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Cont.

ABC analysis concentrate onimportant items

=Control by important

exception(CIE) Classified in the importance of their

relative value=Proportion Value

Analysis(PVA)

ep nvo ve n

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ep nvo ve nimplementing the ABC

analysis Classify ,determine expected use &price of the inventories

Determine total value ofitem(expectedunitXunit price)

Rank the items (according to totalvalue)

Compute the ratios (no.of unit/totalunit) & (each value of item/totalvalue of all item

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ABC analysis tableItem Units % of

Total

Cumula-

tive %

Unit

price Rs

Total cost

Rs

% of

Total

Cumula-

tive %

1 10000 10 30.40 304000 38.00

2 5000 5 15 51.20 256000 32.00 70

3 16000 16 5.50 88000 11.00

4 14000 14 45 5.14 72000 9.00 90

5 30000 30 1.70 51000 6.38

6 15000 15 1.50 22500 2.81

7 10000 10 100 0.65 6500 0.81 100

Total 100000 800000

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Inference

Assumption =1&2 ,3,4&5,6&7 fall inthe same category

1&2=item A

3,4&5=item B

6&7 =item C

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Thank you