Effective Inventory Management

8/9/2019 Effective Inventory Management

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It's easy to turn cash intoinventory... the challenge is to turn

inventory back into cash!





The meaning of inventory is µstock of goods¶.Inaccounting language it may include:

(a)RAW MATERIAL: They are required to carry out

production acivities uninterruptedly.(b)WORK-IN-PROGRESS:It is a stage of stocks

between raw material & finished goods.(c)CONSUMABLES :These are needed to

smoothen the process of production.(d)FINISHED GOODS: These are the goods which

are ready for the consumers.(e)SPARES: Form a part of inventory



An efficient system of inventory

management will determine

(a) what to purchase(b)how much to purchase

(c)from where to purchase

(d) where to store



Inventory management is primarily about

specifying the size and placement of

stocked goods. Inventory management isrequired at different locations within a

facility or within multiple locations of a

supply network to protect the regular and

planned course of production against therandom disturbance of running out of

materials or goods.



The scope of inventory management alsoconcerns the fine lines betweenreplenishment lead time, carrying costs of

inventory, asset management, inventoryforecasting, inventory valuation, inventoryvisibility, future inventory price forecasting,physical inventory, available physical space

for inventory, quality management,replenishment, returns and defective goodsand demand forecasting.



Successful inventory management

involves balancing the costs of inventory

with the benefits of inventory. Many smallbusiness owners fail to appreciate fully the

true costs of carrying inventory, which

include not only direct costs of storage,

insurance and taxes, but also the cost of money tied up in inventory.



DETERMINATION OF STOCK LEVEL:

(a)MINIMUM LEVEL=rerdering level-(normal

consumption * normal reordering period )(b)MAXIMUM LEVEL=reordering level+

reordering quantity ± (minimum consumption* minimum reordering period )

(C) D ANGER LEVEL=consumption * maximumreorder priod



Safety stock is a buffer to meet someunanticipated increase in usage.

Two cost are involved in the determination

1.OPPORTUNITY COST OF STOCK OUTS2.CARRYING COST

INVE

NT

ORY

TU

RNOVE

R RAT

IO: INVENTORY TURNOVER RATIO=COSTOFGOOD SOLD /AVERAGE INVENTRYAT COST



The materials are divided into three categoriesviz, A ,B &C

CATEGORY-A:U

nder this almost 10% of the items contribute to70% of value of consumption.CATEGORY-B:Under this category 20% of the items contribute

about 20% of value of consumption.

CATE

GORY

-C:Under this category about 70% of items of materialcontribute only 10% of value of consumption.





X: Items with high inventory value

Y: Items with moderate inventory value Z: Items with low inventory value

The basis of control is the annual closing inventory value

FNSD Control: F: Fast moving Items N: Normal moving Items S: Slow moving Items

D: Dead items The basis of control is the Usage rate



Selective Control

Technique

Basis of classification Chief Use

ABC Consumption value Controlling RM, WIP andcomponents

VED Criticality of item Determining the inventory

level of spare parts

XYZ Value of item in storage Reviewing the inventories &

other uses

FNSD Consumption rate of item Controlling obsolescence





Budgets are good management tools. Unfortunately, fewdistributors maintain budgets and projections for what isprobably their largest asset, inventory. It is critical to thesuccess of your inventory management system, and your business in general, to develop a budget for the value of

stocked inventory maintained in each warehouse. This budgetis referred to as the "target inventory investment."

To calculate your target inventory investment, we use avariation of the formula used to calculate inventory turnover:

Target Inventory Investment =Projected Annual Cost of Goods Sold from Stock SalesTarget Inventory Turnover





Replenishment is normally based on safety stock quantities,order points, line points, and standard order quantities:

S AFETY STOCK QU ANTITY: The "insurance" inventorymaintained in stock to protect you from stock outs resulting

from unexpected customer demand or vendor shipmentdelays.

ORDER POINT: The Safety Stock Quantity plus predicteddemand during the anticipated lead time.

The Order Point plus predicted demand during the supplier review or order cycle; the normal length of time between

typical replenishment orders with the supplier







Inventory carrying costs

These costs closely depend upon the

quantities ordered and comprise of elements

like insurance, deterioration, rental for storagespace, operating cost for store and the cost of

funds locked up in inventory.

This cost is expressed as cost per unit time

per rupee invested in inventory.



Shortage costs If a firm is not able to meet the demand of

customer for want of stock on hand, we can

attribute a certain cost to this.

x Loss of sale case

x Back ordering

x Cost of procuring an item on an emergency basis.



60% of orders received contain mistakes

Salespeople spend 40% of time fixing

problems instead of selling ABC estimates that electronic commerce

will reduce cost of processing purchase

order from Rs.150 to Rs.25



Developed system to link its 50

wholesalers to its central warehouse

If customer needs product and wholesaler is low, product shipped directly from

central warehouse to customer





Exhibited by Rohi t Rawa t

Mba general2nd sem

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Effective Inventory Management