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(BZU) Department of Business Administration
BAHADUR Sub-Campus Layyah
MBA 2009-12 SEMESTER 5FINAL REPORT
DISTRIBUTION MANAGEMENT
SUBMITTED TO MR MUJEEB SARFRAZ
STUDENTS GROUP
1 Akhtar Hussain Chughtai (MB-09-22)
2 Muhammad Ihsan ul Haq (MB-09-02)
3 Nadeem Akhtar (MB-09-25)
4 Muhammad Rashid (MB-09-41)
Dated January 02 2012
IN THE NAME OF ALLAH THE MOST
MERCIFUL AND THE MOST BENEFICIENT
2 | P a g e
Acknowledgements We are very thankful to Almighty Allah
Who has given us wisdom and power to learn and
seek All praises and admirations to Almighty Allah Who is the creator of every thing
Thanks also to Hazrat Muhammad (PBUH) Who is source of knowledge and leadership for all mankind forever
We are also very thankful to our beloved teacher Mr Mujeeb Sarfaraz who is prompting us towards professionalism Tons of thanks for his valuable support and consistent guidance
Akhtar Hussain Chughtai Muhammad Ihsan ul Haq Nadeem Akhtar Muhammad Rashid
3 | P a g e
Dedication
This
Report
Is
Dedicated
To
Who are always a source of love affection and inspiration for us Whose love and prayers always accompanied us
and guide us like a shining star whenever we
were in darkness and enable us to reach this
stage
4 | P a g e
TABLE OF CONTENTS
1) Introduction 06
2) Inventory in supply chain 09
3) Definitions amp concepts 10
4) Purpose of inventory 12
5) Types of inventory 14
6) Inventory management techniques 19
7) Other techniques 23
8) Five S 28
9) Conclusion 29
10) References 30
5 | P a g e
IntroductionThe word inventory simply means the goods and services that businesses hold in stock There
are however several different categories or types of inventory The first is called materials
and components This usually consists of the essential items needed to create or make a
finished product such as gears for a bicycle microchips for a computer or screens and tubes
for a television set The second type of inventory is called WIP or work in progress
inventory This refers to items that are partially completed but are not the entire finished
product They are on their way to becoming whole items but are not quite their yet The third
and most common form of inventory is called finished goods These are the final products
that are ready to be purchased by customers and consumers Finished goods can range from
cakes to furniture to vehicles Most people think of the finished goods as being part of an
inventory stock but the parts that create them are held accountable in inventory as well
Management is an individual or a group of individuals that accept responsibilities to run an
organisation They Plan Organise Direct and Control all the essential activities of the
organisation Management does not do the work themselves They motivate others to do the
work and co-ordinate (ie bring together) all the work for achieving the objectives of the
organisation Management brings together all Six Ms ie Men and Women Money
Machines Materials Methods and Markets They use these resources for achieving the
objectives of the organisation such as high sales maximum profits business expansion etc
Inventory management is the process of efficiently overseeing the constant flow of units into
and out of an existing inventory This process usually involves controlling the transfer in of
units in order to prevent the inventory from becoming too high or dwindling to levels that
could put the operation of the company into jeopardy Competent inventory management also
seeks to control the costs associated with the inventory both from the perspective of the total
value of the goods included and the tax burden generated by the cumulative value of the
inventory
6 | P a g e
INVENTORY MANAGEMENT
Inventory management includes a companys activities to acquire dispose and control of
inventories that are necessary for the attainment of a companys objectives The management
of inventories concerns the flow to within and from the company and the balance between
shortages and excesses in an uncertain environment (Tersin 1988) According to McPharson
(1987 p360) in apparel manufacturing inventory management systems are designed to
obtain concise and accurate information for control and planning of planned goods issues
cuts projections WIP and finished goods Inventory management has been a concern for
academics as well as practitioners in that overall investment in inventory accounts for
relatively large part of a companys assets Inventory may account for 20 to 40 of total
assets (Tersin 1988 Verwijmeren Vlist amp Donselaar 1996) Inventories tie up money and
success or failure in inventory management impacts a companys financial status Having too
much inventory can be as problematic as having too little inventory Too much inventory
requires unnecessary costs related to issues of storage markdowns and obsolescence while
7 | P a g e
too little results in stockouts or disrupted production Besides long-run production associated
with a high level of inventory conceals production problems (eg quality) which can
damage a companys long term performance (Vergin 1998) Therefore the primary goal of
inventory management has been to maximize a companys profitability by minimizing the
cost tied up with inventory and at the same time meeting the customer service requirements
(Lambert Stock amp Ellram 1998) Decisions on Production and Inventory Management
Many authors have proposed factors which management should consider for better inventory
management Branam (1984) specifically emphasized the importance of in-plant throughput
time reduction because throughput time is the ultimate constraint on inventory turnover ratio
(inventory turnover ratio = annual cost of goods soldaverage on hand inventory) which is
one of the major performance indicators in inventory management The authors
interpretation of the in-plant throughput time is the time span from the point of raw material
receipt to final assembly Tersine (1988) pointed out the factors for better inventory
management as better forecasting improved transportation improved communication
improved technology better scheduling and standardization
Pachura (1998) suggested that management should start the process of improving inventory
management by determining the manufacturing type benchmarking the inventory control
performance validating strategy (ie make-to-order make-to-stock build-to-forecast)
determining underlying causes through the use of an operational review and implementing
corrective action Higginson and Alam (1997) suggested specific techniques for inventory
management by focusing on cycle time
1 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin
2 Increasing inventory turnover -- but not sacrificing the service level3 Keeping stock low -- but not sacrificing service or performance4 Obtaining lower prices by making volume purchases -- but not ending up with slow-
moving inventory and
5 Having an adequate inventory on hand -- but not getting caught with obsolete items
8 | P a g e
INVENTORY MANAGEMENT IN THE SUPPLY CHAIN
Inventory management is one aspect of SCM The main goal of SCM is to better manage
inventory throughout the chain via improved information flow aimed at improved customer
service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)
Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory
Management (p16) for the inventory aspect of SCM The efficiency of SCM can be
measured by inventory performance such as the speed of inventory passing through the chain
and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various
forms from raw materials through WIP to finished goods is fed into the chain from suppliers
production and subsequently distribution centers to customers (Alber amp Walker 1997) This
flow of inventory requires responsibilities of channel members for the planning acquisition
storage movement and control of materials and final products (Tersine 1988) High levels
of inventory are found when the chain members less communicates due to lack of
information sharing between chain members and inefficiency of SCM Manufacturers the
main interest of this study have the most difficult and complex inventory problem as they
deal with raw material acquisition transformation of the material into final finished goods
and movement to the customer These consecutive activities require manufacturers to control
production scheduling and timing that are not easily accomplished due to uncertainties in
supplier performance manufacturing process and customer demand Manufacturers could
not reduce their buffer stocks without trusting in their partnerships and sharing forecasting
information on actual demand at retail level because of the bullwhip effect(Nahmias 1997
p791) which means the effect of retail sales fluctuation grows larger as it traverses to
upstream chain members More customer requirements for broader product coverage and
greater delivery capabilities escalate manufacturers problem in production process
complexity and forecasting of future demand
9 | P a g e
Definitions and concepts
In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are
Demand
The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)
Lead time
The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are
1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods
10 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
Dated January 02 2012
IN THE NAME OF ALLAH THE MOST
MERCIFUL AND THE MOST BENEFICIENT
2 | P a g e
Acknowledgements We are very thankful to Almighty Allah
Who has given us wisdom and power to learn and
seek All praises and admirations to Almighty Allah Who is the creator of every thing
Thanks also to Hazrat Muhammad (PBUH) Who is source of knowledge and leadership for all mankind forever
We are also very thankful to our beloved teacher Mr Mujeeb Sarfaraz who is prompting us towards professionalism Tons of thanks for his valuable support and consistent guidance
Akhtar Hussain Chughtai Muhammad Ihsan ul Haq Nadeem Akhtar Muhammad Rashid
3 | P a g e
Dedication
This
Report
Is
Dedicated
To
Who are always a source of love affection and inspiration for us Whose love and prayers always accompanied us
and guide us like a shining star whenever we
were in darkness and enable us to reach this
stage
4 | P a g e
TABLE OF CONTENTS
1) Introduction 06
2) Inventory in supply chain 09
3) Definitions amp concepts 10
4) Purpose of inventory 12
5) Types of inventory 14
6) Inventory management techniques 19
7) Other techniques 23
8) Five S 28
9) Conclusion 29
10) References 30
5 | P a g e
IntroductionThe word inventory simply means the goods and services that businesses hold in stock There
are however several different categories or types of inventory The first is called materials
and components This usually consists of the essential items needed to create or make a
finished product such as gears for a bicycle microchips for a computer or screens and tubes
for a television set The second type of inventory is called WIP or work in progress
inventory This refers to items that are partially completed but are not the entire finished
product They are on their way to becoming whole items but are not quite their yet The third
and most common form of inventory is called finished goods These are the final products
that are ready to be purchased by customers and consumers Finished goods can range from
cakes to furniture to vehicles Most people think of the finished goods as being part of an
inventory stock but the parts that create them are held accountable in inventory as well
Management is an individual or a group of individuals that accept responsibilities to run an
organisation They Plan Organise Direct and Control all the essential activities of the
organisation Management does not do the work themselves They motivate others to do the
work and co-ordinate (ie bring together) all the work for achieving the objectives of the
organisation Management brings together all Six Ms ie Men and Women Money
Machines Materials Methods and Markets They use these resources for achieving the
objectives of the organisation such as high sales maximum profits business expansion etc
Inventory management is the process of efficiently overseeing the constant flow of units into
and out of an existing inventory This process usually involves controlling the transfer in of
units in order to prevent the inventory from becoming too high or dwindling to levels that
could put the operation of the company into jeopardy Competent inventory management also
seeks to control the costs associated with the inventory both from the perspective of the total
value of the goods included and the tax burden generated by the cumulative value of the
inventory
6 | P a g e
INVENTORY MANAGEMENT
Inventory management includes a companys activities to acquire dispose and control of
inventories that are necessary for the attainment of a companys objectives The management
of inventories concerns the flow to within and from the company and the balance between
shortages and excesses in an uncertain environment (Tersin 1988) According to McPharson
(1987 p360) in apparel manufacturing inventory management systems are designed to
obtain concise and accurate information for control and planning of planned goods issues
cuts projections WIP and finished goods Inventory management has been a concern for
academics as well as practitioners in that overall investment in inventory accounts for
relatively large part of a companys assets Inventory may account for 20 to 40 of total
assets (Tersin 1988 Verwijmeren Vlist amp Donselaar 1996) Inventories tie up money and
success or failure in inventory management impacts a companys financial status Having too
much inventory can be as problematic as having too little inventory Too much inventory
requires unnecessary costs related to issues of storage markdowns and obsolescence while
7 | P a g e
too little results in stockouts or disrupted production Besides long-run production associated
with a high level of inventory conceals production problems (eg quality) which can
damage a companys long term performance (Vergin 1998) Therefore the primary goal of
inventory management has been to maximize a companys profitability by minimizing the
cost tied up with inventory and at the same time meeting the customer service requirements
(Lambert Stock amp Ellram 1998) Decisions on Production and Inventory Management
Many authors have proposed factors which management should consider for better inventory
management Branam (1984) specifically emphasized the importance of in-plant throughput
time reduction because throughput time is the ultimate constraint on inventory turnover ratio
(inventory turnover ratio = annual cost of goods soldaverage on hand inventory) which is
one of the major performance indicators in inventory management The authors
interpretation of the in-plant throughput time is the time span from the point of raw material
receipt to final assembly Tersine (1988) pointed out the factors for better inventory
management as better forecasting improved transportation improved communication
improved technology better scheduling and standardization
Pachura (1998) suggested that management should start the process of improving inventory
management by determining the manufacturing type benchmarking the inventory control
performance validating strategy (ie make-to-order make-to-stock build-to-forecast)
determining underlying causes through the use of an operational review and implementing
corrective action Higginson and Alam (1997) suggested specific techniques for inventory
management by focusing on cycle time
1 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin
2 Increasing inventory turnover -- but not sacrificing the service level3 Keeping stock low -- but not sacrificing service or performance4 Obtaining lower prices by making volume purchases -- but not ending up with slow-
moving inventory and
5 Having an adequate inventory on hand -- but not getting caught with obsolete items
8 | P a g e
INVENTORY MANAGEMENT IN THE SUPPLY CHAIN
Inventory management is one aspect of SCM The main goal of SCM is to better manage
inventory throughout the chain via improved information flow aimed at improved customer
service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)
Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory
Management (p16) for the inventory aspect of SCM The efficiency of SCM can be
measured by inventory performance such as the speed of inventory passing through the chain
and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various
forms from raw materials through WIP to finished goods is fed into the chain from suppliers
production and subsequently distribution centers to customers (Alber amp Walker 1997) This
flow of inventory requires responsibilities of channel members for the planning acquisition
storage movement and control of materials and final products (Tersine 1988) High levels
of inventory are found when the chain members less communicates due to lack of
information sharing between chain members and inefficiency of SCM Manufacturers the
main interest of this study have the most difficult and complex inventory problem as they
deal with raw material acquisition transformation of the material into final finished goods
and movement to the customer These consecutive activities require manufacturers to control
production scheduling and timing that are not easily accomplished due to uncertainties in
supplier performance manufacturing process and customer demand Manufacturers could
not reduce their buffer stocks without trusting in their partnerships and sharing forecasting
information on actual demand at retail level because of the bullwhip effect(Nahmias 1997
p791) which means the effect of retail sales fluctuation grows larger as it traverses to
upstream chain members More customer requirements for broader product coverage and
greater delivery capabilities escalate manufacturers problem in production process
complexity and forecasting of future demand
9 | P a g e
Definitions and concepts
In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are
Demand
The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)
Lead time
The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are
1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods
10 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
Acknowledgements We are very thankful to Almighty Allah
Who has given us wisdom and power to learn and
seek All praises and admirations to Almighty Allah Who is the creator of every thing
Thanks also to Hazrat Muhammad (PBUH) Who is source of knowledge and leadership for all mankind forever
We are also very thankful to our beloved teacher Mr Mujeeb Sarfaraz who is prompting us towards professionalism Tons of thanks for his valuable support and consistent guidance
Akhtar Hussain Chughtai Muhammad Ihsan ul Haq Nadeem Akhtar Muhammad Rashid
3 | P a g e
Dedication
This
Report
Is
Dedicated
To
Who are always a source of love affection and inspiration for us Whose love and prayers always accompanied us
and guide us like a shining star whenever we
were in darkness and enable us to reach this
stage
4 | P a g e
TABLE OF CONTENTS
1) Introduction 06
2) Inventory in supply chain 09
3) Definitions amp concepts 10
4) Purpose of inventory 12
5) Types of inventory 14
6) Inventory management techniques 19
7) Other techniques 23
8) Five S 28
9) Conclusion 29
10) References 30
5 | P a g e
IntroductionThe word inventory simply means the goods and services that businesses hold in stock There
are however several different categories or types of inventory The first is called materials
and components This usually consists of the essential items needed to create or make a
finished product such as gears for a bicycle microchips for a computer or screens and tubes
for a television set The second type of inventory is called WIP or work in progress
inventory This refers to items that are partially completed but are not the entire finished
product They are on their way to becoming whole items but are not quite their yet The third
and most common form of inventory is called finished goods These are the final products
that are ready to be purchased by customers and consumers Finished goods can range from
cakes to furniture to vehicles Most people think of the finished goods as being part of an
inventory stock but the parts that create them are held accountable in inventory as well
Management is an individual or a group of individuals that accept responsibilities to run an
organisation They Plan Organise Direct and Control all the essential activities of the
organisation Management does not do the work themselves They motivate others to do the
work and co-ordinate (ie bring together) all the work for achieving the objectives of the
organisation Management brings together all Six Ms ie Men and Women Money
Machines Materials Methods and Markets They use these resources for achieving the
objectives of the organisation such as high sales maximum profits business expansion etc
Inventory management is the process of efficiently overseeing the constant flow of units into
and out of an existing inventory This process usually involves controlling the transfer in of
units in order to prevent the inventory from becoming too high or dwindling to levels that
could put the operation of the company into jeopardy Competent inventory management also
seeks to control the costs associated with the inventory both from the perspective of the total
value of the goods included and the tax burden generated by the cumulative value of the
inventory
6 | P a g e
INVENTORY MANAGEMENT
Inventory management includes a companys activities to acquire dispose and control of
inventories that are necessary for the attainment of a companys objectives The management
of inventories concerns the flow to within and from the company and the balance between
shortages and excesses in an uncertain environment (Tersin 1988) According to McPharson
(1987 p360) in apparel manufacturing inventory management systems are designed to
obtain concise and accurate information for control and planning of planned goods issues
cuts projections WIP and finished goods Inventory management has been a concern for
academics as well as practitioners in that overall investment in inventory accounts for
relatively large part of a companys assets Inventory may account for 20 to 40 of total
assets (Tersin 1988 Verwijmeren Vlist amp Donselaar 1996) Inventories tie up money and
success or failure in inventory management impacts a companys financial status Having too
much inventory can be as problematic as having too little inventory Too much inventory
requires unnecessary costs related to issues of storage markdowns and obsolescence while
7 | P a g e
too little results in stockouts or disrupted production Besides long-run production associated
with a high level of inventory conceals production problems (eg quality) which can
damage a companys long term performance (Vergin 1998) Therefore the primary goal of
inventory management has been to maximize a companys profitability by minimizing the
cost tied up with inventory and at the same time meeting the customer service requirements
(Lambert Stock amp Ellram 1998) Decisions on Production and Inventory Management
Many authors have proposed factors which management should consider for better inventory
management Branam (1984) specifically emphasized the importance of in-plant throughput
time reduction because throughput time is the ultimate constraint on inventory turnover ratio
(inventory turnover ratio = annual cost of goods soldaverage on hand inventory) which is
one of the major performance indicators in inventory management The authors
interpretation of the in-plant throughput time is the time span from the point of raw material
receipt to final assembly Tersine (1988) pointed out the factors for better inventory
management as better forecasting improved transportation improved communication
improved technology better scheduling and standardization
Pachura (1998) suggested that management should start the process of improving inventory
management by determining the manufacturing type benchmarking the inventory control
performance validating strategy (ie make-to-order make-to-stock build-to-forecast)
determining underlying causes through the use of an operational review and implementing
corrective action Higginson and Alam (1997) suggested specific techniques for inventory
management by focusing on cycle time
1 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin
2 Increasing inventory turnover -- but not sacrificing the service level3 Keeping stock low -- but not sacrificing service or performance4 Obtaining lower prices by making volume purchases -- but not ending up with slow-
moving inventory and
5 Having an adequate inventory on hand -- but not getting caught with obsolete items
8 | P a g e
INVENTORY MANAGEMENT IN THE SUPPLY CHAIN
Inventory management is one aspect of SCM The main goal of SCM is to better manage
inventory throughout the chain via improved information flow aimed at improved customer
service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)
Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory
Management (p16) for the inventory aspect of SCM The efficiency of SCM can be
measured by inventory performance such as the speed of inventory passing through the chain
and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various
forms from raw materials through WIP to finished goods is fed into the chain from suppliers
production and subsequently distribution centers to customers (Alber amp Walker 1997) This
flow of inventory requires responsibilities of channel members for the planning acquisition
storage movement and control of materials and final products (Tersine 1988) High levels
of inventory are found when the chain members less communicates due to lack of
information sharing between chain members and inefficiency of SCM Manufacturers the
main interest of this study have the most difficult and complex inventory problem as they
deal with raw material acquisition transformation of the material into final finished goods
and movement to the customer These consecutive activities require manufacturers to control
production scheduling and timing that are not easily accomplished due to uncertainties in
supplier performance manufacturing process and customer demand Manufacturers could
not reduce their buffer stocks without trusting in their partnerships and sharing forecasting
information on actual demand at retail level because of the bullwhip effect(Nahmias 1997
p791) which means the effect of retail sales fluctuation grows larger as it traverses to
upstream chain members More customer requirements for broader product coverage and
greater delivery capabilities escalate manufacturers problem in production process
complexity and forecasting of future demand
9 | P a g e
Definitions and concepts
In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are
Demand
The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)
Lead time
The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are
1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods
10 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
Dedication
This
Report
Is
Dedicated
To
Who are always a source of love affection and inspiration for us Whose love and prayers always accompanied us
and guide us like a shining star whenever we
were in darkness and enable us to reach this
stage
4 | P a g e
TABLE OF CONTENTS
1) Introduction 06
2) Inventory in supply chain 09
3) Definitions amp concepts 10
4) Purpose of inventory 12
5) Types of inventory 14
6) Inventory management techniques 19
7) Other techniques 23
8) Five S 28
9) Conclusion 29
10) References 30
5 | P a g e
IntroductionThe word inventory simply means the goods and services that businesses hold in stock There
are however several different categories or types of inventory The first is called materials
and components This usually consists of the essential items needed to create or make a
finished product such as gears for a bicycle microchips for a computer or screens and tubes
for a television set The second type of inventory is called WIP or work in progress
inventory This refers to items that are partially completed but are not the entire finished
product They are on their way to becoming whole items but are not quite their yet The third
and most common form of inventory is called finished goods These are the final products
that are ready to be purchased by customers and consumers Finished goods can range from
cakes to furniture to vehicles Most people think of the finished goods as being part of an
inventory stock but the parts that create them are held accountable in inventory as well
Management is an individual or a group of individuals that accept responsibilities to run an
organisation They Plan Organise Direct and Control all the essential activities of the
organisation Management does not do the work themselves They motivate others to do the
work and co-ordinate (ie bring together) all the work for achieving the objectives of the
organisation Management brings together all Six Ms ie Men and Women Money
Machines Materials Methods and Markets They use these resources for achieving the
objectives of the organisation such as high sales maximum profits business expansion etc
Inventory management is the process of efficiently overseeing the constant flow of units into
and out of an existing inventory This process usually involves controlling the transfer in of
units in order to prevent the inventory from becoming too high or dwindling to levels that
could put the operation of the company into jeopardy Competent inventory management also
seeks to control the costs associated with the inventory both from the perspective of the total
value of the goods included and the tax burden generated by the cumulative value of the
inventory
6 | P a g e
INVENTORY MANAGEMENT
Inventory management includes a companys activities to acquire dispose and control of
inventories that are necessary for the attainment of a companys objectives The management
of inventories concerns the flow to within and from the company and the balance between
shortages and excesses in an uncertain environment (Tersin 1988) According to McPharson
(1987 p360) in apparel manufacturing inventory management systems are designed to
obtain concise and accurate information for control and planning of planned goods issues
cuts projections WIP and finished goods Inventory management has been a concern for
academics as well as practitioners in that overall investment in inventory accounts for
relatively large part of a companys assets Inventory may account for 20 to 40 of total
assets (Tersin 1988 Verwijmeren Vlist amp Donselaar 1996) Inventories tie up money and
success or failure in inventory management impacts a companys financial status Having too
much inventory can be as problematic as having too little inventory Too much inventory
requires unnecessary costs related to issues of storage markdowns and obsolescence while
7 | P a g e
too little results in stockouts or disrupted production Besides long-run production associated
with a high level of inventory conceals production problems (eg quality) which can
damage a companys long term performance (Vergin 1998) Therefore the primary goal of
inventory management has been to maximize a companys profitability by minimizing the
cost tied up with inventory and at the same time meeting the customer service requirements
(Lambert Stock amp Ellram 1998) Decisions on Production and Inventory Management
Many authors have proposed factors which management should consider for better inventory
management Branam (1984) specifically emphasized the importance of in-plant throughput
time reduction because throughput time is the ultimate constraint on inventory turnover ratio
(inventory turnover ratio = annual cost of goods soldaverage on hand inventory) which is
one of the major performance indicators in inventory management The authors
interpretation of the in-plant throughput time is the time span from the point of raw material
receipt to final assembly Tersine (1988) pointed out the factors for better inventory
management as better forecasting improved transportation improved communication
improved technology better scheduling and standardization
Pachura (1998) suggested that management should start the process of improving inventory
management by determining the manufacturing type benchmarking the inventory control
performance validating strategy (ie make-to-order make-to-stock build-to-forecast)
determining underlying causes through the use of an operational review and implementing
corrective action Higginson and Alam (1997) suggested specific techniques for inventory
management by focusing on cycle time
1 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin
2 Increasing inventory turnover -- but not sacrificing the service level3 Keeping stock low -- but not sacrificing service or performance4 Obtaining lower prices by making volume purchases -- but not ending up with slow-
moving inventory and
5 Having an adequate inventory on hand -- but not getting caught with obsolete items
8 | P a g e
INVENTORY MANAGEMENT IN THE SUPPLY CHAIN
Inventory management is one aspect of SCM The main goal of SCM is to better manage
inventory throughout the chain via improved information flow aimed at improved customer
service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)
Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory
Management (p16) for the inventory aspect of SCM The efficiency of SCM can be
measured by inventory performance such as the speed of inventory passing through the chain
and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various
forms from raw materials through WIP to finished goods is fed into the chain from suppliers
production and subsequently distribution centers to customers (Alber amp Walker 1997) This
flow of inventory requires responsibilities of channel members for the planning acquisition
storage movement and control of materials and final products (Tersine 1988) High levels
of inventory are found when the chain members less communicates due to lack of
information sharing between chain members and inefficiency of SCM Manufacturers the
main interest of this study have the most difficult and complex inventory problem as they
deal with raw material acquisition transformation of the material into final finished goods
and movement to the customer These consecutive activities require manufacturers to control
production scheduling and timing that are not easily accomplished due to uncertainties in
supplier performance manufacturing process and customer demand Manufacturers could
not reduce their buffer stocks without trusting in their partnerships and sharing forecasting
information on actual demand at retail level because of the bullwhip effect(Nahmias 1997
p791) which means the effect of retail sales fluctuation grows larger as it traverses to
upstream chain members More customer requirements for broader product coverage and
greater delivery capabilities escalate manufacturers problem in production process
complexity and forecasting of future demand
9 | P a g e
Definitions and concepts
In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are
Demand
The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)
Lead time
The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are
1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods
10 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
TABLE OF CONTENTS
1) Introduction 06
2) Inventory in supply chain 09
3) Definitions amp concepts 10
4) Purpose of inventory 12
5) Types of inventory 14
6) Inventory management techniques 19
7) Other techniques 23
8) Five S 28
9) Conclusion 29
10) References 30
5 | P a g e
IntroductionThe word inventory simply means the goods and services that businesses hold in stock There
are however several different categories or types of inventory The first is called materials
and components This usually consists of the essential items needed to create or make a
finished product such as gears for a bicycle microchips for a computer or screens and tubes
for a television set The second type of inventory is called WIP or work in progress
inventory This refers to items that are partially completed but are not the entire finished
product They are on their way to becoming whole items but are not quite their yet The third
and most common form of inventory is called finished goods These are the final products
that are ready to be purchased by customers and consumers Finished goods can range from
cakes to furniture to vehicles Most people think of the finished goods as being part of an
inventory stock but the parts that create them are held accountable in inventory as well
Management is an individual or a group of individuals that accept responsibilities to run an
organisation They Plan Organise Direct and Control all the essential activities of the
organisation Management does not do the work themselves They motivate others to do the
work and co-ordinate (ie bring together) all the work for achieving the objectives of the
organisation Management brings together all Six Ms ie Men and Women Money
Machines Materials Methods and Markets They use these resources for achieving the
objectives of the organisation such as high sales maximum profits business expansion etc
Inventory management is the process of efficiently overseeing the constant flow of units into
and out of an existing inventory This process usually involves controlling the transfer in of
units in order to prevent the inventory from becoming too high or dwindling to levels that
could put the operation of the company into jeopardy Competent inventory management also
seeks to control the costs associated with the inventory both from the perspective of the total
value of the goods included and the tax burden generated by the cumulative value of the
inventory
6 | P a g e
INVENTORY MANAGEMENT
Inventory management includes a companys activities to acquire dispose and control of
inventories that are necessary for the attainment of a companys objectives The management
of inventories concerns the flow to within and from the company and the balance between
shortages and excesses in an uncertain environment (Tersin 1988) According to McPharson
(1987 p360) in apparel manufacturing inventory management systems are designed to
obtain concise and accurate information for control and planning of planned goods issues
cuts projections WIP and finished goods Inventory management has been a concern for
academics as well as practitioners in that overall investment in inventory accounts for
relatively large part of a companys assets Inventory may account for 20 to 40 of total
assets (Tersin 1988 Verwijmeren Vlist amp Donselaar 1996) Inventories tie up money and
success or failure in inventory management impacts a companys financial status Having too
much inventory can be as problematic as having too little inventory Too much inventory
requires unnecessary costs related to issues of storage markdowns and obsolescence while
7 | P a g e
too little results in stockouts or disrupted production Besides long-run production associated
with a high level of inventory conceals production problems (eg quality) which can
damage a companys long term performance (Vergin 1998) Therefore the primary goal of
inventory management has been to maximize a companys profitability by minimizing the
cost tied up with inventory and at the same time meeting the customer service requirements
(Lambert Stock amp Ellram 1998) Decisions on Production and Inventory Management
Many authors have proposed factors which management should consider for better inventory
management Branam (1984) specifically emphasized the importance of in-plant throughput
time reduction because throughput time is the ultimate constraint on inventory turnover ratio
(inventory turnover ratio = annual cost of goods soldaverage on hand inventory) which is
one of the major performance indicators in inventory management The authors
interpretation of the in-plant throughput time is the time span from the point of raw material
receipt to final assembly Tersine (1988) pointed out the factors for better inventory
management as better forecasting improved transportation improved communication
improved technology better scheduling and standardization
Pachura (1998) suggested that management should start the process of improving inventory
management by determining the manufacturing type benchmarking the inventory control
performance validating strategy (ie make-to-order make-to-stock build-to-forecast)
determining underlying causes through the use of an operational review and implementing
corrective action Higginson and Alam (1997) suggested specific techniques for inventory
management by focusing on cycle time
1 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin
2 Increasing inventory turnover -- but not sacrificing the service level3 Keeping stock low -- but not sacrificing service or performance4 Obtaining lower prices by making volume purchases -- but not ending up with slow-
moving inventory and
5 Having an adequate inventory on hand -- but not getting caught with obsolete items
8 | P a g e
INVENTORY MANAGEMENT IN THE SUPPLY CHAIN
Inventory management is one aspect of SCM The main goal of SCM is to better manage
inventory throughout the chain via improved information flow aimed at improved customer
service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)
Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory
Management (p16) for the inventory aspect of SCM The efficiency of SCM can be
measured by inventory performance such as the speed of inventory passing through the chain
and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various
forms from raw materials through WIP to finished goods is fed into the chain from suppliers
production and subsequently distribution centers to customers (Alber amp Walker 1997) This
flow of inventory requires responsibilities of channel members for the planning acquisition
storage movement and control of materials and final products (Tersine 1988) High levels
of inventory are found when the chain members less communicates due to lack of
information sharing between chain members and inefficiency of SCM Manufacturers the
main interest of this study have the most difficult and complex inventory problem as they
deal with raw material acquisition transformation of the material into final finished goods
and movement to the customer These consecutive activities require manufacturers to control
production scheduling and timing that are not easily accomplished due to uncertainties in
supplier performance manufacturing process and customer demand Manufacturers could
not reduce their buffer stocks without trusting in their partnerships and sharing forecasting
information on actual demand at retail level because of the bullwhip effect(Nahmias 1997
p791) which means the effect of retail sales fluctuation grows larger as it traverses to
upstream chain members More customer requirements for broader product coverage and
greater delivery capabilities escalate manufacturers problem in production process
complexity and forecasting of future demand
9 | P a g e
Definitions and concepts
In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are
Demand
The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)
Lead time
The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are
1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods
10 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
IntroductionThe word inventory simply means the goods and services that businesses hold in stock There
are however several different categories or types of inventory The first is called materials
and components This usually consists of the essential items needed to create or make a
finished product such as gears for a bicycle microchips for a computer or screens and tubes
for a television set The second type of inventory is called WIP or work in progress
inventory This refers to items that are partially completed but are not the entire finished
product They are on their way to becoming whole items but are not quite their yet The third
and most common form of inventory is called finished goods These are the final products
that are ready to be purchased by customers and consumers Finished goods can range from
cakes to furniture to vehicles Most people think of the finished goods as being part of an
inventory stock but the parts that create them are held accountable in inventory as well
Management is an individual or a group of individuals that accept responsibilities to run an
organisation They Plan Organise Direct and Control all the essential activities of the
organisation Management does not do the work themselves They motivate others to do the
work and co-ordinate (ie bring together) all the work for achieving the objectives of the
organisation Management brings together all Six Ms ie Men and Women Money
Machines Materials Methods and Markets They use these resources for achieving the
objectives of the organisation such as high sales maximum profits business expansion etc
Inventory management is the process of efficiently overseeing the constant flow of units into
and out of an existing inventory This process usually involves controlling the transfer in of
units in order to prevent the inventory from becoming too high or dwindling to levels that
could put the operation of the company into jeopardy Competent inventory management also
seeks to control the costs associated with the inventory both from the perspective of the total
value of the goods included and the tax burden generated by the cumulative value of the
inventory
6 | P a g e
INVENTORY MANAGEMENT
Inventory management includes a companys activities to acquire dispose and control of
inventories that are necessary for the attainment of a companys objectives The management
of inventories concerns the flow to within and from the company and the balance between
shortages and excesses in an uncertain environment (Tersin 1988) According to McPharson
(1987 p360) in apparel manufacturing inventory management systems are designed to
obtain concise and accurate information for control and planning of planned goods issues
cuts projections WIP and finished goods Inventory management has been a concern for
academics as well as practitioners in that overall investment in inventory accounts for
relatively large part of a companys assets Inventory may account for 20 to 40 of total
assets (Tersin 1988 Verwijmeren Vlist amp Donselaar 1996) Inventories tie up money and
success or failure in inventory management impacts a companys financial status Having too
much inventory can be as problematic as having too little inventory Too much inventory
requires unnecessary costs related to issues of storage markdowns and obsolescence while
7 | P a g e
too little results in stockouts or disrupted production Besides long-run production associated
with a high level of inventory conceals production problems (eg quality) which can
damage a companys long term performance (Vergin 1998) Therefore the primary goal of
inventory management has been to maximize a companys profitability by minimizing the
cost tied up with inventory and at the same time meeting the customer service requirements
(Lambert Stock amp Ellram 1998) Decisions on Production and Inventory Management
Many authors have proposed factors which management should consider for better inventory
management Branam (1984) specifically emphasized the importance of in-plant throughput
time reduction because throughput time is the ultimate constraint on inventory turnover ratio
(inventory turnover ratio = annual cost of goods soldaverage on hand inventory) which is
one of the major performance indicators in inventory management The authors
interpretation of the in-plant throughput time is the time span from the point of raw material
receipt to final assembly Tersine (1988) pointed out the factors for better inventory
management as better forecasting improved transportation improved communication
improved technology better scheduling and standardization
Pachura (1998) suggested that management should start the process of improving inventory
management by determining the manufacturing type benchmarking the inventory control
performance validating strategy (ie make-to-order make-to-stock build-to-forecast)
determining underlying causes through the use of an operational review and implementing
corrective action Higginson and Alam (1997) suggested specific techniques for inventory
management by focusing on cycle time
1 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin
2 Increasing inventory turnover -- but not sacrificing the service level3 Keeping stock low -- but not sacrificing service or performance4 Obtaining lower prices by making volume purchases -- but not ending up with slow-
moving inventory and
5 Having an adequate inventory on hand -- but not getting caught with obsolete items
8 | P a g e
INVENTORY MANAGEMENT IN THE SUPPLY CHAIN
Inventory management is one aspect of SCM The main goal of SCM is to better manage
inventory throughout the chain via improved information flow aimed at improved customer
service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)
Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory
Management (p16) for the inventory aspect of SCM The efficiency of SCM can be
measured by inventory performance such as the speed of inventory passing through the chain
and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various
forms from raw materials through WIP to finished goods is fed into the chain from suppliers
production and subsequently distribution centers to customers (Alber amp Walker 1997) This
flow of inventory requires responsibilities of channel members for the planning acquisition
storage movement and control of materials and final products (Tersine 1988) High levels
of inventory are found when the chain members less communicates due to lack of
information sharing between chain members and inefficiency of SCM Manufacturers the
main interest of this study have the most difficult and complex inventory problem as they
deal with raw material acquisition transformation of the material into final finished goods
and movement to the customer These consecutive activities require manufacturers to control
production scheduling and timing that are not easily accomplished due to uncertainties in
supplier performance manufacturing process and customer demand Manufacturers could
not reduce their buffer stocks without trusting in their partnerships and sharing forecasting
information on actual demand at retail level because of the bullwhip effect(Nahmias 1997
p791) which means the effect of retail sales fluctuation grows larger as it traverses to
upstream chain members More customer requirements for broader product coverage and
greater delivery capabilities escalate manufacturers problem in production process
complexity and forecasting of future demand
9 | P a g e
Definitions and concepts
In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are
Demand
The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)
Lead time
The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are
1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods
10 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
INVENTORY MANAGEMENT
Inventory management includes a companys activities to acquire dispose and control of
inventories that are necessary for the attainment of a companys objectives The management
of inventories concerns the flow to within and from the company and the balance between
shortages and excesses in an uncertain environment (Tersin 1988) According to McPharson
(1987 p360) in apparel manufacturing inventory management systems are designed to
obtain concise and accurate information for control and planning of planned goods issues
cuts projections WIP and finished goods Inventory management has been a concern for
academics as well as practitioners in that overall investment in inventory accounts for
relatively large part of a companys assets Inventory may account for 20 to 40 of total
assets (Tersin 1988 Verwijmeren Vlist amp Donselaar 1996) Inventories tie up money and
success or failure in inventory management impacts a companys financial status Having too
much inventory can be as problematic as having too little inventory Too much inventory
requires unnecessary costs related to issues of storage markdowns and obsolescence while
7 | P a g e
too little results in stockouts or disrupted production Besides long-run production associated
with a high level of inventory conceals production problems (eg quality) which can
damage a companys long term performance (Vergin 1998) Therefore the primary goal of
inventory management has been to maximize a companys profitability by minimizing the
cost tied up with inventory and at the same time meeting the customer service requirements
(Lambert Stock amp Ellram 1998) Decisions on Production and Inventory Management
Many authors have proposed factors which management should consider for better inventory
management Branam (1984) specifically emphasized the importance of in-plant throughput
time reduction because throughput time is the ultimate constraint on inventory turnover ratio
(inventory turnover ratio = annual cost of goods soldaverage on hand inventory) which is
one of the major performance indicators in inventory management The authors
interpretation of the in-plant throughput time is the time span from the point of raw material
receipt to final assembly Tersine (1988) pointed out the factors for better inventory
management as better forecasting improved transportation improved communication
improved technology better scheduling and standardization
Pachura (1998) suggested that management should start the process of improving inventory
management by determining the manufacturing type benchmarking the inventory control
performance validating strategy (ie make-to-order make-to-stock build-to-forecast)
determining underlying causes through the use of an operational review and implementing
corrective action Higginson and Alam (1997) suggested specific techniques for inventory
management by focusing on cycle time
1 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin
2 Increasing inventory turnover -- but not sacrificing the service level3 Keeping stock low -- but not sacrificing service or performance4 Obtaining lower prices by making volume purchases -- but not ending up with slow-
moving inventory and
5 Having an adequate inventory on hand -- but not getting caught with obsolete items
8 | P a g e
INVENTORY MANAGEMENT IN THE SUPPLY CHAIN
Inventory management is one aspect of SCM The main goal of SCM is to better manage
inventory throughout the chain via improved information flow aimed at improved customer
service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)
Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory
Management (p16) for the inventory aspect of SCM The efficiency of SCM can be
measured by inventory performance such as the speed of inventory passing through the chain
and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various
forms from raw materials through WIP to finished goods is fed into the chain from suppliers
production and subsequently distribution centers to customers (Alber amp Walker 1997) This
flow of inventory requires responsibilities of channel members for the planning acquisition
storage movement and control of materials and final products (Tersine 1988) High levels
of inventory are found when the chain members less communicates due to lack of
information sharing between chain members and inefficiency of SCM Manufacturers the
main interest of this study have the most difficult and complex inventory problem as they
deal with raw material acquisition transformation of the material into final finished goods
and movement to the customer These consecutive activities require manufacturers to control
production scheduling and timing that are not easily accomplished due to uncertainties in
supplier performance manufacturing process and customer demand Manufacturers could
not reduce their buffer stocks without trusting in their partnerships and sharing forecasting
information on actual demand at retail level because of the bullwhip effect(Nahmias 1997
p791) which means the effect of retail sales fluctuation grows larger as it traverses to
upstream chain members More customer requirements for broader product coverage and
greater delivery capabilities escalate manufacturers problem in production process
complexity and forecasting of future demand
9 | P a g e
Definitions and concepts
In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are
Demand
The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)
Lead time
The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are
1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods
10 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
too little results in stockouts or disrupted production Besides long-run production associated
with a high level of inventory conceals production problems (eg quality) which can
damage a companys long term performance (Vergin 1998) Therefore the primary goal of
inventory management has been to maximize a companys profitability by minimizing the
cost tied up with inventory and at the same time meeting the customer service requirements
(Lambert Stock amp Ellram 1998) Decisions on Production and Inventory Management
Many authors have proposed factors which management should consider for better inventory
management Branam (1984) specifically emphasized the importance of in-plant throughput
time reduction because throughput time is the ultimate constraint on inventory turnover ratio
(inventory turnover ratio = annual cost of goods soldaverage on hand inventory) which is
one of the major performance indicators in inventory management The authors
interpretation of the in-plant throughput time is the time span from the point of raw material
receipt to final assembly Tersine (1988) pointed out the factors for better inventory
management as better forecasting improved transportation improved communication
improved technology better scheduling and standardization
Pachura (1998) suggested that management should start the process of improving inventory
management by determining the manufacturing type benchmarking the inventory control
performance validating strategy (ie make-to-order make-to-stock build-to-forecast)
determining underlying causes through the use of an operational review and implementing
corrective action Higginson and Alam (1997) suggested specific techniques for inventory
management by focusing on cycle time
1 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin
2 Increasing inventory turnover -- but not sacrificing the service level3 Keeping stock low -- but not sacrificing service or performance4 Obtaining lower prices by making volume purchases -- but not ending up with slow-
moving inventory and
5 Having an adequate inventory on hand -- but not getting caught with obsolete items
8 | P a g e
INVENTORY MANAGEMENT IN THE SUPPLY CHAIN
Inventory management is one aspect of SCM The main goal of SCM is to better manage
inventory throughout the chain via improved information flow aimed at improved customer
service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)
Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory
Management (p16) for the inventory aspect of SCM The efficiency of SCM can be
measured by inventory performance such as the speed of inventory passing through the chain
and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various
forms from raw materials through WIP to finished goods is fed into the chain from suppliers
production and subsequently distribution centers to customers (Alber amp Walker 1997) This
flow of inventory requires responsibilities of channel members for the planning acquisition
storage movement and control of materials and final products (Tersine 1988) High levels
of inventory are found when the chain members less communicates due to lack of
information sharing between chain members and inefficiency of SCM Manufacturers the
main interest of this study have the most difficult and complex inventory problem as they
deal with raw material acquisition transformation of the material into final finished goods
and movement to the customer These consecutive activities require manufacturers to control
production scheduling and timing that are not easily accomplished due to uncertainties in
supplier performance manufacturing process and customer demand Manufacturers could
not reduce their buffer stocks without trusting in their partnerships and sharing forecasting
information on actual demand at retail level because of the bullwhip effect(Nahmias 1997
p791) which means the effect of retail sales fluctuation grows larger as it traverses to
upstream chain members More customer requirements for broader product coverage and
greater delivery capabilities escalate manufacturers problem in production process
complexity and forecasting of future demand
9 | P a g e
Definitions and concepts
In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are
Demand
The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)
Lead time
The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are
1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods
10 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
INVENTORY MANAGEMENT IN THE SUPPLY CHAIN
Inventory management is one aspect of SCM The main goal of SCM is to better manage
inventory throughout the chain via improved information flow aimed at improved customer
service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)
Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory
Management (p16) for the inventory aspect of SCM The efficiency of SCM can be
measured by inventory performance such as the speed of inventory passing through the chain
and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various
forms from raw materials through WIP to finished goods is fed into the chain from suppliers
production and subsequently distribution centers to customers (Alber amp Walker 1997) This
flow of inventory requires responsibilities of channel members for the planning acquisition
storage movement and control of materials and final products (Tersine 1988) High levels
of inventory are found when the chain members less communicates due to lack of
information sharing between chain members and inefficiency of SCM Manufacturers the
main interest of this study have the most difficult and complex inventory problem as they
deal with raw material acquisition transformation of the material into final finished goods
and movement to the customer These consecutive activities require manufacturers to control
production scheduling and timing that are not easily accomplished due to uncertainties in
supplier performance manufacturing process and customer demand Manufacturers could
not reduce their buffer stocks without trusting in their partnerships and sharing forecasting
information on actual demand at retail level because of the bullwhip effect(Nahmias 1997
p791) which means the effect of retail sales fluctuation grows larger as it traverses to
upstream chain members More customer requirements for broader product coverage and
greater delivery capabilities escalate manufacturers problem in production process
complexity and forecasting of future demand
9 | P a g e
Definitions and concepts
In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are
Demand
The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)
Lead time
The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are
1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods
10 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
Definitions and concepts
In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are
Demand
The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)
Lead time
The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are
1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods
10 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
Ordering cost
The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost
Purchasing cost
The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales
Holding cost
The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate
Handling cost
The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses
Shipping cost
The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost
Stockout cost
In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it
11 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)
Management cost
The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered
Inventory on hand
The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position
The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant
Safety stock
The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses
The Purpose of Inventory
So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are
bull Predictability
In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process
bull Fluctuations in demand
A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand
12 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum
bull Unreliability of supply
Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs
bull Price protection
Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)
bull Quantity discounts
Often bulk discounts are available if you buy in large rather than in small quantities
bull Lower ordering costs
If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for
13 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
TYPES OF INVENTORIES
I MATERIAL INVENTORIES -
A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests
WORK IN PROCESS INVENTORIES-
Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for
14 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
further processing or in a buffer storage The term is used in production and supply chain management
SPARE PARTS INVENTORIES-
Maintenance repair 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
15 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
FINISHED INVENTORIES-
Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories
16 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
Consumables
These are the materials which are needed to smoothen the process of production
Consumables may be classified acc to their consumption and criticality
Top Ten Reduction Practices
1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21
Inventory Control Records
Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more
17 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item
Perpetual inventory control records
are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card
Out-of-stock sheets
sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted
Open-to-buy records
help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area
Purchase order files
keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates
Supplier files
are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems
Returned goods files
provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues
18 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
Price books
maintained in alphabetical order according to supplier provide a record of purchase prices
selling prices markdowns and markups It is important to keep this record completely up to
date in order to be able to access the latest price and profit information on materials
purchased for resale
Inventory Management Techniques
Inventory is maintained as a cushion in soppy of material for continuous production
without causing stock out situation This cushion should not be suicidal to any organization
The following techniques are being use for controlling the inventory
1 Inventory Management Technique
2 Perceptual Inventory system
3 Selective Control Techniques
4 Inventory turnover Ratios
5 Classification and Codification of inventories
Inventory Management Techniques
1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying
costs are equal this is the quantity of material which can be purchased at minimum costs
This model includes two costs
Ordering Costs
Carrying Costs
Ordering Costs These are the costs which are associated with the purchasing or ordering of
materials These costs include
1 Costs of staff posted for ordering of goods
2 Expenses incurred on transportation of goods purchased
3 Inspection costs of incoming materials
4 Cost of stationery typing postage telephone charges etc
These costs are called buying costs and will arise only when some purchases are made The
ordering costs are totaled up for the year and then divided by the number of orders placed
each year
Carrying Costs These are the costs for holding the inventories These costs will not be
incurred of inventories are not carried These costs include
19 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
1 The cost of capital invested in inventories An interest will be paid on the amount of
capital locked-up in inventories
2 Cost of storage which could have been used for other purposes
3 Insurance cost
4 Cost of spoilage in handling of materials
The ordering costs and carrying costs has reverse relationship the ordering cost goes up
with the increase in number of orders placed On the other hand carrying costs go down per
unit with the increase in number of units purchased and stored
Assumptions of EOQ
1 The supply of goods is satisfactory The goods can be purchased as and when they are
needed
2 The quantity of be purchased by the concern is certain
3 The prices of goods are stable It results to stabilize carrying costs
Total cost of inventory
= (A x P)+(A xO)EOQ+(EOQ x C)2
Where
A= Annual consumption in units
O= Ordering Cost per unit
P= Price per unit
C=carrying cost per unit
2 Selective control techniques
Selective control means selecting the area of control so that required objective is achieved as
early as possible without any lost of time due to taking care of full area-
Minimum lost of energy
At minimum cost without loss of time
There are following selective Techniques
ABC Analysis
V E D analysis
XYZ analysis
ABC Analysis
Indicators that classifies a material as an AB or C part according to its consumption
value The classification process is known as the ABC analysis
The three indictors have the following meanings
A-important part high consumption value
20 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
B-less important medium consumption value
C-relatively unimportant part low consumption value
The ABC classification process is an analysis of a range of items such as finished products
or customers into three categories A - outstandingly important B - of average importance C
- relatively unimportant as a basis for a control scheme Each category can and sometimes
should be handled in a different way with more attention being devoted to category A less to
B and less to C Usually this means that the firm monitors A items very closely but can
check on B and C items on a periodic basis (for example monthly for B items and quarterly
for C items)
The third element is the most difficult to measure and is often handled by establishing
a service level policy e g certain percentage of demand will be met from stock without
delay The ABC classification system is to grouping items according to annual sales volume
in an attempt to identify the small number of items that will account for most of the sales
volume and that are the most important ones to control for effective inventory management
Class No of Items () Value Of items ()
A 10 70
B 20 20
C 70 10
XYZ analysis
This type of analysis is carried out form the point of view of balance of value stocks lying in
the stock from time to time and classifies all the items as given below
X items are those items whose value of balance stocks lying in the stock are vary high
Y items are those items whose value of balance stocks is moderate
Z items are those items whose value of balance stocks lying in the stock is low
After knowing this type of classification and their items can be taken to control the inventory
as below
1 From security point of view high value items must be stored and kept order lock and
key Items should be kept in such a way that they are always under supervision
2 From inventory point of view we must know why there is high inventory for lsquoXrsquo
items We should review inventory control procedure for each and every item
because stock should be maintained to take acre of lead time consumption and also
21 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
to provide as safety stocks For high value items lying in the stores we should
review the reasons for long lead time as well as demand variations and see whether
safety stocks can be reduced Thus proper inventory control procedures can be
developed on the basis of XYZ analysis
VED Analysis
The VED analysis is used generally for spare parts The requirements and urgency of
spare parts is different from that of materials From point of view of material it is
classified into three categories
V - Vital
B - Essential
D - Desirable
Vital categories of the items are those for the want of which the production
Come to stop For exp Power in the factory
Essential group of items are those items because of non availability of which the stock
out cost is very high
Desirable group of items are those items because of non availability of which there is no
immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for short time
3 Inventory Turnover Ratio
Inventory turnover ratios are calculated to indicate whether inventories have been used
efficiently or not The purpose is to ensure the blocking of only required minimum funds in
inventory The Inventory turnover ratio ia also known as stock velocity
Inventory Turnover Ratio= Cost of goods sold
Average Inventory at cost
22 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
Others Important Things
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business 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 This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving
inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for
others For example computing the inventory turnover ratio is a simple measure of
managerial performance This value gives a rough guideline by which managers can set goals
and evaluate performance but it must be realized that the turnover rate varies with the
function of inventory the type of business and how the ratio is calculated (whether on sales
or cost of goods sold) Average inventory turnover ratios for individual industries can be
obtained from trade associations
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product
23 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale
CONTROLLING YOUR INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items
Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis
Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes
Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold
As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives
information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who
uses the information to ship additional items automatically to the buyerinventory manager
The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which
additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely
used method of computing the minimum annual cost for ordering and stocking each item
The EOQ computation takes into account the cost of placing an order the annual sales rate
24 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
the unit cost and the cost of carrying inventory Many books on management practices
describe the EOQ model in detail
TIPS FOR BETTER INVENTORY MANAGEMENT
At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
receipt Carefully examine each carton for visible damage -- If damage is visible note it on the
delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection
25 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier
Do not return damaged items without written authorization from shippersupplier
4 Perceptual Inventory System
The chartered Institute of Management Accountants London defines the perceptual
inventory ldquoa system of records maintained by controlling department which reflects the
physical movements of stocks and their current balance ldquo Bind cards add the stores ledger
help the movements of the stock on the receipts and in maintaining this system as they make
a record of to physical movements of the stocks on the receipts and issues of material and
also reflect the balance in the stores Thus it is a system of ascertaining balance after every
receipt and issue of material through stock record to facilitate regular checking and to avoid
closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records
physical verification of the stores is made by bin cards and stores ledger may differ from the
actual balance of stock as ascertained by the physical verification
5 Classification and codification of inventories
The inventories of a manufacturing concern may consist of raw material work in
process finished goods spares consumables stocks etc for proper recording and control of
inventory proper classification of various types of items is essential The inventories should
first be classified and then code numbers should be assigned for their identification The
identification of short names is useful for inventory management not only for large concerns
but also for small concerns The inventories should be classified either acc to their use and
their nature
Special terms used in dealing with inventory
Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item Therefore any change in the packaging or product is a
new SKU This level of detailed specification assists in managing inventory
Stock out means running out of the inventory of an SKU
New old stock (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale that was manufactured long ago but that has never been
used Such merchandise may not be produced anymore and the new old stock may represent
the only market source of a particular item at the present time
26 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
JIT
For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets
There are seven types of waste JIT
systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly
27 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos
28 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
CONCLUSION
A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can
maintain safety stock for its components in order to avoid stock-out conditions amp help in
continuous production flow This would reduce the cost and enhance the profit Also there
should be tight control exercised on stock levels based on ABC analysis amp maintain high
percentage in fast moving items in inventories as per on FSN analysis for efficient running of
the inventory Since the inventory Turnover ratio shows the increasing trend there will be
more demand for the products in the future periods If they could properly implement and
follow the norms and techniques of inventory management they can enhance the profit with
minimum cost
29 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e
ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001
30 | P a g e