Inventory Presentation-power Point

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STORES/INVENTORY STORES/INVENTORY MANAGEMENTMANAGEMENT

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Inventory definition Inventory definition

• Inventory" is an American term which is the English equivalent of "Stock".

• The definitions are varied. • inventory refers to the stored materials

that exist within an organization.• Stored quantity of goods that exceeds

what is needed for the firm to function at the current time.

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Inventory definitionInventory definition

• Idle resource awaiting demand from users. To be considered an inventory, this idle resource must be of economic value.

• With reference to International Accounting Standard 2 (IAS 2), inventories are assetsheld for sale in the ordinary course of business; or held in process of production for such sale; or held in the form of materials or supplies to be consumed in the production process or in rendering of services.

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Types of inventoryTypes of inventory

• Raw materials

• Work-in-Progress

• Finished goods

• MRO Goods

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Raw materials, Work in ProgressRaw materials, Work in Progress

• Raw materials are inventory items that are used in the manufacturer's conversion process to produce components, subassemblies, or finished products.

• Work in Progress/Process are materials and components that have begun their transformation to finished goods.

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Finished goods, MRO goodsFinished goods, MRO goods

• A finished good is a completed part that is ready for a customer order.

• Finished goods inventory is the stock of completed products.

• Maintenance, repair, and operating supplies, or MRO goods, are items that are used to support and maintain the production process and its infrastructure.

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MRO goodsMRO goods

• These goods are usually consumed as a result of the production process but are not directly a part of the finished product.

• Examples of MRO goods include oils, lubricants, coolants, janitorial supplies, uniforms, gloves, packing material, tools, nuts, bolts, screws, shim stock, and key stock.

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MRO Goods and other MRO Goods and other classificationclassification

• Even office supplies such as staples, pens and pencils, copier paper, and toner are considered part of MRO goods inventory.

• Inventories can be further classified according to the purpose they serve.

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other classification of inventoryother classification of inventory

These types include: • Transit inventory/pipeline inventory• Buffer inventory/safety stock• Anticipation inventory/seasonal

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Transit inventory/pipeline inventoryTransit inventory/pipeline inventory

• Goods still in transit or in the process of distribution - have left the factory but not arrived at the customer yet.

• These exist because materials cannot be

transported instantaneously between points of supply and demand

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Buffer inventory/safety stockBuffer inventory/safety stock

• Inventory is sometimes used to protect against the uncertainties of supply and demand, as well as unpredictable events such as poor delivery reliability or poor quality of a supplier's products

• it compensates for unexpected fluctuations in supply and demand.

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Anticipation inventory/seasonalAnticipation inventory/seasonal

• inventory that is in excess of the current need in anticipation of a possible future event.

• Such events may include a price increase, a seasonal increase in demand, predictable demand for products in Christmas period or even an impending labor strike.

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Why we should not hold stockWhy we should not hold stock

• Inventory in most firms represents a significant portion of investment.

• Unnecessary inventory adds enormously to the working capital tied up in the business as well as the complexity of the supply chain.

• It also means carrying risk in terms of obsolescence, deterioration and quality faults.

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Why we should hold stockWhy we should hold stock

• Cash is critical to a firm's daily operations hence excessive storage of inventory especially slow moving stocks results in cash being tied up.

• This means that cash is not put in use immediately hence it will further affect other cash decisions, hence a serious drain of resources

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Justification for holding stockJustification for holding stock

• Inventory adds value. Organizations with high finished goods inventory can offer a wide product range and quick delivery from stock to customers or users.

• Meet Demand. Delivery cannot be exactly matched with usage day by day. Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.

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• Keep Operations Running. Operational risks require the holding of stock to guard against breakdown or programme changes. Running out of only one item can prevent a manufacturer from completing the production of its finished goods.

• Lead time. Need to stock excess stock where the buying organization is located far from supply sources and long lead times are inevitable.

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• Inventory can also be used as a hedge against price increases and inflation. owing to fluctuations in the price of some commodities it is desirable to acquire stocks when prices are low.

• Often firms are given a price discount when purchasing large quantities of a good. However, if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory, the decision to buy the large quantity is justified.

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• In order that material may appreciate in value through maturing in storage - for example, wines, cheeses, whisky and timber

• In order that customers may be attracted by a range of products from which to select on a short delivery timescale

• Because of supplier's minimum order quantities

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Inventory managementInventory management

• Inventory management or stock control as it used to be known, is the activity of determining the range and quantities of materials to be stocked in an organization and the regulation of receipts and issues of these stocks.

• Inventory represents money we therefore need to plan a head and control it so that at any one time an organization does not tie up unnecessary large sums of money in it while at the same time it is able to satisfy demands placed upon it.

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Reasons for controlling stockReasons for controlling stock

• In order to ration the available quantities to the many competing users. This is particularly so to the public sector where there are a large number of customers and a general shortage of funds.

• To be able to weed out those stocks which are seen to be becoming slow moving or those which have become obsolete due to lack of demand for them.

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Reasons for controlling stockReasons for controlling stock

• In order to ensure that stocks are issued only to those who are accredited customers that is, those customers for whom the goods were procured.

• In order to place fresh orders when re-order level have been reached to replenish the stocks.

• Ensure appropriate levels of stock are held

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Effective inventory managementEffective inventory management

• One is to put in place a system of keeping track of items in inventory.

• Second is to make decisions on how much and when to order.

• Third is to avail the appropriate physical structures required to store the inventory.

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Effective inventory managementEffective inventory management

• To be objective in their decision making, management must have the following: -

An inventory counting system• This is a system to keep track of the

inventory on hand, on order and on issue.• Use of stock cards can be used to record

the movement of transactions for the inventory. Normally a bin card has the following features;

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An inventory counting systemAn inventory counting system

• Recording of inventory transactions can be done using either a batch or an online system.

• In a batch system, inventory records are collected periodically and entered into the system e.g. recording in stock cards.

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An inventory counting systemAn inventory counting system

• In an online system, the transactions are recorded instantaneously, for example, the use of electronic computers in supermarkets which recognize bar codes on the products.

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Information on the level of Information on the level of demand and lead timedemand and lead time

• Since inventory are used to satisfy customer demand, it is essential to have reliable estimates of the amount and timing of demand.

• It is also important to know how long it will take for orders to be delivered.

• The higher the demand and lead time variances, the greater the need for additional stock to reduce the risk of a shortage between deliveries and to reduce customer dissatisfaction.

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The cost of informationThe cost of information

• Cost is a critical factor especially when one determines reasonable estimates of inventory holding costs, ordering costs, purchasing costs and shortage costs.

• Holding costs or carrying costs relate to the costs of having physical items in the store. Inventory in excess of current demand frequently means that its holder must provide a place for its storage when not in use.

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• A storage facility requires personnel to move the inventory when needed and to keep track of what is stored and where it is stored.

• If the inventory is heavy or bulky, forklifts may be necessary to move it around.

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• Storage facilities also require heating, cooling, lighting, and water.

• The firm must pay taxes on the inventory, and opportunity costs occur from the lost use of the funds that could be spent elsewhere are tied up in inventory.

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• The other holding costs could include insurance, depreciation

• Also, obsolescence, pilferage (theft), and shrinkage are problems.

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The cost of informationThe cost of information• Ordering costs are costs of placing an

order and receiving the inventory. • Ordering costs include the purchasing

agent's salary and travel/entertainment budget, administrative and secretarial support, office space, copiers and office supplies, forms and documents, long-distance telephone bills, and computer systems and support.

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• Also, some firms include the cost of shipping the purchased goods in the order cost, costs in preparing invoices, inspecting goods upon arrival for quality and quantity and moving the goods to the temporary storage.

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The cost of informationThe cost of information• In a factory environment they are called set up

costs associated with setting up of the machines before production can begin.

• Purchasing cost is simply the cost of the purchased item itself. If the firm purchases a part that goes into its finished product, the firm can determine its annual purchasing cost by multiplying the cost of one purchased unit by the number of finished products

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• Shortage costs result when demand exceeds the supply of inventory on hand. The costs can include opportunity cost of making a sale, loss of customer goodwill, late charges and similar costs. Shortage costs are sometimes difficult to measure and they may be subjectively estimated.

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Classification systemClassification system

• A classification system for inventory items is an aspect of inventory management that deals with items held in inventory that are not equal in importance in terms of amount invested, profit potential, sales or usage volume or stock-outs penalties

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Classification systemClassification system• The most common classification system is

the ABC system. The ABC system classifies inventory items according to some measure of importance, usually annual usage or cost.

• It is in line with on Pareto’s rule where it is suggested that 80% of a company’s expenses are contributed by 20% of the items consumed.

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• Controls are then applied selectively to avoid wasting too much time on trivial issues and also avoiding excess control.

• Attention is paid where results will be most critical.

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The ABC system classifies inventory as follows:

• A - Very Important• B - Moderately Important• C - Least Important

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• For a given situation/condition with three classes of items,

• A Items generally account for about 10 to 25 percent of the number of items in inventory but about 55 to 65 percent of the usage in shillings.

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• At the end of the scale, C items might account for about 70 percent of the number of items but only about 5 percent of the usage in shillings. Ultimately, A items should receive close attention through frequent reviews of amounts in hand and control over withdrawals to make sure that customer service levels are maintained.

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• The C items should receive only minimal control and B items should have controls that lie between the two extremes.

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How much to order and what How much to order and what items to stockitems to stock

• The concept of how much to order is often determined by the use of the Economic Order Quantity (EOQ) model.

• The EOQ model identifies the optimal order Quantity by minimizing the sum of certain annual costs that vary with order size. It is also better to know:

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Minimum Stock Level• Refers to the point below which the level of stock

should not fall. It is one below which stocks should not be allowed to drop as this would pose a danger of a stock-out situation occurring.

• It is really a buffer stock which will guard against the possibility of stocks being depleted to zero before arrival of the next order.

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Maximum Stock Level• Refers to the highest quantity of stock which is

expected to be in store at any time. • It is the level considered adequate to satisfy

demand as it arises. • It is inadvisable to hold stock beyond this level

as the organization will be considered to be holding too much stock and therefore tying up too much funds which could be better utilized elsewhere.

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Reorder level.• This is the level at which replenishment

action should be taken so as to bring the stocks back to the maximum.

• It is the signal for taking this important action to avoid stocks running out and therefore hampering the smooth running of the organization operations.

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• This is the level at which an order will be placed for additional supplies of material so that delivery will be made when the minimum stock level is reached

Reorder quantity• This is the quantity which should be

purchased when the reorder level is reached.

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Miscellaneous informationMiscellaneous information

Store• Place where inventory are held in custody

for future use.Receipt• Function of receiving goods into store or

signature given confirming safe receipt.Issue• The function of supply goods to users

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Surplus• Items of supply in excess of known and

anticipated requirements.Brought on charge• Accepted and accounted for

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Commonly used stock documents in the Public Service

• S11-Counter requisition and issue voucher• S12-issue and receipt voucher• S13-counter receipt voucher• S3-stocks ledger and stock control card

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Conclusion Conclusion

• Inventory in most firms represents a significant portion of investment.

• Therefore, the right quantity and quality of the required stock should be available at the right time and in the right place with the optimal size because of the cost implications.

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ConclusionConclusion

• One of the widely used measures of managerial performance is the return on investments (ROI), which is profit after taxes divided by the total assets. Since inventory represents a significant percentage of assets, a reduction in inventory can result in significant increase in that return on investment

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THANKS FOR LISTENING.************END**************

Presentation by B.A.OmondiProcurement Officer I

Ministry of Livestock Development HQS

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Inventory Presentation-power Point