1. Inventory Management

2. Introduction
Inventory management is the system devised and adopted for controlling investment in inventory
The aim of inventory management is to attain a healthy balance between the cost of not having.
Bad management of inventory may lead to overstocking or stock outs.

3. Types of Inventory Direct inventories Raw Materials Work in progress
Finished Goods
Indirect Inventories
Transit or movement inventories
Buffer inventories or Safety stocks
Lot size inventory
Seasonal inventory
Fluctuation inventory

4. Objective of Inventory
Hedge against inflation
Protection against fluctuation in demand
Protection against fluctuation in supply
To avoid stock outs and shortage
Quantity discount
Optimum use of men, machine and materials
Helps prevent wastage

5. Steps in Inventory Control
Formulation of Policy
Location of warehouses
Determination of EOQ
Determination of safety stocks
Determination of lead time

6. Types of inventory
Deterministic model – these are simple models in which it is assumed that
The demand or consumption rate is known with certainty
Constant lead time is involved in procurement
Probabilistic model – here the demand follows a known probability distribution, while the lead time may either be constant or variable with a known probabilistic distribution
Static model – static model relate to a single decisions process in which only a single purchase order can be placed to meet the demands. Eg. Bread and eggs at a grocery
Dynamic – the decision on one procurement process will affect the subsequent procurement. A printer and its consumbables

7. Types on Inventory Models
EOQ
Assumptions under this model
The demand is known and is constant and occurs uniformly over time
The replenishment is in a single delivery
The lead time can be estimated deterministically
The cost on the units is the same irrespective of the lot size
Unit cost of ordering and storing can be calculated
The inventory system pertains to a single inventory

8. Inventory Cost Direct Material Cost Ordering Cost Holding Cost
Shortage or Back order cost

9. Inventory Control
All inventory items need not be controlled with equal importance
Some items are very important and require a tight and intensive control
The items are classified on different bases
ABC analysis: Materials are divided into three categories – A,B,C
“A” Category items are high value items and require tight control
“B” Category items are managed by stocks management system and do not require regular control

10. “C” category items are usually common items and requires minimum management
10% of the items. i.e “A” category items contribute to 60% of the cost
60% of the items. i.e “B” category items contribute to 10% of the cost
Policies for high items
Order the more frequently to avoid lock up of capital
The items should be delivered promptly from the supplier

11. Monthly report must be set to ensure proper usage of the material
Policies for “B” category items
They should be ordered less frequent then “A” category item
Recorder level, safety stock and such other norms have to be applied to these stock items
Policies for “C” category items
Liberal quantities are to be ordered which may last for 6 months or more as frequent purchase are time consuming

12. Annual or six monthly order reduce paper work and the company can avail bulk discount
Items should be grouped according to requirements like electrical requirements, plumbing requirements , etc to help in easy storage

13. VED Classifications V – Vital E – Essential D –Desirable
Vital items are desirable to smooth production operations
Essential items are those whose stock outs adversely affect the efficiency of the production system
Desirable items are those which do not hamper the process of production

14. FSND – Fast moving, normal, slow moving and dead items
Other methods
HML classifications
H – High Value Items
M – Medium Value Items
L – Low Value items
XYZ classification
Base on the inventory valuation of the items as per the closing stock. High investment items are categorised as “X” items and low investment items are categorized as “Z” items. Helps the company in planning for storage and maintenance
FSND – Fast moving, normal, slow moving and dead items

15. SOS – Seasonal and non-seasonal items
GOLF – Government, Open Market, Local supplies and foreign market supplies
SDE – Scare, Difficult to obtain and easy to obtain