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Session Outline
• Inventory
• Inventory Management
• Factors Determining Inventory Levels
• EOQ Model
• Inventory Valuation
• Just in Time
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Inventory
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Inventory means Tangible property
which is held:
• For Sale in the ordinary course of
Business OR;
• In the process of Production (i.e.
WIP) for Sale OR;
• For Consumption in the production
of good & services which will be
used for sale in the ordinary course
of Business
• Inventory Includes Raw-Material,
FG, WIP, Spares, Consumables etc.
Inventory
Inventory Management means:
• An Optimum Investment in the
Inventories
• Striking balance between Adequate
Stock & Investment
• Maintain Adequate Stock and that
too by keeping Investment at
Minimum Level. It is also known as
Optimum Level of Inventory
• Maintaining Inventory at the
Optimum Level is called Inventory
Magt.
Inventory Management
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Objectives of Inventory Management
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• Availability of Materials
• Promotion of Manufacturing
Efficiency
• Minimizing of wastage
• Better service to customer
• Control of production level
• Optimum level of inventories
Operating
• Economy in purchasing
• Efficient use of capital
• Reasonable price
• Minimizing cost
Financial
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Factors determining optimum level of
inventory
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• Nature of Business
• Anticipated volume of sales
• Availability of funds
• Attitude of Management
General Factors
• Seasonal nature of business
• Process length
• Terms of purchase
• Supply conditions
• Loan facility
Specific Factors
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Inventory Costs
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.... Cost of holding an item of inventory
.... Cost of replenishing Inventory
.... Loss when demand can not be met
Carrying Cost
Ordering Cost
Shortage Cost
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EOQ Model
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2FU
Q =
PC
Q = economic order quantity
F = cost per order
U = annual usage/demand
F = cost per order
C = percent carrying cost
P = price per unit
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EOQ Model
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Costs
Total costs
Carrying costs
Ordering costs
Quantity ordered
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Assumptions of EOQ Model
• Demand is known with certainty and is
constant over time
• No shortages are allowed
• Lead time for receipt of orders is constant
• Order quantity is received all at once
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Re-order Point
• If the usage rate of materials and the lead
time for procurement are known with
certainty, then the ordering level would simply
be:
Lead time in days for procurement X Avg. daily usage
• When the usage rate and lead time are likely
to vary, the reorder level should be:
(Lead Time X Avg. daily consumption)+ Safety stock
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Illustration
Marvel Limited uses a large quantity of salt in its production
process. Annual consumption is 60,000 tonnes over a 50-week
working year. It costs ` 100 to initiate and process an order and
delivery follow two weeks later. Storage costs for the salt are
estimated at 10 paise per tonne per annum. The current
practice is to order twice a year when the stock falls to 10,000
tonnes. Recommend an appropriate ordering policy for Marvel
Limited, and contrast it with the cost of the current policy.
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Illustration
Using EOQ Model
• Number of orders per year = 60,000/10,954 = 5.5 orders
• Re-order level = 2×60,000/50 = 2,400 tonnes
• Total cost of optimal policy = holding costs + ordering costs =
(0.1×10954)/2 + (100×60,000)/10,954
= 547.70 + 547.74 = ` 1,095
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Inventory Valuation
The important methods of pricing inventories used in
production are:
• FIFO (First in First Out) Method The material which is issued
first is priced on the basis of the cost of material received
earliest, so on and so forth.
• Weighted Average Cost Method Material issued are priced
at the weighted average cost of materials in stocks
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Just in Time (JIT)
• The JIT control system implies that the firm should
maintain a minimal level of inventory and rely on
suppliers to provide parts and components ‘just-in-
time’ to meet its assembly requirements.
• This may be contrasted with the traditional inventory
management system which calls for maintaining a
healthy level of safety stock to provide a reasonable
protection against uncertainties of consumption and
supply – the traditional system may be referred to as a
“just-in-case” system.
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Summary
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• Inventories represent a very significant proportion of total assets.
• A distinction may be drawn between ‘process or movement’
inventories and ‘organization’ inventories.
• According to EOQ model, the optimal order quantity is:
Q =
• JIT system can be used to manage inventory levels
2 FU
PC
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Thank You
mail@pace2race.com
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