Inventory is material that the firm obtains in advance of need, holds until it
is needed, and then used, consumes, incorporates into a product, sells, or
otherwise disposes it of. A business inventory is temporary innature.
Inventories are stock of any kind like fuel and lubricants, spare parts and
semi-processed materials to be stored for future use mainly in the process of
production or it can be known as the ideal resource of any kind having some
4. FORMS OF INVENTORIES
There are many types of inventory. The form of
inventories depends upon the type of concern. All
types of inventory do not require same treatment and
therefore policy with regard to each may also differ.
5. RAW MATERIAL INVENTORIES
There are raw materials and other supplies, parts and components, which
enter into the product during the production process and generally form part
These are semi finished, work in progress and partly finished products
formed at the various stages of production.
WORK IN PROCESS INVENTORIES
6. M.R.O INVENTORIES/ SPARE PART
Maintenance, repairs and operating supplies which are consumed
during the production process and generally do not form part ofthe
product itself are referred to as spare partinventories.
These are complete finished products ready for sales. Ina
manufacturing unit, they are the
final output of the production
process. They can also be classified
• Movement inventories
• Lot size inventories
• Anticipation inventories
• Fluctuation inventories
8. PURCHASE COST:
For items that are purchased from outside the firms, this is
usually the unit price that the firm pays to its vendor. As an
item moves through the logistics system of the firms, it
purchase cost in the inventory analysis should reflect its fully
landed cost, by which is meant the cost to acquire and
moves the item to that point in the system.
In addition to the per unit purchase cost, there is usually an
additional cost which is incurred whenever we order, reorder or
replenish the inventory. If we produce items internally then there will
be an organization set up cost. This happens because we have to shut
down the manufacturing line and change over, reconfigure the line to
make a specific item.
This is the cost involved with processing the order, involving paying
the bill, auditing, and so forth.
9. HOLDING COST:
The cost that accrue due to the actual holding of the inventory over a time
period. Many different kinds of cost can be considered as holding cost. The
key characteristics of holding cost varies with the amount of inventory being
held and the time that the inventory is held. The holding cost can further be
classified as follows:
• Storage cost
• Service cost
• Risk cost
When a demand arises which cannot be satisfied from available inventory
an inventory shortage occurs. Purchase, ordering and holding cost can be
thought of as the cost of having inventories, while shortage cost result for
not having inventory, or for not having enough inventory at the right place at
the right time
10. Inventory management
What is inventory management?
Inventory management refers to the process of
ordering, storing and using a company's inventory: raw materials,
components and finished products.
Inventory management is the management of inventory and stock.
Inventory management is the proper planning of purchasing, handling,
The objective of inventory management is to provide uninterrupted
production, sales, and/or customer-service levels at the minimum cost.
Since for many companies inventory is the largest item in the current assets
category, inventory problems can and do contribute to losses or even
business failures. Also called inventory control.
13. Inventory management
BREAKING DOWN 'Inventory Management‘
A large inventory carries the
risk of spoilage, theft, damage, or shifts in demand. Inventory must be
insured, and if it is not sold in time it may have to be disposed of at
clearance prices – or simply destroyed.
For these reasons, inventory management is important for businesses of
any size. Larger businesses will use specialized enterprise resource
planning (ERP) software. The largest corporations use highly customized
software as a service (SaaS) applications.
14. Inventory management
The method allows companies to save significant amounts of money and
reduce waste by keeping only the inventory they need to produce and sell
products. This approach reduces storage and insurance costs, as well as the
cost of liquidating or discarding excess inventory.
The just-in-time (JIT) inventory system is a management strategy that
minimizes inventory and increases efficiency.
Just-in-time (JIT) manufacturing is also known as the Toyota Production
System (TPS) because the car manufacturer Toyota adopted the system in the
The success of the JIT production process relies on steady production, high-
quality workmanship, no machine breakdowns, and reliable suppliers.
15. Inventory management
Materials Requirement Planning (MRP)
Material requirements planning (MRP) is a system for calculating the
materials and components needed to manufacture a product. It consists of
three primary steps: taking inventory of the materials and components on
hand, identifying which additional ones are needed and then scheduling
their production or purchase.
MRP uses information from the bill of materials(a list of all the materials,
subassemblies and other components needed to make a product, along with
their quantities), inventory data and the master production schedule to
calculate the required materials and when they will be needed during the
MRP can also improve manufacturing efficiency by using accurate
scheduling to optimize the use of labor and equipment.
17. Economic Order Quantity (EOQ)
The Economic Order Quantity (EOQ) is the number of units that a company should
add to inventory with each order to minimize the total costs of inventory such as
holding costs, order costs, and shortage costs.
MINIMUM ORDER QUANTITY (MOQ)
Minimum order quantities are the minimum order size that the supplier is willing to
accept. This is often expressed as the minimum number of units. However, suppliers
may also set the minimum order quantity in terms of order value. For example,
Supplier ABC Ltd will only accept an order in excess of £1000.
First in, first out method (FIFO)
The first in, first out (FIFO) method of inventory valuation is a cost flow assumption
that the first goods purchased are also the first goods sold. In most companies, this
assumption closely matches the actual flow of goods, and so is considered the most
theoretically correct inventory valuation method.
18. Nature of Inventories
1) Raw Materials
Basic inputs that are converted into finshed product through the
2) Work In Progress
Semi manufactured products need some more work before they
becomes finished goods for sale
3) Finished Goods
Completly manufactured products ready for sale
Office and plant cleaning materials not directly enter production but
are necessary for production process and do not involve significant
22. FOUR SPECIFIC CASE WHERE SHORTAGE COST
Lost customer cost
23. INVENTORY CONTROL:
Inventory control is the means by which materials of
the correct quality and in correct quantity are made
available as and when required with due regard to
economic instorage and ordering cost. Hear the
desired level of inventory can neither be high or low
because high level inventory will lead to increase in
carrying cost while low level of inventory will
lead to increase in ordering cost
24. SCOPE OF INVENTORY CONTROL:
SCOPE OF INVENTORY CONTROL
economic order size
Safety or buffer
the work of
25. OBJECTIVES OF INVENTORY CONTROL:
Toensure smooth flow of stock.
Toprovide for required quality of material
Tocontrol investments in stock.
Protection against fluctuating demand.
Protection against fluctuations in output.
Minimization of risk and uncertainty.
Risk of obsolescence.
Minimization of material cost.