1. INVENTORY MANAGEMENT
Inventory: it refers to stock, raw material, components, spares or work in progress maintained in an organization to have
continuous production and sales.
Inventory Management: Ensuring continues supply of raw materials is known as inventory management.
Objects of inventory management
To provide continuous supply of raw materials
To reduce wastages
To exploit the available opportunities
To provide right material at right price
To meet the demand in the market
To avoid excess inventory
To ensure effective utilization of the floor space.
Tools of Inventory Management
Fixation of Levels:
It is a tool through which the inventories are maintained by fixing different levels namely. Maximum level, Re-order
level, Minimum level and Danger level. Fixations of levels are made by considering different factors. Nature of raw materials,
cost, availability, lead time, storage space. The above factors will act as an indicator for managing the inventory.
it is the level set for materials beyond which it should not be stored. Maximum level is set by considering different
factors. Nature of raw materials, cost, availability, lead time, storage space. Materials stored beyond maximum level
create several financial and managerial problems to the firm.
Maximum Level = Re order Level +Re ordering Quality – (Minimum Consumption Minimum Re Ordering Period)
It is also known as safety stock, below which the storing of materials leads to server consequences. In other words,
it is a level at which stores controller takes immediate action in procuring the materials. Any negligence on the part of
the in charge of stores may lead to stoppage of production. This level is set by considering lead time, rate of
consumption and the nature of materials.
Minimum Stock Level = Re ordering Level – (Normal Consumption x Normal Reorder Period)
Re order level is that level fixed for the materials to indicate the urgency of procuring them from the market. This
level is fixed by considering the rate of consumption of materials, lead time and the availability of raw materials. Once
the materials reaches this level, stores controller place his request to purchase the materials. So that, he can maintains
storage of such items to maximum level.
Re order Level = Maximum Consumption x Maximum Reorder Period
2. Danger Level:
It is the level beyond which storage of materials should not fall. It also indicates the necessary to arrange for
quick purchases of materials. Otherwise, business firm has to stop the production of major plants. The stores in charge
may procure the materials even at the cost extra expenses and strain.
Danger Level = Average Consumption x Maximum Re order Period for emergency purchases.
ABC Analysis: (Always Better Control)
Under this method, the materials are managed by giving importance to its value. Classifications are made by
Grading the materials as A, B and C.
“A” Grade materials are costly high in value but less in number and are supervised and controlled closely.
“B” Grade materials are moderate in value and moderate numbers of such items are maintained
with moderate control.
“C” Grade materials are cheap in value but more in quantity and least attention is given in
monitoring these items. The main purpose of adopting this technique as a inventory control is to maintain scientific
Category Percentage of total items Percentage of total material cost
A 5-10 70-80
B 10-20 10-20
C 70-80 5-10
EOQ (Economic Order Quantity)
Economic Order Quantity is that quantity of materials to be ordered where it will have least or minimum order placing
and carrying cost. It is also called as the size of the materials to be purchased most economically.
the ordering cost or order placing costs consist of salary of the staff who are in charge of the ordering goods,
transportation costs, inspection costs, cost of stationary,typing,postage,telephone charges..,
Carrying cost refers to the cost of capital, cost of storage, insurance cost and cost of spoilage.., both these costs should
be maintained at minimum to order for a specific quantity of materials this can be calculated by using a formula
Perpetual Inventory System:
Referred as continuous stock checking. Under this system, different registered are maintained for materials, enteries are
made as and when the materials are received and issued. The physical verification of materials are conducted throughout
the year. Hence it is identified as a costly technique of inventory control. Though it is costly technique, the benefits
enjoyed by the management are many. Statement of materials, follow up action, monitoring .., can be smoothly carried
3. out. As a result of this benefit, many trading as well as manufacturing concercens are adopting this technique for
It is most suitable method for automobile industries specially to maintain spare parts. All spare parts are classified in to
vital, Essential and Desirable Components. Vital parts for the manufacturing of a product will be closely monitored.
Inadequate supply of these parts may substantially damage the productive activities.E type of materials is no doubt that
they are essential, but its level of stocks are moderately low. Desirable (D) components may or may not be
maintained.non availability of D type spares do not damage the normal functioning of the industry.
Under this method, materials are grouped according to the movements. Fast moving items, slow moving items and non-
moving items. Fast moving items are stored in large quantity and close watches on the movement of such items are
kept. Slow moving items are not frequently needed by the production department; accordingly moderate quantity
supervision will be maintained.non moving items are rarely required by the production departments. Hence a smaller
number of materials are kept in stores and less importance is given in inventory management.
Periodical Inventory Evaluation:
Under this system inventory valuation with checking will be carried out at different intervels.generally twice or thrice
in a year. During the period of stocking, normal functioning of the organization will be closed for one or two days and
complete stock verification and valuation will be done accordingly. Most of the trading concerns adopt this technique
for their inventory management.
Cost Associated with Inventory
Financial Cost:(capital cost)
The finance required to purchase the inventory and the cost the company bears for mobilizing, it is known as
financial cost therefore adequate supply of finance at cheaper cost must be made available to maintain the inventory
Cost of Storage:
Inventories are to be stored properly by protecting the quality. The required for storing the inventory must be
adequately provided. This cost consists of the rent payable for storing the materials and maintenance of inventory cost
Inventories are exposed to vide fluctuation in the prices. Many at time, the prices of materials may be redused.if
the price paid for procuring the materials are higher than the price that is prevailing; it is a loss to the business firm.
Risk of Obsolescence:
Due to the increased research and innovative and creative minds of technologies, new materials and products will
enter into the market. On such circumantances, the product manufactured today becomes obsolete.
Deterioration in quality:
In a practical situation, most of the materials stored may not be issued to production department for various
reasons. In the process, such material looses its quality or deteriorates itself from original value.
Theft, damage and accident:
4. The materials are stored in the warehouses. If it is exposed to different types of uncertainty, theft, damage and
fire accident all these are looses or increase the cost of production.
Inventory carrying cost :
It includes the expenses of maintance of stores, bins and the salary to the staff who are in charge of warehouses
or storage. Hence theses costs are to be reduced to increase the profitability of the firm.
Cost of Shortage of Stock and
Many at times, business firms may be able to arrange the adequate supply of materials regularly for various
reasons. as a result, production work may be stopped.therefore,sufficient care should be taken not to have this cost in
running the business.
Order placing cost:
Order placing cost is a permanent cost which is incurred by the business firm to place the order for materials, the
salary of the clerk, manger and establishment charges will also be considered in to managing the inventory.
In the min-max method, each item of materials is fixed with its maximum and minimum levels. When the quantity
rewards minimum level, an order is placed for such a quantity as would make the inventory reach its maximum level.
Automatic Order System:
This method of inventory control is done with the help of computers. order for fresh purchases are placed when the inventory
reaches order point quantity (OPQ).for each type of material, records are maintained by data processing in the form of receipts
and issues. When the records show order point the staff concerned place order for necessary quantity. This system ensures that
materials are always promptly replaced.
Just In Time Inventory:
Business concerns are giving maximum attention to reducing stock levels by establishing cardial relationship with suppliers
to arrange for frequent delivery of quantities. This is called Just in Time Purchasiung.the objective of just in time purchasing is to
obtain delivery of materials immedidly before their use. This is possible with the co operation of the supplier. The company
guarantees to purchase large quantities. The supplier guarantees good quality materials at reasonable prices.this arrangement
helps in directly delivering the materials to the shop floor instead of receiving in to stores. Moreover the stocks consists of few
items at more or less same prices where LIFO, FIFOand average cost price will be the same.
Ordering Cycle Method:
In this method, the review of materials held in stock is done in a regular cycle. The length of cycle depends on the nature of
material. Materials which are expensive and essential have a shorter review cycle and non vital materials have longer review
cycle. At the time of review order is placed to bring the inventory to the desired level.
5. Ordering cycle method is also called 90-60-30 cycle method. The maximum stock level is equal to 90 days supply. When the
inventory reaches 60days supply, an order is placed for 30 days supply. The recorder point is equal to 60 days supply and
recorder quantity would be equal to 30days supply.
Inventory Turnover Ratio:
Input-Output Ratio Analysis:
Input output is the ratio of the actual quantity of material in production and standard material content of the actual
output. This is possible in industries where the product and raw material are being expressed in same quantitytative
measurement such as kilograms, metric tons,
The input –output ratio analysis indicates whether the consumption of actual material when compared with standard
is favorable or adverse. The raw material cost of the finished product can be arrived at by multiplying material cost per
unit by the input –output ratio.