A brief summary of Inventory Management techniques. It includes the following methods of Inventory control: Economic Order Quantity, VED classification, Just in Time, ABC analysis, FSN analysis, VMI analysis, FIFO analysis. I have further discussed by focusing on the automobile industry.

1. Managerial
Accounting
Presented By: Mayank Agrawal

2. What is Inventory Management?
• Inventory management is the
supervision of non-capitalized assets
(inventory) and stock items.
• Inventory management refers to the
process of ordering, storing and using
a company's inventory.
• It includes
• Raw materials
• Components, and
• Finished products.

4. Techniques and Tools of Inventory Control
1. Economic Order quantity
2. VED classification
3. Just-in-Time
4. ABC analysis
5. FSN analysis
6. VMI analysis
7. FIFO analysis
We will discuss w.r.t to Automobiles Industry.

5. Economic Order Quantity
• In Inventory management, economic order quantity (EOQ) is the order quantity that
minimizes the total holding costs and ordering costs. It is one of the oldest classical
production scheduling models.
• By this, the company minimizes the total costs of inventory—such as holding
costs, order costs, and shortage costs. Since the model assumes instantaneous
replenishment, there are no inventory shortages or associated costs.
• C = Carrying cost per unit per year
F = Fixed Cost per order
D = Demand in units per year

6. Bajaj Motorcycles
• Bajaj produces a particular bikes in accordance to
EOQ. For a particular product (for a particular
color), it has decided minimum quantity to be
produced.
• When consumers place an order, they are given
wait times according to the production time of
respective products.

7. VED classification
• Vital items- those items without which the production will stop. They must be
available in stock whenever demanded. Ex. Raw Material
• Essential items- those items without which production may not stop instantly
but there can be problems.
• Desirable items- those items without which work may not stop instantly nor it
slows down but unavailability of these items affect the work/production. Ex.
Measuring Instruments, Safety devices.

8. Just-in-Time
• Just in time (JIT)inventory is a strategy to increase efficiency and decrease waste
by receiving goods only as they are needed in the production process, thereby
reducing inventory costs.
• It is a production system designed to cut costs and optimize logistics by delivering
and receiving materials and parts right when they are needed, never too early or
late.
• It also shifts the operational focus to other aspects of the production process,
which can make it easier to implement large-scale process improvement projects
that can yield a high return on investment

9. Just-in-Time Advantages
• Reduced Logistics Cost
A well-run JIT inventory system makes it possible to function effectively with virtually no
inventory.
• Reduced Inventory Waste
Under a mature JIT inventory regime, a significant amount of money can be saved due to
saved space and little to no inventory loss.
• Cusomer Responsiveness
JIT inventory system makes it easy to respond to new needs as they emerge.

10. Just-in-Time Dis-Advantages
• High Institutional Learning Curve
In order for a JIT inventory strategy to be effective, the enterprise must learn to forecast demand
effectively. If large, unexpected changes in demand materialize, it may be impossible to secure the core
benefits of reduced cost.
• Vulnerability to Supplier Errors
A JIT inventory system requires a high degree of trust and coordination with supplier relationships. If
suppliers cannot be trusted to furnish components promptly as required, the entire enterprise may
temporarily cease.
• Risk of Material Cost Increases
When price fluctuations substantially affect the cost of components, enterprises that have inventory
on hand achieve a price advantage for the duration. If the spikes prove to be prolonged, manufacturers
face the peril of shifting strategies.

11. Toyota
• Poster child for JIT success.
• Raw materials are placed on the
production floor only after a customer
has placed an order.
• No parts are allowed at a node unless
they are required for the next node, or
they are part of an assembly for the
next node.
• This allows Toyota to maintain only the
inventory that is needed so that they
can easily pivot when there are
changes in consumer demand.

12. Harley Davidson
• Harley Davidson increased
productivity and reduced inventory
by approximately 75%, due to their
newfound ability to quickly locate
and solve manufacturing
inefficiencies.
• When JIT was put into practice,
process problems could no longer
be hidden by costly inventory that
helped to meet ship dates. The
inefficiencies in the processes were
quickly identified and solved.

13. Maruti Udyog Ltd
• Average inventory turnover ratio of
the company increased from 11.9
(2005-2006) to 13.9 (2006-2007) using
JIT inventory management.
• Various initiatives to improve its
inventory management include:
• Use of Bar Code
• Delivery instruction system
• Kanban production system
• Vendor Management

14. Maruti Udyog Ltd ( contd )
• Use of Bar Codes
-Reduced processing time, Increase accuracy of data & speed of operation.
• Delivery Instruction System
-Reduced lead time & inventory requirements.
• Kanban production System
-Forecasting of delivery dates
• Vendor Management
-Number of vendors reduced from 370 to 299 ( in 2003 )
-Better operational efficiency and economics of sale.

15. Rolls Royce
Rolls Royce uses JIT because of
following reasons:
• Build to order production.
• High Value inventory.
• Decreased Lead Time.
• Customized products.

16. ABC analysis
• ABC analysis divides an inventory into three categories—
• "A items" with very tight control and accurate records,
• "B items" with less tightly controlled and good records, and
• "C items" with the simplest controls possible and minimal records.
• The ABC analysis suggests that inventories of an organization are not of equal
value. Thus, the inventory is grouped into three categories (A, B, and C) in order
of their estimated importance.

17. FSN analysis
As per this method in all items are not required with the same frequency. FSN divided
items into categories in the descending order of the usage rate.
• Fast Moving items- Company actively purchase & consume items. Stocks for such
items are consumed in a short time.
• Slow moving items- those items which are consumed occasionally but rate of
consumption is very slow. Ex. Stock is total 800kg. & avg. consumption is only 20 to
30kg.
• Non moving items- those items which are found in stock but they are not at all
consumed or used by any one. Such items have neither been received from store in
last one year or so.

18. VMI(Vendor Management Inventory)
• In VMI the normal trading relationship is reversed. Instead of the customer
managing its own stock and deciding when and how much more to buy, the
supplier does it.
• VMI works well for high-volume or low-cost items.
• You never have to worry about running out of critical items, you pay only for
items you actually use.

19. Hero MotoCorp
• Consumers walk in retail stores and
order a specific bike, which is
delivered in a day or two.
• Over a specific period of time, the
inventory diminishes for different
products and the low inventory is
stocked again to its full capacity in the
next cycle.

20. FIFO( First In First Out )
• The first or oldest stock is used first and
the stock or inventory that has most
recently been produced or received is
only used or shipped out until all
inventory in the warehouse or store
before it has been used or shipped out.
• This ensures that the oldest stock is used
first and reduces the costs of obsolete
inventory. It is also considered the
ideal stock rotation system.