Inventory Management Use of Inventory Types of Costs ABC Analysis VED Analysis Economic Order Quantity (EOQ) Types of Inventory Management System Assumptions of EOQ Basic Fixed Order Quantity Model (EOQ) EOQ Curve ABC and VED Classification Function / Use of Inventory

1. Prepared By,
Mr. Nishant Agrawal
Inventory Management
METAS Adventist College (NEHU)

2. Session Outline
 Inventory Management
 Use of Inventory
 Types of Costs
 ABC Analysis
 VED Analysis

3. Inventory Management
 Inventory is stock in firm for future use
 In Manufacturing organization have inventories of raw materials,
components, tools and equipment etc.
 In Service organization such as banks, financial organization , hospitals. in
hospital have inventories of medical equipment such as glucose bottle etc.
 Inventory is maintained by organization to avoid stock out of item.
 Stock Out of any items results
 Loss of potential profit
 Loss of goodwill of customer

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 Low level of inventory and High level of inventory
 Inventory of an item should neither be high or low. It should just
optimal
How much size of order placed to suppliers?
When should order placed ?

5. Function / Use of Inventory
 Meeting customer demand: Maintaining finished goods inventory allows a
company to immediately fill customer demand for product.
 Anticipation Inventory : to satisfied expected customer
 Safety or buffer stock : to avoid stock out
 Taking advantage of quantity discounts: Many suppliers offer discounts
based on certain quantity breaks because large orders tend to reduce total
processing and shipping costs while also allowing suppliers to take
advantage of economies of scale in their own production processes.

6. Types of Costs
Costs
Ordering
Carrying
/
holding
•Ordering cost (OC) is cost of placing a single order.
•Carrying cost (CC) is cost of storing the inventory in the warehouse.

7. Example

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11. Inventory Management System

12. Inventory Management System
 Dependent inventory is defined as the inventory of items that
are the components , parts, sub assemblies of Finished Goods.
 Independent demand inventory is defined as inventory of
finished goods .

13. Economic Order Quantity (EOQ)
 Economic order quantity (EOQ) is the order quantity that minimizes
the total holding costs and ordering costs.
 Economic order quality deals when the cost of procurement and
handling of inventory are at optimum level and total cost is minimum.
 EOQ applies only when demand for a product is constant over the year
and each new order is delivered in full when inventory reaches zero.

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 There is a fixed cost for each order placed, cost for each unit held in storage.
 We want to determine the optimal number of units to order so that we
minimize the total cost associated with the purchase, delivery and storage of
the product.
 Safety stock ( buffer stock) is a term used to describe a level of extra stock
that is maintained due to uncertainties in supply and demand.
 The Reorder point is the level of inventory which triggers an action to
replenish that particular inventory stock. It is a minimum amount of an item
which a firm holds in stock, such that, when stock falls to this amount, the item
must be reordered.

15. Economic Order Quantity (EOQ)
Order Quantity Size (Q)
Cost(Rs.)
EOQ
Tc (Total Cost)
Carrying Cost
(Ordering Cost)

16. Assumptions of EOQ
 Demand for the product is constant
 Lead time is constant
 Price per unit is constant
 Inventory carrying cost is based on average inventory
 Ordering costs are constant per order
 All demands for the product will be satisfied (no back orders)

17. Basic Fixed Order Quantity Model
(EOQ)
Annual
Holding
Cost
Total Annual Cost =
Annual
Purchase
Cost
Annual
Ordering
Cost
+ +
S
Q
D
H
Q
DCTC 
2
H
DS
EOQ
2

TC = Total annual cost
D = Demand
C = Cost per unit
Q = Order quantity
S = Cost of placing order/setup cost
H = Annual holding and storage cost
per unit of inventory

18. ABC Analysis
 In materials management, the ABC analysis is inventory categorization
technique.
 The ABC analysis provides a mechanism for identifying items that will
have a significant impact on overall inventory cost
 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,
 "C items" with the simplest controls possible and minimal records.

19. Recommended breakdown of ABC classes:
 "A" approximately 10% of items or 66.6% of value
 "B" approximately 20% of items or 23.3% of value
 "C" approximately 70% of items or 10.1% of value
 'A' items are very important for an organization. Because of the high
value of these 'A' items, frequent value analysis is required. In addition
to that, an organization needs to choose an appropriate order pattern to
avoid excess capacity.
 'B' items are important, but of course less important than 'A' items and
more important than 'C' items. Therefore 'B' items are intergroup items.
'C' items are marginally important.

20. VED Classification
 VED: Vital, Essential & Desirable classification
 VED classification is based on the criticality of the inventories.
 Vital items – Its shortage may cause stop the work in organization. They
are stocked adequately to ensure smooth operation.

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 Essential items - Here, reasonable risk can be taken. If not available,
the plant does not stop; but the efficiency of operations is adversely
affected due to expediting expenses. They should be sufficiently stocked
to ensure regular flow of work.
 Desirable items – Its non availability does not stop the work because
they can be easily purchased from the market as & when needed. They
may be stocked very low or not stocked.

22.  It is useful in capital intensive industries,
transport industries, etc.
 VED analysis can be better used with ABC
analysis in the following pattern:
Category “V” items “E” items “D” items
“A” items Constant control
& regular follow
up
Moderate stocks Nil stocks
“B” items Moderate stocks Moderate stocks Low stocks
“C” items High stocks Moderate stocks Very low stocks