Inventory Planning & Control

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Unit 4
Inventory Planning & Control
Dr. Prashant B. Kalaskar

Unit-4 Syllabus
• Inventory Planning & Control: Continuous & Intermittent
Demand system, Concept of inventory, need for inventory, types
of inventory, Seasonal, Decoupling, Cyclic, Pipeline, Safety,
Implications of Inventory Control Methods
• Inventory Costs: Concept & Behavior of Ordering cost, Carrying
cost & Shortage cost
• Basic EOQ Model & EOQ with Discount
• Inventory control: Classifications of Materials, ABC analysis,
VED, HML, GOLF, FSN & SOS
• (Numerical are expected on Basic EOQ, EOQ with Discount & ABC Analysis,
Inventory Turnover ratio, Fixed Order Quantity Model, Periodic review &
Re-Order Point.
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Concept of Inventory
• Inventory generally refers to the materials in stock.
• Inventory constitutes Supplies, Raw Materials, in Process
goods, components, finished goods including the man
power.
• Inventories are processed to add values further in to it.
• Inventory denotes the idle resources which can be put to
some future use.
• Every unit of inventory is called as Stock Keeping Unit
(SKU)
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• Inventory ties up capital, and capital is required for
handling, storage space, deterioration, sometimes
obsolete, requires insurance (loss/expiry), incurs taxes,
can be stolen or gets lost.
• The primary function of inventory is buffering and
decoupling (intermediate stocks).
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• Dominance of Materials cost in total cost of
Manufacturing (50-60%)
• Inventory cost is nothing but the cost of current assets
• Higher the inventory is higher the total cost to company
• Higher the inventory is, lower the ROI will be to company
• Lower level of inventory causes shortages, costs to the
company due to loss of demand vs. supply
Inventory is nothing but MONEY
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Need
• Every organization has;
- Book entry of Inventory details
- Actual inventory in Hand details
• Organizations must reconcile this both entries often, or
else miss calculation of inventory may affect greatly
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Item Opening Receipt Total Used Balance Ordered
A 10 20 30 15 15 20
B 20 0 20 10 10 20
C 30 30 60 50 10 0

Need of Inventory Management
• Avoid loss of sales
• Gaining quantity discounts
• Reducing order costs
• Reducing risk of production shortages
• Gaining from seasonal reduction in price
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Continuous & Intermittent Demand System
• Continuous Demand : Demand for the product which is
quite consistent over the period and does not demand
too much customization.
For Ex: Sugar, Edible Oil, Petrol etc.
• Intermittent Demand : Demand which is not consistent
over a period is called intermittent demand.
For Ex: Food Items in Restaurant, Grocery items, Racing
Bicycles etc.
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Independent & Dependent Demand
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Independent Demand
(Demand not related to other items)
Dependent Demand
(Derived/Calculated)
X
A B
2C 3D 1E 2F

Types of Inventory
• Raw Material Inventory
• WIP
• Semi-Finished Assemblies
• FG
• Maintenance, Repair and Operating Supplies (MRO) /
Materials And Spares
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Types of Inventory (By Categories)
• Raw Material Inventory:
- Materials that are obtained from the suppliers, which can
be put in the process of transformation in to finished
products.
- RM are often acquired in quantities that are sufficient to
last for some period of time.
- The resulting stock of raw materials on hand, which are
available for use, constitute inventory
Ex: Glass, Tyres, Iron sheet, Mirrors, Screws & Nuts-Bolts
etc are the inventory for Automobile companyj
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• Work in Process (WIP) Materials:
- Materials which are in the manufacturing process in
various stages of completion, they are referred to as
work-in-process inventory (Clay)
• Semi-Finished Assemblies : Often, in manufacturing
processes, raw materials are processed, fabricated, or
assembled into intermediate parts or subassemblies,
which may be restocked temporarily until used for
further process (Clay mugs before heating up)
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• Finished Goods : Finished goods inventories are products
ready to be delivered to distribution centers or ultimate
users.
• Maintenance, Repair and Operating Supplies (MRO): Those
items used in production but are not the part of product
like hand tools, lubricants, spare parts, or even food for
company-run cafeterias.
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Types of Inventory (By Function)
• Transit / Pipeline Inventory:
- Sometimes called transportation stock.
- Pipeline inventories represent materials that are in
transit, such as from a plant to a distribution center or a
customer.
- Pipeline stocks are most prevalent with distribution
inventories of finished goods.
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• Safety Stocks Inventory:
- Safety stock, also referred to as buffer stock.
- It is used to protect against the possibility of stock-outs
when demand or supplies are subject to uncertainty
or fluctuation.
- It constitutes extra inventory held just in case anticipated
demands exceed those that were forecast or in case a
replenishment order is tardy or in a quantity less than
requested.
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• Cycle / Lot Size Inventory:
- Cycle stock gets its name from the cyclic reordering
practice associated with most goods.
- It is sometimes referred to as lot-size stock and results
from ordering on quantities that are in excess of current
needs.
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• Cycle / Lot Size Inventory:
- This stock gets depleted gradually upon serving
customer orders and replenished cyclically when
supplier orders are received
- Cycle stock is used to take advantage of quantity
discounts, reduce shipping, clerical and setup costs and
where supply rate is lower than the demand rate.
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• Seasonal / Anticipation Inventory:
• The term anticipation stock is usually applied to
inventory buildups that are produced and accumulated
based on some strategy as preparing for peak season,
planned sales promotional campaign.
• Seasonal product buildup is one of the best examples of
anticipation stock.
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• Decouple (Supply and Demand):
- The term, decoupling stock, is sometimes used instead of
safety stock to represent a separation, or buffer, of
product demand from product supply.
- Most often, however, it is used to denote work-in-
process inventories that act as buffers between
successive work operations in a factory, especially in job-
shop production.
- The objective is to prevent idle time in the factory.
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• Zero Inventory:
• Reducing amounts of raw materials and purchased parts
and subassemblies by having suppliers deliver them
directly, when required.
• Reducing the amount of works-in process by using just-
in-time production.
• Reducing the amount of finished goods by shipping to
markets as soon as possible.
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Implication of inventory control methods
• The very fact that the inventory needs to be controlled.
• Controlling of this inventory is possible through various
methods such as ABC classification, HML classification,
FSN Classification, S-O-S Analysis, SDE Analysis etc.
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Inventory Costs
• Inventory can be asset used to accomplish the
objective of an organization or a liability depending
upon on its management.
• Inventory can cost or even benefits to the company.
• The problem is to balance the cost of carrying
inventory.
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Inventory Costs
• Customer service: Higher inventory levels result in higher
customer service levels.
- Lower levels of inventory can cause potential stock-out,
backorders, lost sales and lost customers.
• Operating efficiency: Higher inventory levels allow
leveling production, longer production runs and reduced
set-up time.
- Inventory lets manufacturers purchase in larger
quantities availing volume discounts.
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Inventory Costs
• Cost of placing orders: Ordering smaller quantities each
time in an order placed can reduce inventory.
- However, this increases the annual ordering costs.
• Transportation and handling cost: The more often goods
have to be moved and smaller the quantities moved, the
greater the transportation and materials handling cost.
- However, moving larger lots leads to higher inventory.
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Shortage / Stock Out Costs
• If demand during the lead-time exceeds forecast, we can
expect a stock-out.
• A stock-out can potentially be expensive because of
back-order costs, lost sales, and possibly lost customers.
• There is possibility of additional losses due to future
orders being placed with competitors.
• Repeated inability to deliver in competitive manner can
generate a poor delivery reputation, loss of goodwill, and
loss of sales.
• Stock-outs can be reduced by carrying extra inventoryj
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Ordering Costs
• The costs associated with placing orders to replenish
inventory stocks
• Ordering cost differs between orders placed by purchasing
on outside suppliers and orders placed on a factory for
production of the needed product.
• The cost of placing an order does not depend upon the
quantity ordered.
• Ordering cost depends upon the number of orders placed
in a year.
• It can be reduced by ordering more at a time, resulting in
placing of fewer orders, but my increase inventory levels.
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Ordering Costs
• Ordering cost may include;
1) Purchase order Costs :
◊ Supplier selection, follow-up, expediting and other
contacts
◊ Account payables and collection
◊ Receiving, inspecting, and handling
◊ Preparation and handling of an order / authorization
document
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Ordering Costs
• Ordering cost may include;
1) Production Order Costs :
◊ Lost capacity cost due to re-setup of equipment or
assembly-line changeover
◊ Preparation of production paperwork
◊ Tracking and reporting work orders in the plant
◊ “Scrap” that results from start-up after a new setup.
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Carrying Costs
• There are several kinds of costs associated with
carrying inventory.
• Inventory carrying cost increases as levels of
inventory increases.
• Inventory carrying cost is usually expressed for one
year & as a percentage (%) of the cost of the
inventory item being ordered.
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Carrying Costs
• Storage costs : Storing inventory requires various
resources like equipment, space and workers. As
inventory goes up so do these costs.
• Transporting and handling Costs:
• Risk Costs : Risk costs comprises of
• ◊ Obsolescence ◊ Damage
• ◊ Pilferage ◊ Deterioration
• These costs vary from industry to industry and even from
product to product.
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Various Other Costs
• Opportunity Cost (Capital Cost) : These are the rate of
returns possible from the alternative investments that
could be made with the money tied up in the inventory.
• The average expected return from feasible alternative
investment is used as an estimate of opportunity costs
• Insurance and taxes:
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Inventory Control Decisions
Objective: Minimize total inventory cost
Decisions:
• How much to order? (Order Quantity)
- Economic Order Quantity (EOQ)
• When to order? (Order Timing)
- Reorder Point
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Reorder Point
• Quantity to which inventory is allowed to drop before
replenishment order is made
• Need to order EOQ at the Reorder Point:
ROP = D X LT or (Max. Usage x Max Lead Time)
D = Demand rate per period (Maximum Usage)
LT = lead time in periods (Maximum Lead Time)
Based on reorder point - When inventory is depleted
to ROP, order replenishment of quantity EOQ.
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Economic Order Quantity (EOQ)
• Economic order quantity (EOQ) is that size of the
order which gives maximum economy in purchasing any
material and ultimately contributes towards maintaining
the materials at the optimum level and at the minimum
cost.
• In other words, the Economic Order Quantity (EOQ) is
the amount of inventory to be ordered at one time for
purposes of minimizing annual inventory cost.
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Components of Total Cost
1. Cost of items
2. Cost of ordering
3. Cost of carrying or holding inventory
4. Cost of stock outs
5. Cost of safety stock (extra inventory held to help
avoid stock outs)
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Sawtooth Model
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Units
Q/2
Time
Level of Inventory
t
Reorder Point
Zero Inventory
Max Inventory-EOQQ
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Economic Order Quantity (EOQ):
Determining How Much to Order
• One of the oldest and most well known inventory
control techniques
• Easy to use
• Based on a number of assumptions
• when demand is smooth and continuous, can operate
response-based system by determining
– best quantity to replenish periodic demand (EOQ)
– frequency of replenishment (ROP)
• Reorder Point
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Minimizing EOQ Model Costs
• Only ordering and carrying costs need to be minimized
(all other costs are assumed constant)
• As Q (order quantity) increases:
– Carrying cost increases
– Ordering cost decreases (since the number of orders
per year decreases)
It can be very well understand by following table
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Costs for different lot sizes
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Order
Quantity [Q]
Ordering Cost
[AO/Q]
Carrying
Cost [Qic/2]
Total Cost
50 ` 400 ` 25 ` 425
100 ` 200 ` 50 ` 250
150 ` 133 ` 75 ` 208
200 ` 100 ` 100 ` 200
250 ` 80 ` 125 ` 205
300 ` 67 ` 150 ` 217
350 ` 57 ` 175 ` 232
400 ` 50 ` 200 ` 250

Costs for different lot sizes
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Cost
Quantity

EOQ Model Total Cost
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At optimal order quantity (Q*):
Carrying cost = Ordering cost
Min.
Total
Cost
At optimal order quantity (Q*):
Carrying cost = Ordering cost
Holding/ Carrying
Costs Curve
Ordering
Costs Curve
Total Cost Curve
Carrying + Ordering
Min.
Total
Cost
Q
Cost

Finding the Optimal Order Quantity
Parameters:
Q* = Optimal order quantity (the EOQ)
A = Annual demand (Also denoted as D)
O = Ordering cost per order (Unit) (Also denoted as C0)
i = Carrying (or holding) cost per unit per yr.
( Also denoted as Ch )
C = Unit cost inventory
S = Storage cost per unit
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Some Important Formulas
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1) Average Lot Size Inventory = =
2) No. Of Orders per Year =
Order Quantity Q
22
Annual Demand (A)
Order Quantity (Q)
3) Ordering Cost =
AO
Q

Some Formulas
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4) Annual Carrying
Cost
=
=
Average
Inventory
Unit
Cost
Inventory
Carrying Cost
X X
Carrying Cost = Ordering Cost,
Q i C
2
=
AO
Q
Q2 =
2AO
i C
2 A O
i C
Q =
Q
2
X X iC

EOQ Formula
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• EOQ=
2 A O
i
2 A O
i CEOQ=
Annual
Inventory
Cost
Ordering
Cost
Carrying
Cost
Storage
Cost
Material
Cost
= +++
Annual
Cost
Ordering
Cost
Carrying
Cost
= +
2 A O
CEOQ=

Limitations of EOQ technique
EOQ technique has following limitations-
- EOQ requires identification of inventory carrying & ordering
cost, in case it is not clearly known, exactness in EOQ can
not be calculated accurately.
- Sometimes the output value from EOQ is inconvenient
depending upon the demand of that time.
- If materials are not regularly required, EOQ is not useful.
- EOQ is not useful when the prices are fluctuating
- If EOQ is demand dependent, it may lead to irregular orders
placing to vendors.
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EOQ with Discount
• Every purchasing manager looks for getting possible
discounts on every purchase order.
• Discounts is only on the purchase of larger quantities.
• The discounts on bulk orders are c/a Volume Discounts
• The purchase manager must decide, whether to accept the
discount by purchasing in bulk or to go for a normal
quantities purchasing.
• While making a decision for volume purchase, one must
consider-
• Purchase cost Ordering Cost Carrying costj
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EOQ with Discount
Lets see following example-
- An item has an annual demand of 25000 units, unit cost
of item is `10, order preparation cost is ` 10, & carrying
cost is 20%.
- It is ordered on EOQ basis. But the supplier has offered
a discount of 2% on orders of ` 10000 or more.
- Should this discount proposal be accepted by the
purchase manager.
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EOQ with Discount
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- Annual spending on item purchasing is-
25000 X ` 10 = ` 250000
To calculate EOQ=
2% discount is offered on purchase of ` 10000 items at once
Hence purchasing value @ 2% discount will be ` 9800
2 A O
iQ =
2 x 250000 x 10
0.2
Q =
Q = ` 5000

EOQ with Discount
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Particulars No Discount Discount Lot
size
Unit Price per item ` 10 ` 9.80
Lot Size ` 5000 ` 9800
Avg. Lot size Inventory Q/2 ` 2500 ` 4900
Number of Orders per year A/Q 50 25
Purchase Cost ` 250000 `245000
Inventory Carrying Cost @ 20% 1000 1960
Order Preparation Cost @ ` 10 each 500 250
Total Cost `251500 ` 247210

EOQ with Discount
• From the calculation following are the findings-
1) There is saving in purchasing cost
2) Ordering costs are reduced because fewer orders are
placed since larger quantities are being ordered
3) Inventory carrying costs rise because of the larger order
quantity
The buyer must weigh the first two against the last &
decide what counts is the total cost.
Depending upon the figures, it may or may not be the
best decision to take the discountj
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ABC Inventory Classification
ABC classification- This classification is based on annual
consumption value of the inventory.
• A Pareto analysis can be done to segment items into
value categories depending on annual dollar volume
• A Items – typically 10-15% of the items accounting for 60-
70% of the inventory value (cost)
• B Items – typically an additional 20-25% of the items
accounting for 20-25% of the inventory value (cost)
• C Items – Typically the remaining 60-70% of the items
accounting for only 10-15% of the inventory value (cost)
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Pareto’s Principle
• Pareto’s Principle, “ The high significant items in the
given group normally constitutes a small portion of
total items (quantity/number) in a group & the
majority of items in the total will be of minor
significance in value”.
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ABC Classifications
• In a specific inventory control system of a company, it
is quite possible that in a single year, there may be
many items would have not been consumed at all.
• In such cases, it is better to perform ‘’ABC’’ analysis on
longer consumption period data (say 3 years).
• This will give the exact idea about items which are
frequently required & in large quantities required &
some items are required in small quantities that too
very rarely.
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ABC Analysis: Problem-1
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Item No. Unit ` value Annual Usage
101 12.00 80
102 50.00 10
103 15.00 50
104 50.00 40
105 40.00 80
106 75.00 220
107 4.00 250
108 01.50 400
109 02.00 250
110 25.00 500
111 05.00 450
112 07.50 80
113 03.50 250
114 01.00 1200
115 15.00 300
A ’XYZ’
company
wants to do
ABC analysis
on their given
following
inventory

ABC Analysis: Problem-1
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Item Unit ` value Annual Usage Annual Usage in `
101 12.00 80 960.00
102 50.00 10 500.00
103 15.00 50 750.00
104 50.00 40 2000.00
105 40.00 80 3200.00
106 75.00 220 16500.00
107 4.00 250 1000.00
108 01.50 400 600.00
109 02.00 250 500.00
110 25.00 500 12500.00
111 05.00 450 2250.00
112 07.50 80 600.00
113 03.50 250 875.00
114 01.00 1200 1200.00
115 15.00 300 4500.00
First
calculate
the annual
rupee
volume for
each item
` 47935.00

Let’s
Calculate %
contribution
of each item
& assign A, B
or C
Item Annual Usage
in `
% Annual
Usage in `
Cum. % of
Total `
Item
Clasificatn
106 16500.00 34.4 34.4 A
110 12500.00 26.1 60.5 A
115 4500.00 9.4 69.9 A
105 3200.00 6.7 76.6 B
111 2250.00 4.7 81.3 B
104 2000.00 4.2 85.5 B
114 1200.00 2.5 88.0 C
107 1000.00 2.0 90.0 C
101 960.00 2.0 92.0 C
113 875.00 1.8 93.8 C
103 750.00 1.6 95.4 C
108 600.00 1.3 96.7 C
112 600.00 1.3 98.0 C
102 500.00 1.0 99.0 C
109 500.00 1.0 100.0 C
Total `47935.00
B: 20-25%
A: 60-70%
C: 10-15%

Graphical solution for XYZ Co. showing the
ABC classification of materials
• The A items (106 and 110) account for 60.5% of the value
and 13.3% of the items (volume)
• The B items (115,105,111,and 104) account for 25% of the
value and 26.7% of the items
• The C items make up the last 14.5% of the value and 60%
of the items
• How might you control each item classification? Different
ordering rules for each?
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Graphical solution for XYZ Co. showing the
ABC classification of materials
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‘A’ Items
– Small in number, but consume large amount of resources
– Must have:
•Tight control
•Rigid estimate of requirements
•Strict & closer watch
•Low safety stocks
•Managed by top management
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‘B’ Items (Intermediate)
Must have:
•Moderate control
•Purchase based on rigid requirements
•Reasonably strict watch & control
•Moderate safety stocks
•Managed by middle level management

‘C’ Items
• Larger in number, but consume lesser amount of
resources
• Must have:
•Ordinary control measures
•Purchase based on usage estimates
•High safety stocks
ABC analysis does not stress on items those are less
costly but may be vital
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VED Analysis
• Based on critical value & shortage cost of an item
– It is a subjective analysis.
•Items are classified into:
• Vital:
•Shortage cannot be tolerated.
• Essential:
•Shortage can be tolerated for a short period.
• Desirable:
• Shortage will not adversely affect, but may be using
more resources. These must be strictly Scrutinized
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VED Analysis
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• Category 1 - Needs Close Monitoring & Control
• Category 2 - Moderate Control.
• Category 3 - No Need For Control
V E D ITEM COST
A AV AE AD CATEGORY 1 10 70%
B BV BE BD CATEGORY 2 20 20%
C CV CE CD CATEGORY 3 70 10%

SDE Analysis
• Based on availability
– Scarce
• Managed by top level management
• Maintain big safety stocks
– Difficult
• Maintain sufficient safety stocks
– Easily available
• Minimum safety stocks
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FSN Analysis
Based on utilization.
–Fast moving.
–Slow moving.
–Non-moving.
Non-moving items must be periodically reviewed
to prevent expiry & obsolescence
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FSN Analysis
• Following are steps in doing the FSN analysis
• FSN Classification of materials is based on average
stay in the inventory
• FSN Classification of the materials is based on
consumption rate
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FSN Analysis
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Date Receipt Returned Issued Closing Cum. Inv. Holding (days)
1 Jan. 2016 10 0 0 60 60
2 Jan. 2016 15 7 15 67 127
3 Jan. 2016 0 0 0 67 194
4 Jan. 2016 0 0 0 67 261
5 Jan. 2016 0 0 0 72 333
6 Jan. 2016 20 0 0 92 425
7 Jan. 2016 0 0 12 80 505
8 Jan. 2016 0 4 0 84 589
9 Jan. 2016 0 0 0 84 673
10 Jan. 2016 10 0 7 87 760
11 Jan. 2016 0 0 0 87 847
12 Jan. 2016 0 0 12 75 922
13 Jan. 2016 0 0 0 75 997
14 Jan. 2016 10 0 0 82 1079
15 Jan. 2016 0 0 0 82 1161
Total 65 11 46
Considering Opening Quantity is 50 units of Item 101

FSN Analysis
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Average stay
of the
material
=
Cumulative No of Inventory Holding Days
Total quantity received + Opening Balance
= 10.09 Days
Average stay
of the
material 101
1161
=
65 + 50
Consumption
Rate 101
Total Issue Qty.
=
Total Period Duration
46
15
= 3.06/Day

FSN Analysis
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A Similar calculation is made for remaining items to get Average
Stay & Consumption Rate as given in above table

FSN Analysis
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Rule: N > 90%, S: 70% - 89.99% & F < 69.99%
Item Code Consumption Rate Cum. Consmptn Rate % Consmptn Rate FSN Class
Item 6 5.76 5.76 13.24 F
Item 9 5.23 10.99 25.25 F
Item 2 5.2 16.19 37.20 F
Item 5 5.1 21.29 48.92 F
Item 3 4.71 26 59.74 F
Item 8 4.48 30.48 70.04 F
Item 10 4 34.48 79.23 S
Item 7 3.98 38.46 88.37 S
Item 1 3.06 41.52 95.40 N
Item 4 2 43.52 100.00 N

FSN Analysis
Item Code Avg. Stay Cum. Avg. Stay % Avg. Stay FSN Class
Item 6 12 12 14.54 N
Item 9 11.2 23.2 28.11 N
Item 1 10.09 33.29 40.33 N
Item 8 9.11 42.4 51.37 N
Item 3 8.23 50.63 61.34 N
Item 7 8 58.633 71.04 S
Item 2 7.5 66.13 80.12 S
Item 10 6.21 72.34 87.64 S
Item 5 6 78.34 94.91 F
Item 4 4.2 82.54 100.00 F
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Rule: F > 90%, S: 70% - 89.99% & N < 69.99%

HML Analysis
• This method of classification is based on unit cost of
items (XYZ Classification)
• High Unit Cost (X Class Item)
• Medium Unit Cost (Y Class Item)
• Low Unit Cost (Z Class Item)
Here only unit cost of item is considered for classification of
materials, while in ABC classification consumption
pattern is also considered.
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GOLF Classification
• Government, Ordinary, Local, and Foreign items
classification help us to do material analysis based on
location and type of organization.
• G -Government suppliers
• O- Open Market/ Non Government
• L - Local suppliers
• F - Foreign suppliers
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SOS Classification
• Seasonal, Off Seasonal classification helps us to view
seasonal required items.
• S- For seasonal Materials
OS - For non-seasonal (Off Seasonal) Materials
• Purchase planning has to be done if the material is
seasonal, as material shall be available only for that
particular time period of the year.
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SOS Classification
• Seasonal Items can be further classified into two groups-
1) Products which are seasonal & available for very short
time only- Ex-Leechee is seasonal fruit which is available
only for one month in year
2) Products which are seasonal, but are available through
out year- Ex- Grains, Mango pulp etc.
- Such products are available during seasonal period at
economical prices, where as in off season may cost little
higher. Carrying cost should be considered before
making a purchasing decision
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SOS Classification
• Non-seasonal materials are available throughout the year
without much significant price variation.
• Non seasonal items can be Plastics, Metals etc.
• The prices of these materials are independent of the
season.
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Measures for SC Performance
• It is a quantitative method for evaluation of supply chain
performance.
• It also indicates areas of improvement.
• Based on period of measures it can be done a;
1) Post Process Indices (Based on previous Time Periods)
- Inventory Turnover Ratio & No. of Inventory Turns are useful
tools for assessment of Supply Chain Performance
2) Pre Process Measures
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Inventory Turnover Ratio
• Managing inventory levels is important for retailers and
any company that sells physical goods.
• The inventory turnover ratio is a key measure for
evaluating just how efficient the management is at
managing company inventory & generating sales from it.
• Minimum level of inventory and maximum level of sales is
the best inventory ratio.
• Invntry Ratio =
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Total Investment in Inventory (`)
Annual Sales (`)
X 100

• Cost of Goods Sold can be calculated as;
• Average Inventory can be calculated as;
• Inventory Turns (TN) =
• Total Inventory Days =
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Cost of
Goods Sold
= Beginning
Inventories
+
Cost of
Goods Mfred.
- Balance
Inventories
Average
Inventory
=
Beginning Inventories + Balance Inventories
2
Annual Sales (`)
Total Inventory (`)
Sales (`)
X 365 days

Example
j
j
• Annual Report of a Tyre Company in Tamil Nadu
Particulars
For the Year Ended on (Values in Lakhs)
Mar-2000 Mar-1999
Sales 160.57 151.95
Value of Production 109.11 105.35
RM Consumed 74.23 74.06
Accounts Receivables 26.56 20.35
Accounts Payables 9.56 10.23
Inventory Status
Raw Materials 6.93 4.27
WIP 0.97 0.85
FG 2.92 3.38
Others 2.26 1.63
Total Inventory 13.08 10.13

Example
• Inventory Ratio =
• Inventory Ratio =
• Inventory Turns =
• Total Inventory Days (TID) =
j
j
Annual Sales (`)
X 100
13.08
160.57
X 100 = 8.15%
160.57
13.08
= 12.28
13.08
160.57
X 365 = 29.73 days

• In the given examples, it shows a higher inventory
turnover ratio that is 8.15% is preferred, as it indicates
that more sales are being generated in a given certain
amount of inventory.
• The inventory Turns for the company is 12.28 & Total Days
Inventory is 29.73 days (indicates a lead time of 30 days).
j
j

Example
• Sales Outstanding =
• Sales Outstanding =
• This indicates that company is providing approximately 2
months credit period for repayment by its
sellers/customers.
• The increase in Sales Outstanding may affect the financial
position of the company.
j
j
Accounts Receivables
Annual Sales
X 365
25.56
160.57
X 365 = 60.37 days

For Any Query……
j
j
+919975770407
Email: pbkalaskar@sinhgad.edu
prashantkalaskar007@gmail.com
Sinhgad Institute of Business Administration &
Computer Application, Lonavala

Inventory Planning & Control

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