2. FUNCTIONS OF INVENTORIES
 BASICALLY INVENTORIES ARE IDLE RESOURCES
MAINTAINED IN VARIOUS FORMS.
 RAW MATERIALS
 PURCHASED AND MANUFACTURED PARTS
 SUB ASSEMBLIES
 FINISHED PRODUCTS
Since inventories represent a sizable investment in a
logistic system, we must be aware of the functions they
perform.

3. FIVE CATEGORIES OF STOCK
 PIPE LINE STOCK (in process stock, in transit stock): it
can be reduced only by improved design of the system.
 CYCLE STOCKS (batch production owing to
- economies of scale
- technological requirements )
• SEASONAL STOCK(time varying requirements of an item)
• SAFETY STOCK (supply and demand un certainties, lead
time un certainties)
• STOCKS HELD FOR OTHER REASONS (-decoupling
stages of production,
price, quantity discounts and speculation)
-

4. INVENTORY RELATED COSTS
 PROCUREMENT COSTS:(cost per order is generally
fixed and not dependant on order quantity)
 COSTS ASSOCIATED WITH EXISTENCE OF
INVENTORIES:( supply exceeds demand):
cost/unit/unit time
iC
inventory carrying cost rate
• COSTS ASSOCIATED WITH STOCK OUTS: (demand
exceeds supply)
(cost/unit) or (cost/unit/unit time)

5. PROCUREMENT COSTS
 Procurement costs cost of goods
cost per order is generally fixed
(not dependent on order quantity) ordering cost
- Administrative component
- Handling
- Transportation
- Inspection of arrivals

6. INVENTORY HOLDING COSTS
 COSTS ASSOCIATED WITH EXISTENCE OF
INVENTORIES:( supply exceeds demand):
cost/unit/unit time
iC
inventory carrying cost rate
-storage and handling
-interest on tied up capital
-property taxes
-insurance
-spoilage
-obsolescence
-pilferage

7. STORAGE COSTS
• COSTS ASSOCIATED WITH STOCK OUTS: (demand
exceeds supply)
(cost/unit) or (cost/unit/unit time)
 Additional costs of special order
 Back order if possible
 Loss of customer goodwill
 Lost sales

8. SELECTIVE INVENTORY CONTROL
 In a large number there are
 Significant few
 Insignificant many PARETO’S LAW
 Typical organizations deal with a large variety of stocked
items (10000-100000 is not uncommon)
Depending on rankings of
Value (∑(annual demand * unit price))=ABC analysis (Always
Better Control)
Criticality (Vital , Essential, Desirable)= VED analysis
Usage frequency= FSN analysis
 SUITABLE POLICIES CAN BE CHOSEN BASED ON PRODUCT
CHARACTERISTICS

10. Objective of ABC analysis
rationalization of ordering policies:
Equal treatment to all:
Annual
consumption
value(rs)
No: of orders Value per
order
Average
inventory
1 60000 4 15000 7500
2 4000 4 1000 500
3 1000 4 250 125
Total
inventory=8125

11. Preferential treatment on the basis
of ABC analysis
Annual
consumption
value(rs)
No: of orders Value per
order
Average
inventory
1 60000 8 7500 3750
2 4000 3 1333 667
3 1000 1 1000 500
Total
inventory=4917

12. Determination of reorder point

13. Policy implications of selective
inventory control