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Introduction To Inventory Management

The document discusses inventory management, including defining inventory and the objectives and costs of inventory management. It covers topics like economic order quantity, ABC analysis to categorize inventory items, and different inventory levels companies aim to maintain.

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saannkar
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115 views6 pages

Introduction To Inventory Management

The document discusses inventory management, including defining inventory and the objectives and costs of inventory management. It covers topics like economic order quantity, ABC analysis to categorize inventory items, and different inventory levels companies aim to maintain.

Uploaded by

saannkar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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INTRODUCTION TO INVENTORY MANAGEMENT

• Inventory means stock of goods like raw material, work in progress,


stores of finished goods, consumables etc.
• Inventory management means planning, organizing, handling and
storing adequate level of inventory with optimized cost to meet
consumer’s demand.
• There are two most significant costs involved in managing inventory
(ordering cost and carrying cost)
• Inventory occupy 50–80% of the total current assets of the business
concern. It is very essential part of working capital management and
production management.
OBJECTIVES OF INVENTORY MANAGEMENT
• To maintain optimum inventory level to maximize the profitability and
reduce the cost

• To meet the seasonal demand of the products

• To plan when to purchase and where to purchase

• To avoid both over stock and under stock of inventory

• To run production process efficiently

• To analyze and classify the inventory on basis of volume and value


ECONOMIC ORDER QUANTITY
• Economic Order Quantity (EOQ) refers to the optimum level of inventory at
which the total cost of inventory comprising ordering cost and carrying cost is
minimum maintaining the forecasted demand adequacy.
• FORMULA : EOQ = √2AO / C
• A - Annual consumption, O - Ordering cost per order, C - Carrying cost
(expressed in percentage terms of purchase price per unit)
• Find out the economic order quantity, number of orders per year, ordering cost,
carrying cost from the following information:
i. ANNUAL CONSUMPTION: 80,000 units
ii. PURCHASE PRICE PER UNIT: Rs.50
iii. ORDERING COST PER ORDER: Rs.1200
iv. INVENTORY CARRYING COST: 6% of the purchase price
EOQ NUMERICAL SOLVED

• EOQ = √2AO / C
= √2 * 80000 * 1200 / 0.06 * 50 = 8000 units
• NO. OF ORDERS PER YEAR = Annual Consumption (A) / Economic Order Qty.
(EOQ) = 80000 units / 8000 units = 10 orders per year
• TOTAL ORDERING COST = Ordering cost per unit * No. of order per year
= Rs.1200 * 10 orders = Rs. 12000
• TOTAL CARRYING COST = Carrying cost per unit * (EOQ/ 2)
= (0.06*50) * (8000/2) = Rs.12000
• TOTAL INVENTORY COST = Total Ordering Cost + Total Carrying Cost
= 12000 + 12000 = Rs. 24000
A-B-C ANALYSIS OF INVENTORY
A-B-C ANALYSIS
• It is the inventory management technique that divide inventory into three
categories based on the value and volume of the inventories.
• In most inventories a small proportion of items accounts for substantial usage
and high monetary value while a large proportion of items accounts for small
usage and low monetary value.
• ABC analysis advocates a selective approach to classify and focus greater
concentration on inventory items accounting for high monetary value and bulk
usage.
CATEGORY VOLUME (%) VALUE (%)
A 15-25% 60-75%
B 20-30% 20-30%
C 40-60% 10-15%
LEVELS OF INVENTORY
• STOCK LEVEL - It is the level of stock which is maintained by the business
concern at all times.The business concern must maintain optimum level of stock
to smooth running of the business process.
• MINIMUM LEVEL - The business concern must maintain minimum level of
stock at all times. If the stocks are less than the minimum level, then the work
will stop due to shortage of material.
• RE-ORDER LEVEL - It is fixed between minimum level and maximum level. Re-
order level is the level when the business concern makes fresh order at this
level.
• MAXIMUM LEVEL - It is the maximum limit of the quantity of inventories, the
business concern must maintain. If the quantity exceeds maximum level limit
then it will be overstocking.
• DANGER LEVEL - It is the level below the minimum level. It leads to stoppage
of the production process.

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