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Module - 2-Inventory Management

Inventory management involves classifying inventory into raw materials, work in process, and finished goods. The objective is to minimize inventory costs by determining the optimal order quantity, known as economic order quantity. ABC analysis further classifies inventory items based on their consumption value, with class A items comprising the highest value but lowest number of items requiring the most management focus, while class C items are the opposite. This helps companies efficiently manage their most important and costly inventory.

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57 views

Module - 2-Inventory Management

Inventory management involves classifying inventory into raw materials, work in process, and finished goods. The objective is to minimize inventory costs by determining the optimal order quantity, known as economic order quantity. ABC analysis further classifies inventory items based on their consumption value, with class A items comprising the highest value but lowest number of items requiring the most management focus, while class C items are the opposite. This helps companies efficiently manage their most important and costly inventory.

Uploaded by

gaurav shetty
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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INVENTORY MANAGEMENT

INVENTORY MANAGEMENT

 It is the one of the major current asset and almost accounts for 60% of the total
current assets in most of the organisations
 It is composed of the assets that will be sold in the future in the normal course of
business
 The assets which are stored by firm as inventory include RAW
MATERIALS ,WORK IN PROCESS AND FINISHED GOODS
INVENTORY MANAGEMENT

 Raw Material inventory contains items that are purchased by the firm from others
and they are converted to finished goods through production process
 Work in process inventory consists of items currently used in production
process.They are semi-finished goods,They are at various stages of production
 Finished goods represent final and finished goods which are available for sale.
INVENTORY MANAGEMENT

 Inventory management involves all functional areas such as finance, marketing,


production and purchasing
 The job of financial manager is to reconcile the conflicting viewpoints of various
functional areas regarding the appropriate level of inventory
OBJECTIVE OF INVENTORY MANAGEMENT

 To minimize investments in Inventory


 To meet a demand for the product by efficiently organizing the production and
sales operations
 Because maintaining inventory involves costs. Smaller the inventory lower the
costs
 But larger inventory helps in smooth functioning of firms.
COSTS ON INVENTORY

ORDERING COST CARRYING COSTS


 Requisitioning  Warehousing
 Order Placing  Handling
 Transportation  Clerical and staff
 Receiving, inspecting and storing  Insurance
 Clerical and Staff
 Deterioration and Obsolescence
 They increase in proportion to number of orders
 They decrease in proportion to increase in
placed
inventory
 More frequently inventory is ordered the higher will
be the firm’s ordering cots.
OPTIMUM ORDER QUANTITY

 The optimum inventory size is known as ECONOMIC ORDER QUANTITY


 It is the size at which the total ordering cost and carrying costs are minimum
 We can follow Trial and error approach, formula approach and graphic approach
ECONOMIC ORDER QUANTITY
ECONOMIC ORDER QUANTITY

 Economic Order Quantity (EOQ) is a production formula used to determines the


most efficient amount of goods that should be purchased based on ordering and
carrying costs.
 In other words, it represents the optimal quantity of inventory a company should
order each time in order to minimize the costs associated with ordering and
holding inventory.
ECONOMIC ORDER QUANTITY
CARRYING COSTS & ORDERING COSTS

 Carrying Costs= ½ X Order quantity X Annual carrying costs per unit


 Ordering Cost=Number of orders X Ordering costs per order
 =Annual demand/order size X Ordering costs per order
ABC ANALYSIS

 ABC analysis is an approach for classifying inventory items based on the items’
consumption values.
 ABC classification is based on the premise that not all inventory is of equal
value. 
 Consumption value is the total value of an item consumed over a specified time
period, for example a year.
 The approach is based on the Pareto principle to help manage what matters and is
applied in this context.
ABC ANALYSIS

 A items are goods where annual consumption value is the highest.


 The Pareto Principle states that 80% of your inventory costs comes from just 20% of
your inventory. This is known as the 80/20 rule and it helps shape the results of your
ABC Analysis.
 Applying the Pareto principle (also referred to as the 80/20 rule where 80 percent of
the output is determined by 20 percent of the input), they comprise a relatively small
number of items but have a relatively high consumption value.
 So it’s logical that analysis and control of this class is relatively intense, since there is
the greatest potential to reduce costs or losses.
ABC ANALYSIS

 B items are interclass items. Their consumption values are lower than A
items but higher than C items.
 C items have the lowest consumption value. This class has a relatively high
proportion of the total number of lines but with relatively low consumption
values.
 Logically, it’s not usually cost-effective to deploy tight inventory controls,
as the value at risk of significant loss is relatively low and the cost of
analysis would typically yield relatively low returns.
ABC ANALYSIS

 Since businesses are not all the same, the thresholds that define the upper
and lower limits of each class are not definable.
 ABC analysis makes a buyer’s job easier
 Better control over high-value inventory improves availability, and reduces
losses and costs
 More efficient use of stock management resources.
ABC ANALYSIS

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