INVENTORY MANAGEMENT

Production and Operation Management

(BBA209)
Unit-3
BBA-3rd Semester
 What Is Inventory?
 Stock of items kept to meet future demand
It is most significant part of the current assets
It serves as a link between production & distribution process.
. About 90% part of working capitals invented in inventory.

Types of Inventory
Work in
process
Vendors
Raw Work in Finished Customer
Materials process goods

Work in
process
 INVENTORY MANAGEMENT

A proper planning of purchasing of raw material handling storing and

recording is to be considered by the inventory management.

Inventory management is considered:

What to purchase?
How to purchase?
How much to purchase?
Where to purchase?
Where to store?
When to use for product?
Objectives of inventory Mgmt.
 To ensure continuous supply of raw material, spares
and finished goods.
 To avoid both overstocking and under stocking of
inventory.
 To maintain investments in inventories at optimum
level.
 To keep material cost under control.
 Inventory means…

The term inventory is defined as the

itemised list of goods with their estimated
worth specifically annual account of stock
taken in any business.
 All the materials , parts, suppliers,
expenses and in process or finished
products recorded on the books by an
organization and kept in its stocks,
warehouses or plant for some period of
time.
Definition of inventory control

Inventory control is the technique

of maintaining the size of the
inventory at some desired level
keeping in view the best economic
interest of an organization.
OBJECTIVES OF INVENTORY CONTROL
 To ensure adequate supply of products to customer and avoid
shortages as far as possible.
 To make sure that the financial investment in inventories is
minimum (i.e., to see that the working capital is blocked to the
minimum possible extent).
 Efficient purchasing, storing, consumption and accounting for
materials is an important objective.
 To maintain timely record of inventories of all the items and to
maintain the stock within the desired limits.
 To ensure timely action for replenishment.
 To provide a reserve stock for variations in lead times of delivery
of materials.
 To provide a scientific base for both short-term and long-term
planning of materials.
Benefits of Inventory Control
 Improvement in customer’s relationship because of
the timely delivery of goods and service.
 Smooth and uninterrupted production and, hence, no
stock out.
 Efficient utilisation of working capital. Helps in
minimising loss due to deterioration, obsolescence
damage and pilferage.
 Economy in purchasing.
 Eliminates the possibility of duplicate ordering.
Essentials of a Good Inventory Control System

 Classification and Identification of Inventories

 Standardization and Simplification of Inventories
 Setting Maximum and Minimum limits for each part of
inventory
 Economic Order Quantity
 Adequate Storage Facilities
 Adequate Records and Reports
 Co-ordination
 Budgeting
 Internal Check
 Factors affecting Inventory Control Policy
 Product Type: Perishability or Durable
 Lead Time: Supplier Lead Time , Transportation
and Customs Delays:
 Cost Considerations: Ordering cost, Holding cost
 Supplier Reliability and Relationships
 Market Trends and Competition: Market
demand & competitive Pressures
 Technology and Automation
 Government Regulations and Compliance: Safety
standard, import export
Techniques of inventory control
 Inventory control techniques are the tool
available for smooth running of the
business enterprises.
 The inventories should be maintained at
a level lying between the excessive and
the inadequate. This level is known as
the “OPTIMUM LEVEL” of inventories.
CONCEPTS RELEVANT IN
CONTROLLING INVENTORY COSTS

 Lead time:
 It is the average number of days
between placing an indent and receiving
the material.
 Lead time is composed of two elements:
 Administrative or buyer‘s lead time
(i.e. Time required for raising purchase
requisitions, obtaining quotations,
raising purchase order, order to reach
supplier etc)
 • Delivery or supplier‘s leading time
(i.e. Time required for manufacture,
packing and forwarding, shipment,
delays in transit
The common and widely used techniques are:
 ABC ANALYSIS (Always Better Control)
 VED ANALYSIS (Vital, Essential, Desirable)
 EOQ (Economic Order Quantity)
 Lead Time
 Buffer stock
 Perpetual inventory control system
 SDE classification
 HML Classification
 FSN Classification
 SOS classification
 XYZ Classification
 ABC ANALYSIS
 In this technique the materials are divided into 3
groups. A,B,C according to the cost of the materials
and money value.
 A items (High Value, Low Quantity) - A few costly
items come under this category these items require proper
storage and handling, overstock is avoided.
 B items (Moderate Value, Moderate Quantity) -
These are neither costly nor cheap.
 C items (Low Value, High Quantity) - Cheaper in
cost.
 It is also known as Selective Inventory Control Method
(SIM).
ABC analysis: Classification
ABC analysis:
 A-Item: Very tight control, the items being of
high value. The control need be exercised at
higher level of authority.
 B-Item: Moderate control, the items being of
moderate value. The control need be
exercised at middle level of authority.
 C-Item: The items being of low value, the
control can be exercised at gross root level of
authority, i.e., by respective user department
managers.
ABC ANALYSIS
A ITEMS B ITEMS C ITEMS

 it covers 10% of the  It covers 20% of the  It covers 70% of the

total inventories. total inventories. total inventories.
 It consumes about  It consumes about It consumes about 10%
70% of the total 20% of the total of the total expenditure
budget budget.
 It requires very strict  It requires moderate  It may require low
control control. control.

 It requires either no  It requires low safety  It requires high

safety stock or low stock. safety stock.
safety stock.
 It needs maximum  It requires periodic  It needs close follow
follow up follow up up
 It must be handled  It can be handled by  It can be handled by
by senior officers. middle management. any official of the
management
Procedure for ABC Analysis
 Make the list of all items of inventory.
 Determine the annual volume of usage & money
value of each item.
 Multiply each item’s annual volume by its rupee
value.
 Compute each item’s percentage of the total
inventory in terms of annual usage in rupees.
 Select the top 10% of all items which have the
highest rupee percentages & classify them as “A”
items.
 Select the next 20% of all items with the next highest
rupee percentages & designate them “B” items.
 The next 70% of all items with the lowest rupee
percentages are “C” items.
ABC Analysis
Percent of annual dollar usage

A Items
80 –
70 –
60 –
50 –
40 –
30 –
20 – B Items
10 – C Items
0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100
Percent of inventory items
VED ANALYSIS
 VITAL,ESSENTIAL, DESIRABLE
 It is based on the importance of the item and
its effects.

 VITAL DRUGS – Such drugs are categorised

as vital whose absence (no stock) cannot be
tolerated even for an single day. That means
in their absence the work of hospital or
wards or patient care to come standstill.
VED Analysis
 Vital (V): These are items that are critical to operations and
cannot be substituted. Stockouts may cause production to stop.
Example: In a hospital, items like life-saving drugs or critical
surgical instruments are "Vital."
 Essential (E): These items are important but not immediately
critical. A shortage can be managed temporarily. Example: In a
manufacturing plant, spare parts for machines are “Essential” as
their availability affects production efficiency but does not halt it.
 Desirable (D): Items that have a low impact on operations and
can be substituted or delayed. Example: Office supplies in both
manufacturing and healthcare settings are “Desirable” as they
do not directly affect operations.
VED ANALYSIS
 ESSENTIAL Drugs – These are the drugs
without which a hospital can function but may
affect the quality of service to some extent but
not to a very serious extent.
 DESIRABLE Drugs - These are the drugs
whose absence will not affect the functioning
of hospital or ward or department or patient
care.
VED ANALYSIS
 The motive of this system is to reduce
investment in inventories. The drugs
which are fast moving , ie which are in
great demand should be stocked more
than drugs occasionally demanded and
lastly the drugs which are rarely
demanded should be stocked in
minimum quantity.
FSN Analysis:
 The abbreviation for FSN in “Fast moving, Slow moving
and Non moving”.
 Here in this analysis, the date of receipt or the last date of
issue, which ever is later, to determine the no. of months
which have lapsed from last transaction.
 FSN is helpful in identifying active items which need to be
reviewed regularly and surplus items and non-moving items
are examined.
FSN Analysis
 Used to classify items based on their consumption rate, helpful
for managing inventory turnover and shelf life.
 Fast Moving (F): Items with high turnover that need
frequent replenishment.
– Example: In retail, items like popular consumer electronics
or clothing items.
 Slow Moving (S): Items with low turnover but still
used periodically.
– Example: In a factory, specific machine parts only needed
during occasional maintenance.
 Non-Moving (N): Items with little to no movement,
indicating potential obsolescence.
– Example: Spare parts for outdated machinery no longer in
frequent use.
SDE Classification:
 The SDE is based upon the availability of items.
 Here ‘S’ refers to ‘Scarce’ items
 ‘D’ refers to ‘Difficult’ items
 ‘E’ refers to ‘Easy to acquire’
 This is based on problems faced in procurement,
were some strategies are made on purchasing.
 SDE Analysis
 Used to assess items based on their procurement challenges
and availability.
 Scarce (S): Items that are hard to procure due to
limited suppliers, import restrictions, or long lead
times.
– Example: Specialized electronic components that are
sourced internationally.
 Difficult (D): Items that are available domestically but
may have limited suppliers or moderate lead times.
– Example: Custom metal parts that require specialized
machining or molding.
 Easy (E): Items that are widely available and can be
sourced easily with minimal lead time.
– Example: Standard fasteners like nuts and bolts that can be
purchased from multiple vendors.
HML Analysis (High, Medium, Low Cost)
Used to classify items based on their unit cost, helping in cost
control and budget management.
 High Cost (H): Items with a high unit price, requiring
strict monitoring to avoid tying up excessive capital.
– Example: Engine parts in an automotive manufacturing
plant.
 Medium Cost (M): Moderately priced items that still
require cost control but don’t impact cash flow as
heavily.
– Example: Mid-range electronics like sensors or moderately
priced tools.
 Low Cost (L): Low-cost items that are purchased in
bulk with minimal financial impact.
– Example: Basic screws, gaskets, or minor office supplies.
JIT Analysis: Just in Time
Just-in-Time (JIT) Implementation
Requirements
 Reliable Supplier Relationships: Suppliers need to
be dependable and capable of delivering goods
quickly with minimal lead time. Strong collaboration
ensures stock availability without overstocking.
 Accurate Demand Forecasting: Demand planning
must be precise to avoid both stockouts and
overproduction. This often involves using data
analytics to predict demand patterns.
 Efficient Production Scheduling: JIT relies on
production processes that can adapt to fluctuating
demand. Flexible manufacturing systems are crucial
for aligning production schedules with real-time
demand.
Just-in-Time (JIT) Implementation
Requirements
 Strong Inventory Control Systems: Advanced
inventory management software helps track stock
levels, forecast requirements, and reorder as
necessary. Real-time monitoring ensures quick
response times.
 Workforce Training: Employees should be trained in
JIT principles, including quick setup techniques and
continuous improvement, to maintain an agile and
efficient workflow.
 Minimal Lead Time: Reducing lead time is crucial for
JIT. This may require strategic location of suppliers,
streamlined ordering processes, or reducing setup
times.
 ECONOMIC ORDER QUANTITY

 It is the most effective technique for

determination of the quantity.
 It is defined as the quantity of materials to
be ordered at one time which minimises
the lost.
 The basic objective of EOQ is to have an
ideal order quantity for any item and to
economise on the cost of the purchase.
Computation of EOQ
 The widely used formula is

EOQ =√{2A×O/C}
Where ,
A=Annual or periodic requirement
O=Ordering cost
C=Carrying cost
Q. An oil engine manufacturer purchases lubricants at the rate of Rs.
42 per piece from a vendor. The requirements of these lubricants are
1800 per year. What should be the ordering quantity per order, if the
cost per placement of an order is Rs. 16 and inventory carrying
charges per rupee per year is 20 paise.
 Sol.: Number of lubricants to be purchased, D = 1800 per year

Procurement cost, C3 = Rs. 16 per order

Inventory carrying cost, CI = C1 = Rs. 42 × Re. 0.20 = Rs. 8.40 per year
 ILLUSTRATION : A manufacturing company
purchase 9000 parts of a machine for its annual
requirements ordering for month usage at a time,
each part costs Rs. 20. The ordering cost per order is
Rs. 15 and carrying charges are 15% of the average
inventory per year. You have been assigned to
suggest a more economical purchase policy for the
company. What advice you offer and how much
would it save the company per year?
 LEAD TIME : It is the time taken between the
placing of order and receipt of drug to the
department. The longer the lead time the larger
is the safety stock, resulting in excess of
investment in inventories.

 BUFFER STOCK : The quantity of stock kept

as reserve to guarantee against un fore seen
demands is known as buffer stock. This stock
protects against variation in demand and
procurement period. It is used in emergencies.
 Inventory Costs

Carrying cost

• cost of holding an item in inventory

Ordering cost

• cost of replenishing inventory

Shortage cost

• temporary or permanent loss of sales when

demand cannot be met
THANK YOU FOR YOUR TIME
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