Inventory Management (Intro, types, spares mgmt) & Role of stores manager

Stores and
Inventory
Management
Srishti B
UNIT 1

UNIT 1
– Introduction to Inventory
management :
– Definition of inventory,
– scope and importance,
– Classification of Materials;
– Consumable,
– Non consumable,
– Impact on profitability of the
organization and stake holder,
– different types of hospital
inventories,
– hospital maintenance items,
– spare parts stocking policies for
capital items.
– Functions of Store Manager.

Definition
– Inventory is the raw materials, work-in-process products and
finished goods that are considered to be the portion of a
business's assets that are ready or will be ready for sale. Inventory
represents one of the most important assets of a business because
the turnover of inventory represents one of the primary sources of
revenue generation and subsequent earnings for the company's
shareholders.

What is Inventory?
– Inventory represents finished goods or goods in different stages of production
that a company keeps at its premises.
– Inventory can also be on consignment, which is an arrangement when a
company has its goods at third-party locations with ownership interest retained
until goods are sold.
– Inventory is reported on a company's balance sheet under the current assets
category, and it serves as a buffer between manufacturing and order fulfillment.
– When an inventory is sold, its carrying cost goes into the cost of goods sold on
the income statement.

Importance of Inventory
Management
– Possessing a high amount of inventory for a long time is usually not
advantageous for a business because of costly storage, the possibility of
obsolescence and spoilage costs.
– However, possessing too little inventory isn't beneficial either, since the
business runs the risk of losing out on potential sales and potential market
share as well.
– Inventory management forecasts and strategies, such as a just-in-time (JIT)
inventory system, can help minimize inventory costs because goods are created
or received only when needed.

SCOPE
– The scope of an inventory system defines which needs it addresses, including
valuing the inventory, measuring the change in inventory and planning for
future inventory levels.
– The value of the inventory at the end of each period provides a basis for
financial reporting on the balance sheet.
– Measuring the change in inventory allows the company to determine the cost of
inventory sold during the period.
– Together, inventory values and level changes allow the company to plan for
future inventory needs.

Valuing the Inventory
– Accountants value inventory using one of the three methods.
– The first-in, first-out (FIFO) method says that the cost of goods sold is based on
the cost of materials purchased the earliest, while the carrying cost of
remaining inventory is based on the cost of materials bought the latest.
– The last-in, first-out (LIFO) method states that the cost of goods sold is valued
using cost of materials bought latest, while the value of remaining inventory is
based on materials purchased earliest.
– The weighted average method requires valuing both inventory and the cost of
goods sold based on the average cost of all materials bought during the period.

CLASSIFICATION of
Materials
CONSUMABLES & NON CONSUMABLES

CONSUMABLE
– A "consumable" product is one that gets used up, that is, it
can spoil, or has a life:
– A consumable is something that is capable of being
consumed; that may be destroyed, dissipated, wasted, or
spent.
– Consumables are products that consumers buy recurrently,
i.e., items which "get used up" or discarded.
– For example consumable office supplies are such products as
paper, pens, file folders, post-it notes, computer disks, and
toner or ink cartridges.

NON CONSUMABLE
– "Non-consumable" thing don't necessarily mean that they
are, invincible, and they last forever. "Non-consumable", is
more of a legal term, and means:
– a thing (as land, furniture, or shares of stock) that may be
enjoyed without altering its substance except for natural
deterioration over time
– "Non-consumable" objects also includes capital goods:
– (Consumable products) : Not included capital goods such as
computers, fax machines, and other business machines or
office furniture

Impact on profitability of the
organization and stake holder
– Every management problem is a decision problem.
– Decision is an important task that all Organisations have to take.
– The allocation of resource is a common issue to all Organisations.
– Organisations have to acquire, allocate and control the factors of production which are necessary for the achievement
of the business’s objectives.
– Inventory management as one of the key activities of business logistics, has always been a major preoccupation for
the company’s survival and growth.
– The principal goal of inventory management involves having to balance the conflicting economics of not wanting to
hold too much stock.
– Thereby having to tie up capital so as to guide against the incurring of costs, such as storage, spoilage, pilferage and
obsolescence and, the desire to make items or goods available when and where required (quality and quantity wise)
so as to avert the cost of not meeting such requirement. (Cannon, 2008)

 Inventory management in an organization deals with identifying every item of stock.
 Inventory management is primarily about specifying the size and placement of
stocked goods.
 Inventory management is required at different locations within a facility or within
multiple locations of a supply network to protect the regular and planned course of
production against the random disturbance of running out of materials or goods
(Cannon, 2008).
 Effective inventory management determined how profit of an organization can be
maximized.
 Maximizing of profit depend on minimizing cost and maximizing revenue.
 Maximization is an efficient concept which requires increasing profit without
increasing the resources used (Stephenson, 1985).
 The import of inventory management in organization is to ensure that at any point in
time the capital of the business is not necessarily tied down in form of material in the
store, which may provide opportunity for fraud and theft.
 In other word the management wishes to put at minimal rate stock losses, which
emanate from store operation.

 Thus, as business organization stock is of paramount important likewise the
profit of the business.
 Fluctuation Inventory problems of large or small quantities on hand can
cause business failures (Cannon, 2008).
 If manufacturing firms’ experiences stock-out of a critical inventory item,
production halts could result.
 It is thus the management of this economics of stockholding, that is
appropriately being refers to as inventory management.
 In traditional settings, inventories of raw materials, work-in-progress
components and finished goods were kept as a buffer against the possibility
of running out of needed items.
 However, large buffer inventories consume valuable resources and
generate hidden costs. Consequently, many companies have changed their
approach to production and inventory management.

 Since at least the early 1980s, inventory management leading to inventory reduction
has become the primary target, as is often the case in just-in-time (JIT) systems,
where raw materials and parts are purchased or produced just in time to be used at
each stage of the production process.
 This approach to inventory management brings considerable cost savings from
reduced inventory levels. As a result, inventories have been decreasing in many firms
(Chen, 2005), although evidence of improved firm performance is mixed (Cannon,
2008; Koliaset al., 2011).
 Therefore, inventory should be adequately taken care of because it has to do with
profit of the business.
 A well planned and effective stock management can contribute substantially to a firm
annual turnover.
 Inventories are vital to the successful functioning of manufacturing and retailing
organizations. They may consist of raw materials, work-in-progress, spare
parts/consumables, and finished goods.
 It is not necessary that an organization has all these inventory classes.
 But, whatever may be the inventory items, they need efficient management as,
generally, a substantial share of its funds is invested in them.
 Different departments within the same organization adopt different attitude towards
inventory.

 This is mainly because the particular functions performed by a department influence the
department’s motivation.
 For example, the sales department might desire large stock in reserve to meet virtually
every demand that comes.
 The production department similarly would ask for stocks of materials so that the
production system runs uninterrupted.
 On the other hand, the finance department would always argue for a minimum investment
in stocks so that the funds could be used elsewhere for other better purposes, (Vohra,
2008).
 Inventory represents an important decision variable at all stages of product
manufacturing, distribution and sales, in addition to being a major portion of total current
assets of many organizations.
 Inventory often represents as much as 40% of total capital of industrial organizations
(Moore, Lee and Taylor, 2003).
 It many represent 33% of company assets and as much as 90% of working capital,
(Sawaya Jr. and Giauque, 2006).

 According to Temeng (2010), historically, organizations have ignored the
potential savings from since inventory constitutes a major segment of total
investment, it is crucial that good inventory management be practiced to
ensure organizational growth and profitability.
 Proper inventory management, treating inventory as a necessary evil and
not as an asset requiring management, as a result, many inventory systems
are based on arbitrary rules.
 Unfortunately, it is not unusual for some organizations to have more funds
invested in inventory than necessary and still not be able to meet customer
demands because of poor distribution of investment among inventory items
(Temeng, Eshun and Essey, 2010).

Types of Inventory
raw materials, work in progress and finished goods
– Raw materials represent goods that are used in the production as a source material.
– Examples of raw materials are metal bought by car manufacturers, food ingredients held
by food preparation companies and crude oil held by refineries.
– Work in progress includes goods that are in the process of being transformed during
manufacturing and are about to be converted into finished goods.
– For example, a half-assembled airliner or a ship that is being built would be work in
process.
– Finished goods are products that have gone through the production and ready for
sale, such as completed airliners, ready-to-ship cars and electronics. Retailers who
buy and resell goods typically call inventory "merchandise," which includes finished
goods bought from producers and can be resold immediately.
– Examples of merchandise include electronics, clothes and cars held by retailers.

Hospital Maintenance Items
•Generators
•Suction Machines
•Wheel Chairs
•Electric Beds
•Arthroscopic Equipment
•X-ray Machines
•Heart Monitor
•Pumps
•Computers
•Compressors
•Coolers
•Air Purifiers
•Vehicles
•Respirator
•Sterilizing Equipments
Hospitals and clinics can set up maintenance procedures and preventive
maintenance schedules for managing healthcare and hospital facilities and
equipment in the following areas:

Spare parts stocking policies for
capital items
– ....SIM_REF_Spare Parts Policy for Capital Items.docx
– ....SIM_REF_Spare Parts CYCLE.docx

Intro:
 Spare parts are the lifeblood of operational reliability and plant capacity.
 No plant can operate at a high level of output without a reliable supply of
functional spare parts.
 Yet, spare parts are also the most overlooked contributor to reliability
outcomes.
 Many organizations routinely operate without properly implementing even the
most fundamental aspects of spare parts management at their sites.
 Often these organizations have storerooms with neat shelves and clear labels
but this is not enough for highly reliable spare parts management.
 Effective spare parts management is essential for making a difference in the
operational reliability.
 Spare parts management plays an important role in achieving the desired plant
availability at an optimum cost.
 Organisations are normally capital intensive, mass production oriented and with
sophisticated technology. The downtime for Organisations and its equipment is
prohibitively expensive.

Problems with spare parts:
The unique problems faced by the Organisations management in controlling/managing the
spare parts are as follows.
 Firstly, there is an element of uncertainty as to when a part is required and also the
quantity of its requirement. This is due to the fact that the failure of a component,
either due to wearing out or due to other reasons, cannot be predicted accurately.
 Secondly, spare parts are not that easily available in the market as they are not fast-
moving items. The original equipment manufacturer has to supply the spares in most of
the cases. New models are introduced to incorporate the design improvements and old
models are phased out. Hence the spares for old models are not readily available.
Particularly, this is more so in case of imported equipment as the design changes are
taking place faster in the developed countries.
 Thirdly, the number and variety of spare parts are too large making the close control
more and more tedious.
 Fourthly, there is a tendency from the stage of purchase of the equipment to the stage
of the use of the spare parts, to requisition spare parts more number than that are
actually required and accumulation of spares takes place.
 Finally, the rate of consumption of some of the spare parts is very high while for some
other spare parts are very low.

Spare Parts Management:
The solution to these problems lies in the systematic spare parts management. The objective of spare
parts management is to ensure the availability of spares for maintenance and repairs of the plant and
machinery as and when required at an optimum cost. Also, the spares are to be of right quality. Some of
the benefits by utilizing a systematic approach to spare parts management include the following.
Reduced inventory
costs
Justified basis for
carrying inventory
Reduced probability
of running out of
stock
Addressed ‘Total
Cost of Ownership’
(TCO) for supply
chain management
Improved condition of
spares
Linkage of spare
parts levels to actual
criticality of assets

Codification of spare parts and preparation of a spare parts catalogue helps the organization in minimizing
the duplication of spare parts stocking thereby reducing inventory, aids the accounting process and
facilitates the computerization of spare parts control systems. There are many systematic actions are
needed to ensure the effectiveness of the spare parts management. These systematic actions for managing
spare parts are given below.
Identification of
spare parts
Forecasting of
spare parts
requirement
Analysis of spare
parts inventory
Formulation of
selective control
policies for various
categories
Development of
spare parts
inventory control
systems
Stocking policies
for capital &
insurance spares
Stocking policies
for rotating spares
or sub-assemblies
Replacement
policies for spare
parts
Spare parts
inspection
Indigenization of
spares parts
Reconditioning of
spare parts
Establishment of
spare parts bank
Computer
applications to
spare parts
management

The inventory analyses carried out on the basis of different
characteristics of the spare parts, such as annual consumption value,
criticality, lead time, unit cost and the frequency of use help in
establishing suitable policies for selective control and directing the
efforts on real problem areas. A good control system helps
systemizing the ordering procedure and also achieving an optimum
level of spare parts inventory.
Analysis of spares parts inventory
For the successful spare parts management, it is essential to analyze
the spare parts inventory based on various characteristics such as the
frequency of issues, the annual consumption value, the criticality, the
lead time and the unit price. This is essential since it is not being
possible to exercise the same type of control for all items of spare
parts and also the same type of control may not be really effective
for all the items. Commonly used analyses of the spare parts
inventory are described below.

 FSN analysis – This type of classification is based on the frequency of
issues and use of the spare parts. Under this classification
 F stands for fast moving spare parts,
 S stands for slow moving spare parts and
 N for stands for non-moving spare part items.
 This form of classification identifies the items frequently issued, less
frequently issued for use and the items which are not issued for a very
long period.
 This classification helps spare parts management in establishing most
suitable stores layout.
 It also helps management of the organization where to allocate resources
for purchase of spare parts.
 It further helps the management to take decision strategically whether the
non-moving spare parts inventory is continued to be stored or disposed of
to release the working capital locked in these spare parts.

 ABC analysis – This method of classification for the spare parts is on the
basis of the annual consumption value and is based on the Pareto’s principle.
Under this classification system type ‘A’ are those 10 % spare parts which
contributes towards 70 % of the total consumption value. Type ‘B’ are
another 20 % of total spares which account for about 20 % of total
consumption value and type ‘C’ are the balance 70 % of total spares which
account for only 10 % of total consumption value. This type of analysis
helps management of the organization where to provide maximum control
and where there need to have more than one supplier for the spare parts.
Fig 1 shows ABC analysis

 VED analysis – This type of classification is based on the criticality of the spare parts. Criticality of a
spare part can be determined from the production downtime loss, due to spare being not available
when required. Based on criticality, spare parts are conventionally classified into three classes, viz.
vital (V), essential (E), and desirable (D). The VED analysis helps in focusing the attention of the
management on vital items and ensuring their availability by frequent review and reporting.
 SDE analysis – This classification is carried out based on the lead time needed to procure the spare
part. As per this classification scarce (S) items are those items which require a very long lead time.
Difficult (D) items needs moderate lead time and easily available (E) Items have very short delivery
and often these items are available off the shelf. This classification helps in reducing the lead time
and ultimately it helps in the reduction of the stock out costs in case of stock outs. This also results
in streamlining the purchase and receiving systems and procedures.
 HML analysis – This classification is based on the unit price of the spare parts. Under this
classification ‘H’ items are those items whose unit cost is very high. ‘M’ items are medium cost
spare parts while ‘L’ items are those spare parts whose unit value is low. This type of analysis
helps in exercising control at the shop floor level i.e. at the user point. High value spare parts are
to be replaced after proper authorization. Efforts are necessary to find out the means for
prolonging the life of high value spare parts through reconditioning and repair. Also, it may be
worthwhile to apply the techniques of value analysis to find out a less expensive substitute for H
items.

As per another classification system spare parts are classified into the following categories.
 Capital spares – These are critical spares and are usually replaced during the capital repair of
the equipment. Hence the procurement action and receipt of these spares are to be planned
at the time of taking up of the equipment for the capital repair.
 Insurance spares – An insurance spare is a spare part whose impact of not holding the spare
part in stores can be massive. Downtime costs of the equipment for such spares often far
outweigh all the other costs. Hence, by definition, it is an insurance against such failures for
which the down time costs are very high. They do not become obsolete until the parent
equipment remains under use. These spare parts may lie in the stores for many years. These
spares need conservation activities at regular intervals. These spares block the working capital.
 Overhaul spares – These spares are those spare parts which must be replaced every time the
equipment is dissembled and re-assembled.
 Wear and tear spares- These spares are those spare parts which have regular wear and tear
in the course of operation of the equipment and need to be replaced after definite number
of hours of equipment operation.
 Consumable spares – These are regularly used items such as fasteners, seals, gaskets, and fuse
etc. These are usually low value items.

Spare parts management is like every other aspect of operations
management:
 Success requires clear guidelines, differentiation of outcomes,
critical evaluation, and discipline in execution.
 Efficient and effective spare parts management requires more
than having storerooms with neat shelves and clear labels, it
requires forethought and attention to the key decision-making
points and consistency requires a documented approach that
one can be able to audit and report on.
 Only by taking such an approach can an organization can
ensure the optimization of working capital requirements and
that it can hold the right spare parts for meeting the
operational needs.
 Better co-ordination among purchase, stores, maintenance,
operation, and finance departments help in achieving greater
efficiency in management of spare parts inventory.

Functions of Store
Manager
In hospital

– The Store Manager is responsible for
maintaining the store in order to ensure
hospital staff have access to necessary
supplies.
– The Store Manager is responsible for
maintaining customer
service, maintaining cash controls,
purchasing and maintaining the store
– Maintain & prevent stock, supplies and
inventories
– Take inventory
– Order groceries and supplies
– Check received stock against invoices
– Restock shelves
– Maintain register
– Record prices in the log book
– provide correct change
– Maintain a manual general ledger
– record receipts
– Collect receivables
– Perform other related duties as
required

• In the office, store managers plan,
monitor and maximize budgets and
product inventory, purchasing and
monitor consumption and wastage.
• They may work closely with
Purchase/Finance/Accounts managers
and administrator to coordinate and
determine the most cost-effective
marketing and hiring strategies, and
align their SOPs and operations.
• Store managers use hospital’s
software to draft proposals, recruit
employees, and research and track
products.
• On the floor, store managers must
assemble the best possible team.
• They interview and selectively hire the
most qualified candidates, provide
time-efficient and thorough training,
and maintain the skills and well-being
of current staff with motivational
incentives and evaluations.
• In addition, managers must address
internal needs by immediately
resolving conflict, inspiring long-term
inter-relationships, and co-operating in
the manner best efficient for hospital’s
goals and functioning.
Duties of Store Managers

Inventory Management (Intro, types, spares mgmt) & Role of stores manager

Inventory Management (Intro, types, spares mgmt) & Role of stores manager

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Inventory Management (Intro, types, spares mgmt) & Role of stores manager