INVENTORY

MANAGEMENT

PRESENTED BY:
RICHA MAHAJAN
INTRODUCTION
 MENING OF INVENTORY
 The meaning of inventory is ‘stock of goods’.In
accounting language it may include:
 (a)RAW MATERIAL:They are required to carry out
production acivities uninterruptedly.
 (b)WORK-IN-PROGRESS:It is a stage of stocks
between raw material & finished goods.
 (c)CONSUMABLES:These are needed to smoothen
the process of production.
 (d)FINISHED GOODS:These are the goods which
are ready for the consumers.
 (e)SPARES:Form a part of inventory.
Inventory management

 An efficient system of inventory

management will determine
 (a) what to purchase
 (b)how much to purchase
 (c)from where to purchase
 (d) where to store
NEEDS OF INVENTORY
MANAGEMENT
 TO ENSURE CONTINUOUS SUPPLY OF RAW
MATERIAL, SPARES AND FINISHED GOODS.
 TO AVOID BOTH OVERSTOCKING AND
UNDERSTOCKING OF INVENTRY.
 TO MAINTAIN INVESTMENTS IN INVENTRIES AT
OPTIMUM LEVEL.
 TO KEEP MATERIAL COSTUNDER CONTROL.
 TO ELIMINATE DUPLICATION IN ORDERING OR
REPLENISHING STOCKS.
 TO MINIMIZE LOSSES THROUGH WASTAGE
AND DAMAGES .
 TO FACILITATES FINISHING OF DATA.
TECHNIQUES OF INVENTRY
MANAGEMENT
 DETERMINATION OF STOCK LEVEL:
(a)MINIMUM LEVEL=RERDERING LEVEL-
(NORMAL CONSUMPTION * NORMAL
REORDERING PERIOD )

(b)MAXIMUM LEVEL=REORDERING
LEVEL+ REORDERING QUANTITY –
(MINIMUM CONSUMPTION * MINIMUM
REORDERING PERIOD )

(C) DANGER LEVEL=CONSUMPTION *

MAXIMUM REORDER PRIOD
 DETERMINATION SAFETY
STOCKS:
 Safety stock is a buffer to meet some
unanticipated increase in usage.
 TWO COST ARE INVOLVED IN THE
DETERMINATION
1.OPPORTUNITY COST OF STOCK OUTS
2.CARRYING COST
 INVENTORY TURNOVER RATIO:
 INVENTORY TURNOVER RATIO=COST
OF GOOD SOLD /AVERAGE INVENTRY
AT COST
 ECONOMIC ORDER
QUANTITY:
 Economic order quantity is the size of the
lot to be purchased which is economically
viable.
 EOQ IS MADE UP OF TWO PARTS :

1.ORDERING COST:These cost are

associated with the purchasing or ordering
of materials.
2.CARRYING COST:These are the costs for
holding the inventories.
 A-B-C ANALYSIS:
 The materials are divided into three categories viz,
A ,B &C
 CATEGORY-A:
 Under this almost 10% of the items contribute to
70% of value of consumption.
 CATEGORY-B:
 Under this category 20% of the items contribute
about 20% of value of consumption.
 CATEGORY-C:
 Under this category about 70% of items of material
contribute only 10% of value of consumption.
 VED ANALYSIS:
 The VED analysis is used generally for spare
parts.The requirements and urgency of spare parts
is different from that of materials.spare parts are
classified as vital(V),essential(E),desirable(D).
 VITAL SPARE PARTS:
 These are must for running the concern smoothly.
 ESSENTIAL SPARE PARTS:
 Necessory but stock kept at low figures.
 DESIRABLE SPARE PARTS:
 May be avoided at times.
 INVENTORY REPORTS:
 The management is kept informed
with the latest stock position of
different items by preparing
periodical inventory reports.on the
basis of these reports management
takes corrective action wherever
necessary.
 ORDERING SYSTEMS OF
INVENTORY:
 There are three prevalent systems of
ordering and a concern can choose any
one of these:
 (a)Fixed order quantity system generally known as
economic order quantity system.
 (b)Fixed period order system or periodic re-ordering
system or periodic review systems.
 (c)Single order and scheduled part delivery system.
 LEAD TIME:
 Lead time is the period that elapses
between the recognition of a need
and its fulfilment.There is a direct
relationship between lead time and
inventories.
 Lead time has two components:
 (a)administrative lead time
 (b)delivery lead time
 INVENTORY TURNOVER
RATIO
 Inventory turnover ratio=cost of good
sold*average inventory at cost
 or
=net sales*(average inventory)