Inventory • Inventory is the stock of items kept in hand to meet the fluctuating Demand. • A Certain level of Inventory is maintained that will help in fulfilling the anticipated demand.
Types of Inventory • Raw Materials • This type of inventory includes any goods used in the manufacturing process, such as components used to assemble a finished product. • Raw materials may also include partially finished goods or materials. • For example, for an orange juice company, oranges, sugar and preservatives are raw materials; while for a computer manufacturer, chips, circuit boards and diodes are raw materials.
Work-in-Process • Work-in-process inventory items are those materials and parts that are waiting to be made into something else. • These may include partially assembled items that are waiting to be completed.
Finished Goods • Finished goods are any products that are ready to be shipped out or sold directly to customers, including to wholesalers and retailers. • Finished goods may be waiting in a storage area or on a shop floor. • If the amount of inventory of finished goods increases faster that the amount of raw goods and work-in-process goods, then production may need to slow down until more finished goods are sold
Other Types of Inventory • Maintenance, repair and operating inventory are all the items an organization needs in order to operate, such as office equipment, packing boxes and tools to repair equipment.
Objectives of Inventory Management • To minimize the investment on inventory. • To minimise the idle time by avoiding stock outs and shortages. • To minimise carrying Cost. • To avoid obsolescence of inventory.
Functions of Inventory Management • To meet the anticipated Demand (To meet uncertainty in demand). • To smooth Production requirements (Sudden breakdown of machine). • To protect against the stock outs. • To provide protection against the Price increases. • To take advantage of Quantity discount
Under stocking of Inventory • Understocking of inventory results in cost incurred when an item is out of stock. • It includes the cost of lost production during the period of stock out. • It also includes the extra cost per unit which might have to be paid for an emergency purchase.
Overstocking of Inventory • Overstocking results in the cost incurred due to : • Storage Cost • Obsolescence • Shift in demand • Opportunity Cost of capital.
Analysis of inventory • http://www.sparepartsmanagement.co.in/Inventory%20analyses.html
Costs Involved in Inventory • Inventory Carrying Cost (or Holding Cost) – Cost of storing items in storage. • These costs vary with level of inventory and length of time inventory is held. • Includes operating costs, record keeping etc.
Ordering Cost – Costs of replenishing the cost of inventory. • Expressed as Rupees per order. • Independent of Order Size. • These costs vary with the number of orders made. • Includes shipping costs, inspections costs etc.
Shortage or Stock-out Costs – Cost associated with insufficient inventory. • Loss of sales • Penalties
Review Systems • Tracking inventory is an essential part of business operations for any company that sells tangible goods. • The system used to track inventory for accounting and ordering purposes. • Two Methods are Continuous Review System and Periodic Review System.
Continuous Review System • Continuous inventory review, also known as perpetual review, involves a system that tracks each item and updates inventory counts each time an item is removed from inventory. • For example, a retailer may use bar code scanners to record customer purchases and update inventory counts every time a cashier scans a product code.
Whenever the Inventory decreases to a predetermined level (the re-order point), an order is placed for fixed amount to replenish the stock. • The fixed amount is Economic Order Quantity (EOQ). • Its magnitude is fixed at a level which minimises the Carrying cost, Order cost and shortage cost
Economic Order Quantity Model • Economic Order Quantity is the quantity ordered when inventory decreases to the reorder point. • The purpose of the EOQ Model is to decide the Optimal Order size that will minimise the Total Inventory Cost.
Assumptions of EOQ Model • The demand rate is constant and is known with certainty. • No constrains are placed on the size of each lot. • The only two relevant costs are inventory holding cost and the Ordering Cost. • No shortages are allowed. • Decisions for one item can be made independent of decisions for other items. • The Lead time is constant and is known with certainty.
Lead Time • The Time Period between placing an order and receiving the Order is Lead time
Reorder Point • Inventory level of an item which signals the need for placement of a replenishment order, taking into account the consumption of the item during order lead time.