This document discusses inventory management techniques. It begins by explaining that inventory is a significant current asset that requires management to avoid unnecessary investment of funds. It then defines inventory control measures like order size, safety stock, and reorder points. It discusses the different types of inventories and the various reasons companies hold inventory. The objectives and techniques of effective inventory management are outlined, including determining economic order quantity and reorder points. ABC analysis is presented as a case study, classifying inventory into categories based on value to prioritize control efforts.

1. INVENTORY MANAGEMENT HYDERALI C.K 106004

2. INTRODUCTION Significant part of the current asset Large amount of inventory leads to considerable lapse of fund Imperative to manage to avoid unnecessary investment

3. Cont……….. Inventory Control measure and regulate to predetermine -size for order or production, -safety stock - minimum level of order - maximum level of order

4. Nature of inventories Raw material Work in process Finished goods

5. NEED TO HOLD INVENTORIES Transaction motive(smooth production) Precautionary motive(demand) Production motive (price)

6. PRODUCTION CYCLE Time span between introduction raw material to the conversion into the finished product

7. OBJECTIVE OF INVENTORY MANAGEMENT To meet unforeseen future demand due to variation in forecast figures and actual figures. To meet the customer requirement timely, effectively, efficiently and smoothly To smoothen the production process. To facilitate intermittent production of several products on the same facility.

8. Cont…….. To gain economy of production or purchase in lots. To reduce loss due to changes in prices of inventory items. To meet the time lag for transportation of goods. To balance various costs of inventory such as order cost or set up cost and inventory carrying cost

9. Cont…….. To balance the stock out cost/opportunity cost due to loss of sales against the costs of inventory. To minimize losses due to deterioration, obsolescence, damage etc.

10. Optimum level of inventory It lies between two danger point,i.e between excessive and inadequate level

11. Major danger in the overinvesment Unnecessary tie-up of firm’s fund and loss of profit Excessive carrying cost Risk of liquidity

12. Major danger in the inadequate level Production hold-up Failure to meet delivery commitment

13. Effective inventory management Continues supply of raw material to facilitate production Maintain sufficient stock of raw materials in periods of short supply and anticipate price changes Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service

14. Cont…….. Minimise the carrying cost and time Control investment in inventories and keep it an optimum level

15. Inventory management techniques Aim to maximise the shareholder wealth For efficient inventory management, we have to answer -how much should be ordered ? (ans;EOQ) -when should it be ordered ? (ans;reorder point)

16. Economic order quantity ordering materials whenever stock reaches the reorder point It tells how production to be schedule optimum level of inventory involves two types of cost 1.ordering cost 2.carrying cost

17. Ordering cost It is the entire cost to acquire the raw material(supplies). It include -Requisitioning -order placing -Transportation -Receiving, inspecting and storing -clerical and staff

18. Carrying cost It is the cost incurred to maintain the given level of inventory It include -Warehousing -Handling -clerical and staff -Insurance -Deterioration and obsolescene

19. Ordering and carrying cost trade off Optimum level of inventory referred to EOQ To determine EOQ-three approaches -Trial and error approach -Formula approach -Graphical approach

20. Trial and error approach Assumptions -known annual requirement -steady usage -ordering and carrying cost to be constant through the entire period

21. Example – illustrating the trial and error approach Estimated annual requirement, A =1200unit Purchasing cost per unit, P(Rs) =50 Ordering cost (per order),O(Rs) =37.50 Carrying cost per unit,c(Re) =1

22. Total cost in the various orders

23. Inference from the TC table OrderTotal cost 1.For single order(once in year) 637.5 2.12 order (once in a month) 500 3.4 order(once in every 3 month) 300 i.e.the third option is the most economic

24. Order formula approach It is more easier way compared to trial and error approach Assumption -carrying cost per unit constant -ordering cost per order fixed

25. Cont………… O=ordering cost per order A=Total annual requirement Q=order size Per unit carrying cost=c Number of order=A/Q TOC(Total order cost)=(A/Q)XO

26. Cont…….. Average inventory =Q/2 TCC(Total carrying cost)=(Q/2)Xc TC(Total cost) =TOC+TCC TC =(A/Q)XO + (Q/2)Xc

27. Inference from the equation For larger quantity order =carrying cost increases =ordering cost decreases For lower quantity order=carrying cost decreases =ordering cost increase

28. Cont………. EOQ should lie between larger & lower quantity order So EOQ = differentiate TC and equate to zero TC =(A/Q)XO + (Q/2)Xc EOQ=-(AO)/Q^2+c/2=0 c/2=(AO)/Q^2 EOQ=Q=((2AO)/c)^.5

29. In the earlier problem A=1200 O=37.5 c=1 EOQ=((2AO)/c)^.5 =((2X1200X37.5)/1)^.5 =300

30. Graphical method Vertical axis =costs -carrying cost (TCC) -ordering cost (TOC) -Total cost (TC) Horizontal axis =order size (Q)

31. Cont…… Tc (Total Cost) Carrying Cost (Q/2)H Cost (Rs.) DS/Q (Ordering Cost) EOQ Order Quantity Size (Q)

32. Cont…… Carrying cost increases with increase order size, because of large have to be maintained Ordering cost decline with increase in order size, because larger order size means lesser no of order Total cost has the behaviour of both ordering cost and carrying cost EOQ=deviating point of TC

33. Quantity discount Supplier offer discount for large order size (above EOQ) Net return=discount savings –additional carrying cost If return +ve = can avail the discount offer If return –ve= order size should be EOQ level

34. Example d=discount rate (.005) Discount on savings=dXPXA=(.005X50X1200) =300 Savings on the ordering cost=(OA/Q)-(OA/q) Here Q=EOQ & q=discount quantity(400) =O[A/Q-A/q] =37.5[1200/300-1200/400] =37.5

35. Cont………. Additional carrying cost=(cq/2)-(cQ/2) =c/2(q-Q) =1/2(400-300) =50

36. Cont…… Net return=[dPA+ savings on - additional discount] carrying cost =(300+37.5)-50 =287.5 Here net return is +ve= firm should order 400 unit

37. Important Terms Minimum Level – It is the minimum stock to be maintained for smooth production. Maximum Level – It is the level of stock, beyond which a firm should not maintain the stock. Reorder Level – The stock level at which an order should be placed. Safety Stock – Stock for usage at normal rate during the extension of lead time.

38. Case study of inventory control (ABC) Several types of inventories are there in ABC Classify the inventories into -High value =A -Least value =C -reasonable attention=B(A&C)

39. Cont……. ABC analysis concentrate on important items =Control by important exception(CIE) Classified in the importance of their relative value=Proportion Value Analysis(PVA)

40. Step involved in implementing the ABC analysis Classify ,determine expected use & price of the inventories Determine total value of item(expected unitXunit price) Rank the items (according to total value) Compute the ratios (no.of unit/total unit) & (each value of item/total value of all item) Combine on the basis of relative values (A,B,C)

41. ABC analysis table

42. Inference Assumption =1&2 ,3,4&5,6&7 fall in the same category 1&2=item A 3,4&5=item B 6&7 =item C

43. Thank you