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Inventory can be defined as a physical resource that
a firm holds in stock with the intent of selling it or
transforming it into a more valuable state.
Inventory System is a set of policies and controls
that monitors levels of inventory and determines
what levels should be maintained, when stock should
be replenished, and how large the orders should be.
Inventory is material that the firm obtains in advance of
need, holds until it is needed, and then used, consumes or
incorporates into a product, sells, or otherwise disposes it
A business inventory is temporary in nature.
It includes stock of any kind like fuel and lubricants, spare
parts and semi-processed materials to be stored for future
use mainly in the process of production or it can be known
as the ideal resource of any kind having some economic
There are many types of inventory.
The form of inventories depends upon the type of
They are :
*Maintenance, Repair and Operating (MRO))
Raw Material : There are raw materials and other
supplies, parts and components, which enter into the
product during the production process and generally
form part of the product.
WIP : These are semi finished goods and partly finished
products formed at the various stages of production.
Finished Goods : These are complete finished products
ready for sales.
In a manufacturing unit, they are the final output of the
MRO : Maintenance, repairs and operating supplies which
are consumed during the production process and generally
do not form part of the product itself are referred to as
spare part inventories.
* Improve customer service.
* Economies of purchasing.
* Economies of production.
* Transportation savings.
* Hedge against future.
* Unplanned shocks (labor strikes, natural disasters, surges
in demand, etc.)
* To maintain independence of supply chain..
* Ensures a continuous supply of raw materials to facilitate
* Maintains an optimum size of inventory for efficient and
smooth production and sales operations.
* Maintains sufficient stock of raw materials in periods of short
IMPORTANCE OF INVENTORY
MANAGEMENT IN PRODUCTION
* Maintains a minimum investment in inventories to
maximize the profitability.
* Effort should be made to place an order at the right
time with right source to acquire the right quantity
at the right price and right quality.
A Items: very tight control, complete
and accurate records, frequent review.
B Items: less tightly controlled, good
records, regular review.
C Items: simplest controls possible,
minimal records, large inventories,
periodic review and reorder.
In most of the cases 10 to 20 % of the inventory
account for 70 to 80% of the annual activity.
• A typical manufacturing operation shows that the
top 15% of the line items, in terms of annual rupees
usage, represent 80% of total annual rupees usage i.e.
• Next 15% of items reflect 15% of annual rupees i.e. B
• Next 70% accounts only for 5% usage i.e. C items.
Another recommended breakdown of ABC classes:
•"A" approximately 10% of items or 66.6% of value.
2. "B" approximately 20% of items or 23.3% of value.
3. "C" approximately 70% of items or 10.1% of value.
Helps to exercise selective control.
Gives rewarding results quickly.
Helps to point out obsolete stocks easily.
In case of “A” items careful attention can be
paid at every step such as estimate of
requirements, purchase, safety stock, receipts,
inspections, issues, etc. & close control is
In case of “C” items, recording & follow
up, etc. may be dispensed with or
Helps better planning of inventory
Provides sound basis for allocation of
funds & human resources.
Proper standardization & codification of inventory
Considers only money value of items & neglects the
importance of items for the production process or
assembly or functioning.
Periodic review becomes difficult if only ABC
analysis is recalled.
When other important factors make it obligatory to
concentrate on “C” items more, the purpose of ABC
analysis is defeated.
The High, medium and Low (HML) classification follows
the same procedure as is adopted in ABC classification.
Only difference is that in (HML) High, Medium and low,
the classification unit value is the criterion and not the
annual consumption value.
The items of inventory should be listed in the descending
order of unit value and it is up to the management to fix
limits for three categories.
The management may decide:
All units with unit value of Rs. 2000 and above will
be H items,
Rs.1000 to 2000 will be M items
and less than Rs.1000 will be L items.
The HML analysis is useful for:
* keeping control over consumption at departmental
* for deciding the frequency of physical verification and
* for controlling purchases.
OBJECTIVES OF HML ANALYSIS
* Determine the frequency of stock verification.
* To keep control over the consumption at the
* To evolve buying policy, to control purchase.
* To delegate the authority to different buyer.
* Based on the consumption pattern to
combat obsolete items.
* Classification depends on the pattern of
issues from stores.
F – Fast moving
S – Slow moving
N – Non Moving
Date of receipt or last date of issue,
whichever is later, is taken to determine
the no. of months which have lapsed
since the last transaction.
The items are usually grouped in
periods of 12 months.
It helps to avoid investments in non
moving or slow items.
It is also useful in facilitating timely
For analysis, the issues of items in past two or three
years are considered.
If there are no issues of an item during the period, it is
Then up to certain limit, say 10-15 issues in the period,
the item is “S” item.
The items exceeding such limit of no. of issues during
the period are “F” items.
The period of consideration & the limiting number of
issues vary from organization to organization..
The SDE analysis is based upon the availability of
items and is very useful in the context of scarcity
* S refers to scarce items, generally imported, and
those which are in short supply.
* D refers to difficult items, which are available
indigenously but are difficult items to procure.
* E refers to items which are easy to acquire and
which are available in the local markets.
* These are generally short in supply or are
channelized through government agencies.
* If the company feels that a lot of time as well as
expenditure is involved in procuring these items, it
would be advisable for the company to procure
these items, say once a year.
* These items are available indigenously, but are difficult
* “Difficult” categorization also includes those items
which are procured from far off places and whose
suppliers cannot be relied upon.
* Sometimes it may happen that certain items are difficult
to manufacture and further, there may be only one or two
companies who manufacture this item.
* As the name suggests, these items are easily and
* They include all those items that are produced
according to commercial standards, items which are
available to be procured locally without any difficulty,
Definition of ‘Make-Or-Buy Decision’
oIt is the act of choosing between manufacturing a
product in-house or purchasing it from an external
oIn a make-or-buy decision, the two most important
factors to consider are cost and availability of
• Factors that may influence a firm's decision to
buy a part rather than produce it internally
-- lack of in-house expertise.
-- small volume requirements.
-- desire for multiple sourcing.
-- the fact that the item may not be critical to
• Similarly, factors that may tilt a firm towards
making an item in-house include :
o-- existing idle production capacity.
-- better quality control.
o-- proprietary technology that needs to be
If the decision is small in nature and has less impact on
the business, then even one person can make the decision.
The person can consider the pros and cons between
making and buying and finally arrive at a decision.
When it comes to larger and high impact decisions,
usually organizations follow a standard method to arrive at a
This method can be divided into four main stages as
It is important to keep in mind there are several different
functions of inventory management:
-- raw inventory, meaning the raw goods the company must
keep on hand for production;
-- work in progress inventory which includes any of the
goods that are in the production process; and
-- finished goods inventory or the products that are ready to
ship to customers.
Without inventory management it would be difficult for
any company to maintain control and be able to handle the
needs of their customers.