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Nature of Inventory
Stocks of manufactured products and the
material that make up the product.
Components:
raw materials
work-in-process
finished goods
stores and spares (supplies)
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Need for Inventories
Transaction motive
Precautionary motive
Speculative motive
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Objectives of Inventory Management
Ensure a continuous supply of raw materials to
facilitate uninterrupted production
Maintain sufficient stock of raw materials in
periods of short supply and anticipate price
changes
Maintain sufficient finished goods inventory for
smooth sales operations and efficient customer
service
Minimise the inventory costs
Control inventory investment by maintaining
optimum inventory
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Causes of poor inventory control
Over buying.
Over production
Cancellation of orders
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Carrying cost
Cost of storage space.
Depreciation cost
Pilferage cost
Obsolescence cost
Handling cost
Record keeping cost
Taxes and insurance.
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Inventory Management Techniques
Economic order quantity (EOQ)
ordering costs: requisitioning, order placing,
transportation, receiving, inspecting and storing,
administration
Purchase cost.
Shortage cost.
carrying costs: warehousing, handling, clerical and
staff, insurance, depreciation and obsolescence
ordering and carrying costs trade-off:
2AO
EOQ =
c
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Inventory Management Techniques
Reorder point under certainty
lead time
average usage
Reorder point = Lead time x average usage
Reorder point under uncertainty
safety stock
Reorder point = (Lead time x average usage)
+ safety stock
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Selective Inventory Control
ABC analysis
classify inventory into three categories according
to value
control by importance and exception: maximum
attention to “A” items.
5 to 10% of items account for 70 to 80 % of sales (
A items), 10 to 20 5 of items account for 15 to 20
% of annual sales ( B Items), 70 to 80 % of items
account for balance 5 to 10 5 of sales ( C items)
VEDAnalysis.
FSND Analysis
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Inventory Management Process
Explicitly state the inventory policy
Create an inventory monitoring cell
Management group for controlling purchases
Periodic meetings between purchase, materials
planning and production executives
Monthly reviews of total inventory at
plant/corporate level
Dovetail inventory control to the total budgeting
system
Identify critical inventory items for closer
scrutiny
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