Inventory Management

Presented By :
Anuja Barve 03
Bhagyashree Khabale 24
Akshata Kembhavi 23
Gaurav Landge 29
Aishwarya Tarade 51
Ruchi Tirpude 52
What is Inventory ?

Inventory is literally defined as a stock or store

of goods.
These are goods maintained by a business to
meet demand and fulfill its purpose.
For example , you own a retail store and a customer comes in looking for new
trousers.
What if you ran out
of trousers yesterday and haven’t restocked them , the customer may decide to
 Types of inventories
• Raw materials

Materials or goods purchased by the manufacturers . These items are purchased and kept in
stock The manufacturing process is applied to the raw material to produce desired .
For example, water, sugar and lemon would be the raw materials you’d need if you run a Lemonade
business. Without those raw materials , you can’t produce the beverage you want.
• Work in progress
These are the partly processed raw materials. They may or may not be saleable. These are also called
semi-finished goods. This level of this inventory should be kept as low as possible . Since a lot of money
is blocked over here which otherwise can be used to achieve better returns.

• Finished goods
Final products after manufacturing process on raw materials. They are sold in the market.
There are two kinds of manufacturing industries. One where the product is first Manufactured and then
sold Second, where the order is received first and then it is Manufactured as per specifications.
● Packing material
Packing material is the inventory you use to pack and ship your finished goods. Packing Material
usually falls into one of three categories:

• Primary packing- Includes the box, bag, or other material that encloses your product while on
retail display.
• Secondary packing- It is the box, bag, or other material you use for convenient
storage and transportation of your product.
• Miscellaneous packing- It is all of the other items that you use for the storage and transport of
your product such as-

▪ Bubble wrap
▪ Foam peanuts
▪ Pallets
▪ Pallet wrap
▪ Labels
• Safety/Buffer stock
Safety stock is the amount of product you keep on hand that exceeds what your business needs
to satisfy regular demand

With safety stock, you can avoid:

• Stock-outs (when an order cannot be filled from existing inventory)
• Backorders
• Making the customer wait until the next production cycle causing the customer to go elsewhere to
find the product .

• Smoothing/ Anticipate
Based on the past experiences, a businessman is able to foresee the future trends of the market
and takes certain decisions based on that.
Expecting a price rise, as spurt in demand etc. some businessman invests money in stocking those goods.
Such kind of inventory is known as anticipatory stock.
Used by retailers who routinely build up inventory months before the demand for their products .
Decoupling
Decoupling inventory are parts , supplies and finished products that are waiting to be used by the
next machine in chain.
Cycle
Cycle inventory is a byproduct of economic order quantity theory (EOQ) . EOQ attempts to
balance inventory
costs and machine setup costs.
MRO Goods
M -
Maintenance R
- Repair
O – Operating supplies
Items put in place to maintain tasks in the production process but are not directly a part of
the finished products.
Services
Services inventory includes the monitoring and management of all other types of inventory in
the production process.

Transportation
Transit inventories helps to transport items or materials from one location to another.

Obsolete inventory
When any facility becomes unserviceable and it is to be replaced by a new one , after replacing , the
old machine is
to be disposed. Such machines which are of no use are termed as Obsolete Inventory .
Cost associated with Inventory

The cost of maintaining the stock and the interest paid. They vary directly with the size of
the inventory
as well as the time the item is held in the stock.

Various components of the stockholding or Inventory Carrying cost are:

• Cost of money or Capital tied up in inventory

How much the organization would have earned, had the capital been invested in alternative
project Eg:-Developing a new product.

• Cost of Storage space

It consist of rent for the space occupied by the inventory. It also include heating lighting and
other atmospheric
control expense.
Depreciation and Deterioration
It relates to fashion items or items undergoing chemical changes.

Pilferage Cost
Meaning: - The action of stealing things of little
value. Valuable items may be more tempting.

Obsolescence Cost
Electronic and Computer components are likely to be outdated fast.

Handling Cost
Cost associated with movement of stock eg:- Labour, Overhead cranes,
Gantries . Other machinery used for this purpose.

Record Keeping and Administrative Cost

Maintaining account and various records of the inventory.

Tax and Insurance

TAX and insurance cover cost associated with inventory.
Inventory Model 1 : Purchase Model Without
Shortage
Inventory Model 2 : Purchase Model With
Shortage
What Is Economic Order Quantity –
EOQ?

• Economic order quantity (EOQ) is the ideal order quantity a company should purchase for
its inventory.

• The goal of the EOQ formula is to identify the optimal number of product units to order so
that a company can minimize its costs related to buying, taking delivery of and storing the
units.

• It is calculated to minimize inventory holding costs and order-related costs.

• The EOQ formula is best used in situations where demand, ordering, and holding costs
remain constant over time.
Example

• Annual requirement: 2,400 units

• Ordering cost: 10 per order
• Carrying/ Holding cost: 0.30 per unit
Formula of EOQ

Denoting EOQ by Q*, we obtain the expression of Q* as :-

Q*= √2 x Co x D/Cc
Where,
D= Annual Demand
Cc = Carrying Cost
Co = Ordering Cost

Example :-
Annual requirement: 2,400 units
Ordering cost: 10 per order
Carrying/ Holding cost: 0.30 per unit

EOQ = √2x10x2400/0.30 = 400 Units.

Derivation of Formula

• Total Cost = Total Carrying Cost + Total Ordering

Cost

• In EOQ,

Total Carrying Cost = Total Ordering Cost

1. QxCc/2 = DxCo/Q

2. Q^2 = 2xDxCo/Cc

3. Q = √2xDxCo/Cc
Graphical Representation of
EOQ

Derivation of
Formula
Classification of
inventory

● ABC classification
● HML classification
● VED classification
● SDE classification
● FSN classification
● XYZ classification
ABC Analysis
● Always Better Control

● ABC analysis provides a mechanism for identifying items that will

have a significant impact on overall inventory cost
● It's a system of categorization into three classes with
each class having a different management control
associated
 ABC Analysis
Control

A B C
A B C

HI MI LI
%Value 70% 20% 10%
%Qty 10% 20% 70%
Control Constant Need Little
Based
HML Classifications
● The High,medium and Low(HML)

● The HML analysis is useful for keeping control over consumption at

departmental levels, for deciding the frequency of physical verification,
and for controlling purchases.

VED Classifications
● Vital,Essential and Desirable Categorization.
● It is specially used for classification of spare
parts
SDE Classification
● 's' refers to scarce ,'D' refers to Difficult, 'E' refers to Easy.
● The SDE classification, based on problems faced in
procurement,is vital to the lead time analysis and in deciding on purchasing
strategies.

FSN Classification
● Inventory is classified based on the MOVEMENT OF INVENTORIES from
stores
● Inventory technique used to AVOID OBSOLESCENCE
● F- Fast moving
● S- Slow moving
● N- Non moving
XYZ classification
● X-High value :close monitoring and light control
● Y-Medium value :Standard controls and periodic reviews of
usage
● Z-Least value :"Free stock" or forward holding
Example: The stores of an oil engine repair shop has 10 items whose details are shown in
the following table. Apply ABC analysis to the store.
Component Description Price/Unit Annual Demand
Code (₹) Units/Year

C01 Practicing 100 100

Threads

C02 Tower bolt 200 300

C03 Hexagonal nut 50 700
C04 Bush 300 400
C05 Coupling 500 1000
C06 Bearings(Big) 3000 30
C07 Bearing(small) 1000 100
C08 Fuel pump 7000 500
C09 Fixture 5000 105
C10 Drill bit 60 1000
Component Description Price/Unit Annual Demand Annual
Code (₹) Units/year Consumption
(₹)

C01 Practicing Threads 100 100 10,000

C02 Tower bolt 200 300 60,000

C03 Hexagonal nut 50 700 35,000
C04 Bush 300 400 1,20,000
C05 Coupling 500 1000 5,00,000
C06 Bearings(Big) 3000 30 90,000
C07 Bearing(small) 1000 100 1,00,000
C08 Fuel pump 7000 500 35,00,000
C09 Fixture 5000 105 5,25,000
C10 Drill bit 60 1000 60,000
component price/unit unit/year Annual Cumulative %of Cumm value of % of Class
code Consumption Value of Annual Annual No.of
Consumption Consumption
Items
C08 7000 500 35,00,000 35,00,000 70% 10% A
C09 5000 105 5,25,000 40,25,000 80.5% 20% B
C05 500 1000 5,00,000 45,25,000 90.5% 30% B
C04 300 400 1,20,000 46,45,000 92.9% 40% C
C07 1000 100 1,00,000 47,45,000 94.9% 50% C
C06 3000 30 90,000 48,35,000 96.7% 60% C
C02 200 300 60,000 48,95,000 97.9% 70% C
C10 60 1000 60,000 49,55,000 99.1% 80% C
C03 50 700 35,000 49,90,000 99.8% 90% C
C01 100 100 10,000 50,00,000 100% 100% C
ABC Analysis

C
B

A
Advantages Of ABC Analysis:

● Smooth Flow
● Cost Savings-EOQ
● Control by Exception
● Standardisation of Work
THANK YOU