Inventory Management e6h3v

INVENTORY MANAGEMENT

Meaning and Definition of Inventory Management Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an organization in its custody awaiting packing, processing, transformation, use or sale in a future point of time. Inventory management is the overseeing and controlling of the ordering, storage and use of components that a company will use in the production of the items it will sell as well as the overseeing and controlling of quantities of finished products for sale. 

Forms of Inventory

The major forms of inventory are: 1. Raw Material. 2. Work in Progress. 3. Finished Goods.

Objectives of inventory management The major objectives of inventory management are: a. Maximum satisfaction to customer. b. Minimum investment in inventory. c. Achieving low cost plant operation.

Benefits and Costs of Holding Inventory Benefits : 1. Smooth production 2. Sales : 3. To avail quantity discounts 4. Reducing ordering Costs and time 5. Reduce risk of production stoppages

Costs associated with inventories 1. Material costs 2. Ordering Cost 3. Carrying Costs

Inventory Management Techniques There are many techniques of management of inventory. Some of them are: 1. ABC System 2. EOQ System 3. Material Levels etc.

Inventory Management Techniques 1. ABC System: ABC analysis classifies all the inventory items in an organization into three categories. A: Items are of high value but small in number. A items require strict control. B: Items of moderate value and size which require reasonable attention of the management.. C: Items represent relatively small value items and require simple control. Since this method concentrates attention on the basis of the relative importance of various items of inventory it is also known as control by importance and exception. As the items are classified in order of their relative importance in of value, it is also known as proportional value Analysis.

Inventory Management Techniques 2.Economic Order Quantity: EOQ refers to the optimal order size that will result in the lowest ordering and carrying costs for an item of inventory based on its expected usage. EOQ is defined as the order quantity that minimizes the total cost associated with inventory management. It is based on the following assumptions: 1. Constant or uniform demand 2. Known demand or usage 3. Constant Unit price 4. Constant Carrying Costs 5. Constant ordering cost

Inventory Management Techniques Economic Order Quantity: where, C= Annual Consumption of materials in Units O= Ordering Cost Per Order i= Carrying Cost in %

Inventory Management Techniques 3. Material Levels : Maximum Level: Maximum level is that level above which stock of inventory should never rise. Maximum Level = Ordering level – (MRC x MDP) + standard ordering quantity. Where, MRC = minimum rate of consumption, MDP= minimum lead time. Minimum Level: Minimum level is that level below which stock of inventory should not normally fall. Minimum level = OL – (NRC x NLT) Where, OL = ordering level, NRC = Normal rate of consumption, NLT = Normal Lead Time

Inventory Management Techniques Ordering Level: Ordering level is that level at which action for replenishment of inventory is initiated. Ordering Level = MRC X MLT Where, MRC = Maximum rate of consumption, MLT = Maximum lead time. Average stock level Average stock level can be computed in two ways 1. minimum level + maximum level 2. Minimum level + 1 /2 of reorder quantity Re – order Point: The re – order point is that inventory level at which an order should be placed to replenish the inventory. Re – order point = lead time x Average usage