30-07-2012, 09:36 AM
Inventory Management
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Inventory is a detailed list of those
movable items which are necessary to
manufacture a product and to maintain
the equipment and machinery in good
working order . The qty and value of
every item is also mentioned in the
list.
Characteristics of Inventory
Inventory serves as cushions to absorb shocks.
Inventories are necessary evil:- As cost of not having inventories are usually greater than the costs of having them.
Inventory provides prod’n economies i.e. discounts on bulk purchase.
Importance of Inventory
Provides and maintains good customer service.
Enables smooth flow of goods through the prod’n process.
Provides protection against the uncertainties of demand and supply.
Various prod’n operations can be performed economically and independently.
Ensures a reasonable utilization of equipment and labour.
With purchases in bulk discount can be availed.
Inventory Classification
TRANSIT INV.:- As under this there is a need to transport inventories from one point to another larger the distance of supply source, larger is the transit inventory. Work in process transit inventories are determined by process design and plant layout.
BUFFER INV/Safety Stock.:-In any org. as a result of uncertainties of demand and supply some inventory is to be maintained.
DECOUPLING INV.:- The existence of inventories at major linkage points in a prod’n process makes it possible to carry an activities on either side of the point relatively independent of each other.
Inventory can also be classified according to the nature of items stocked namely raw materials, in-process inventories, finished goods inventories and spare part inventories.
INVENTORY CTRL
1. Inv. Ctrl keeps track of inventories. It is observed that ‘Too much', 'Too little’ or badly balanced inventories are all to be avoided because they cost too much on many counts
2. TOO MUCH leads to undue carrying charges in the form of taxes, insurance, storage, obsolescence and depreciation and undue proportion of total working capital is invested in them.
3. TOO LITTLE implies of too frequent ordering, loss of qty discounts and higher transportation charges.
THE BALANCE B/W TOO MUCH AND TOO LOW CAN BE DONE BY MEANS OF EFFECTIVE INV. CTRL.
Inventory ctrl is the technique of maintaining the size of inventory at some desired level keeping in view the best economic interests of an organization.
Inventory ctrl means keeping a track of inventories, so that items are available when they are needed. This is achieved by:-
Purchasing items at economic price at a proper time and in sufficient qty.
Provision of suitable and secured storage location with sufficient space.
Inventory identification system.
Up-to-date and accurate record keeping by a responsible staff.
Appropriate requisition procedures
Objectives of Inventory Ctrl
Protection against fluctuations in demand:- If sufficient items are available in the inventory, then the fluctuations in demand can be easily adjusted and the org. can protect from unforeseen economic losses.
Better use of Men, Machine and Material:- The resources can remain engaged during slack period of demand and there will be no need of generating additional resources in the boom periods as then the inventory enlarged in slack period can be utilized. This will lead to uniform and proper utilization of resources available with the enterprise.
3. Protection against fluctuations in output:- It helps to reduce the gap b/w actual and scheduled production.
4. For production economies:-
5. Control of Stock volume:-Inv Ctrl is concerned with the size and the value of goods present in stock. It is responsible to forecast the value of the stocks at regular intervals so that,
Capital invested in inventories does not exceed the funds available for the purpose.
The amt. invested in inventory is correctly recorded in a/c’s book.
Protection against theft is ensured.
To carry reserves in order to prevent stock outs or cost sales i.e. never to run out of any thing.
To gain economies in purchase by buying items beyond the desired amount.
To maintain reserves in stock for the period of replenishment.
Limitations of Inventory Ctrl
Efficient inventory ctrl methods can reduce but cannot eliminate business risk.
The objectives of better sales through improved service to customer, reduction in inventories to reduce size of invt. And reducing cost of prod’n by smoother prod’n operations are conflicting with each other.
The ctrl of inventories is complex because of the many functions it performs. It should be viewed as shared responsibility.
Costs in Inventory system
Purchase/Procurement cost:- Purchase cost in the inventory analysis shd. Reflect its fully landed cost, means cost to acquire and move the item to that point in the system. Thus landed cost include transportation costs, tariffs, taxes and any other cost incurred to make the item available at that point.
Ordering Costs:- If we produce the item internally, there may be an organization set-up cost. For an item, which is purchased from outside the firm, there is an administrative cost, which is incurred in the purchasing function.
3. Holding Cost:-
Storage costs:- Occur due to warehousing the inventory . Storage cost are usually function of land and labour costs associated with running a warehouse, and thus can be expected to vary considerably from location to location.
Service costs:- are out of pocket expenses that arise in addition to the physical storage costs. Two typical examples are insurance and taxes.
Risk costs:- are intended to recognize that there can be considerable financial risk associated with holding an item in inventory, because the item may become lost, stolen, damaged etc.
Capital costs:- inventory ties up funds, which the firm could be using for other productive purposes.
Shortage costs:-When a demand arises which cannot be satisfied from available inventory an inventory shortage occurs.
Shortage Costs may exists as:-
BACK ORDERS occur when the customer is willing to wait for inventory to be made available. Costs accrue because the firm must maintain a system to record the backorder, maintain it and fill it when stock becomes available. The customer may eventually retaliate by reducing the number of orders, demanding compensation, or finding a new source.
LOST SALES occur when the customer responds to an out-of-stock situation by canceling the demand.
LOST CUSTOMER COSTS as it is very difficult to retain loyal customers.
DISRUPTION COSTS occur in a production process when a shortage of raw material or component parts causes an interruption to the
A B C Analysis
Always Better Control is an analytical techniques for classification of inventory items was first introduced by an AMERICAN FIRM- GENERAL ELECTRIC COMPANY.
According to this analysis, there are three categories of inventory items A, B and C type . Depending upon their percentages of consumption.