Inventory

Management

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 INVENTORY MANAGEMENT
Introduction

Functions Of Inventory Control

Advantages Of Inventory Control

Methods Of Inventory Issues

Material Resource Planning(MRP)

Enterprise Resource Planning(ERP) 2

 Introduction
 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.
 Inventory is an essential requirement for every facet of business
life.
 Even in organization that processes information, data are
supposed as the inventory and are stored for future references.
 Inventory management in business refers to managing order
processing, manufacturing, storage, and selling raw materials and
finished goods.
 It ensures the right type of goods reach the right place in the right
quantity at the right time and at the right price.
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• Inventory management is the entire process of managing
inventories from raw materials to finished products.
• Inventory management tries to efficiently streamline
inventories to avoid both gluts and shortages.
• Four major inventory management methods include
• Just-in-time management (JIT),
• Materials requirement planning (MRP),
• Economic order quantity (EOQ) , and
• Days sales of inventory (DSI).

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 Inventory
Types of Inventory
• Raw Material Inventory
• Semi finished goods
• Components(crews, keyboards, screens, etc.)
• Spare Parts Inventory(belts, motors, gears, and grease)
• Obsolete Inventory (inventory has not been sold or used for a
long period of time and is not expected to be sold in the future)
• Waste, Scrap and rejects
Understanding the different types of inventory is essential for
making sound financial and production planning choices
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 Definition

Inventory Control may be defined as the scientific method of finding out how
much stock should be maintained in order to meet the production demands and be able to
provide right type of material at right time in the right quantities and at competitive prices.

It may be defined “as the systematic location, storage and recording of goods in
such a way that desired degree of service can be made to the operating shops at minimum
ultimate cost”.

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 Inventory Control

Inventory control is concerned with achieving an optimum balance

between two competing objectives. The objectives are:
1. To minimize investment in inventory,
2. To maximize the service levels to the firm’s -customers and its own
operating departments.

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 Inventory Control
Inventory control aims at keeping track of inventories. In other words, inventories of
required quality and in desired quantities should be made available to different departments
as and when they need.
Objectives:
 To minimize the carrying cost of inventory.
 To supply the finished product/raw material/subassemblies/semi finished goods to the
users as per their requirements at the right time and right price.
 To minimize the inactive, surplus, waste, scrap, obsolete, spoilage materials.
 To reduce the shortage costs.
 To minimize the replacement costs.
 To maximize production efficiency and distribution effectiveness.
 To maximize the Return On Investment(ROI).

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 Inventory Management
Functions of Inventory Control:
• To run the stores effectively: This includes layout, utilization of storage space, receiving and
issuing procedures.
•To ensure timely availability of materials and avoid built up of stock levels.
•Technical responsibility for the state of materials: This includes methods of storing, maintenance
procedures, studies of deterioration(Worse) and obsolescence.
•Stock Control System: Physical verification , records, ordering policies and procedures for the
purchase of goods.
•Maintenance of specified raw materials, general supplies, work in process and component parts in
sufficient quantities to meet the demand of production.
•Protecting the inventory from losses due to improper handling or storing of goods and
unauthorized removal from stores.
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•Pricing all materials supplied to the shops so as to estimate material cost.
 Inventory Management
Factors affecting Inventory Management

• Sudden change in production policies

• Increase in material prices

• Excessive storage costs

• Stock-out costs(Stockout costs are both direct and indirect expenses incurred
by a business when it runs out of stock)

• Increasing lead time.

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 Inventory Management
Advantages Of Inventory Management

• One does not face shortage of materials.

• Materials of good quality and procured in time minimizes defects in finished

goods.

• Delays in production schedules are avoided.

• Production targets are achieved.

• Accurate delivery dates can be ascertained and the industry builds up

reputation and better relations with customers. 11
 Inventory Management
Methods Of Inventory Issues
While issuing the material, it is necessary to value the stocks, particularly at
the end of the accounting period. Following are the important methods an
organization may choose according to their requirements.
• First in first out (FIFO)
•Last in first out (LIFO)
•Simple average price method
•Weighted average price method
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 Inventory Management
First In First Out:
This is also known as original cost method. In this system, the materials first received are
issued first. Materials from second lot are issued only when first lot is exhausted. The price is
charged at the cost at which that lot was purchased. Under this method, the balance of stock at any
time is from the most recently procured stock.
Advantages:
•It is simple to calculate and easy to understand.
•Closing stock value is almost nearest to the most recent prices.
Disadvantages:
•There is a danger that material charged to the job/product will be low and the stock is valued at a
high price when the prices are in increasing trend.
•This method tends to show higher profits than other methods, particularly in times of rising prices.
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Benefits of FIFO
• Warehouse Operations are More Streamlined
• Keeps Stock Handling to a Minimum
• Enhanced Quality Control
• Warranty Control.

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• First In, First Out (FIFO) is an accounting method in which assets
purchased or acquired first are disposed of first.
• FIFO assumes that the remaining inventory consists of items
purchased last.
• An alternative to FIFO, LIFO is an accounting method in which assets
purchased or acquired last are disposed of first.
• Often, in an inflationary market(unevenly rising prices inevitably
reduce the purchasing power of some consumers), lower, older costs
are assigned to the cost of goods sold under the FIFO method, which
results in a higher net income than if LIFO were used.

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• FIFO stands for “First In, First Out” and is an inventory accounting
method used to track the cost of goods sold. This method assumes
that the first items purchased (or produced) are the first items sold
and that the cost of those items is the cost of goods sold.
• First In, First Out (FIFO) is a system for storing and rotating food. In
FIFO, the food that has been in storage longest (“first in”) should be
the next food used (“first out”). This method helps restaurants and
homes keep their food storage organized and to use food before it
goes bad.
• FIFO (“First-In, First-Out”) assumes that the oldest products in a
company's inventory have been sold first and goes by those
production costs. The LIFO (“Last-In, First-Out”) method assumes that
the most recent products in a company's inventory have been sold
first and uses those costs instead.
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 Inventory Management
Last In First Out:
Under this method, the material received recently will be issued first. Hence, the stock at
hand is made up of the earlier purchases. This method is better to adopt particularly when the prices
are on the increasing trend and also the charge to production is closely related to the current price
level.
Advantages:
•It is simple to calculate and easy to understand.
•Goods are issued at the latest prices.
Disadvantages:
•Old stock is not exhausted first, which always remains in stock and hence liable to deteriorate or to
become out of date.
•Closing stock is not valued at the recent prices.
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• The LIFO method is based on the idea that the most recent products
in your inventory will be sold first. The FIFO method is the opposite as
it assumes the oldest products in your inventory will be sold first and
uses those lower cost numbers when calculating COGS.
• The LIFO method is used in the COGS (Cost of Goods Sold) calculation
when the costs of producing a product or acquiring inventory has
been increasing. This may be due to inflation.
• Although the LIFO accounting method may mean a decrease in profits
for a business, it can also mean less corporate tax a company has to
pay. Should the cost increases last for some time, then these savings
could be significant for a business

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 Inventory Management
Simple Average Price Method:
In this method, the stocks are issued at an average price. The average price is determined by
dividing the sum of the prices at which the goods are received by the number of prices available.
Here the quantities are not considered in determining the simple average price.
Advantages:
•It is simple to calculate and easy to understand.
•This method neutralizes price differences since the stock is valued at the average price.
Disadvantages:
•It considers only the prices, not the quantities of stocks. All receipts, irrespective of the quantity of
each, are given equal importance, which is not fair.
•When there is a large fluctuation, the average price is not close to any of the prices available.

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 Inventory Management
Weighted Average Price Method:
This method is the improved version of simple average price method. This method considers
the price as well as the quantities of each of the receipts. This is calculated as follows: Suppose there
are three receipts, each of the quantities Q1,Q2, & Q3 with the prices P1,P2, & P3, respectively then
Weighted average price = (Q1P1+Q2P2+Q3P3)/[Q1+Q2+Q3]
Advantages:
•The effect of quantity is considered in this model.
•Extreme fluctuations in the prices at which the materials are received are neutralized.
•It is more realistic since it considers the quantities of each of the receipts.
Disadvantages:
•It involves relatively complicated calculations and is difficult to understand.
•The prices at which issues and stocks are valued are different from the actual price.
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