INVENTORY

MANAGEMENT

Inventory is technically an asset, but is indirectly taxing

on the profitability of the firm.

Hence, besides various activities associated with lean

supply chain, Corporation across the world are always
finding ways & techniques to reduce inventories.

With latest IT tools & communication technology, it has

become comparatively easy to size & control this single
largest Cost spinner in supply Chain.

INVENTORY AN ASSET OR LIABILITY?

Inventory generally constitutes the Second largest item after fixed

asset in financial balance sheet of the Manufacturing Company.

It seems that there is no disadvantage in carrying excess inventory,

However, investments in inventory carry cost.

Reduction in inventory will reduce inventory handling and

carrying cost & benefits of inventory reduction will be reflected in
terms of increase in profit margin & return on investment (ROI).

Today, inventory investment is viewed as a supply chain Cost

Driver rather than a material asset.

Lean Supply Chain operating on MRP, DRP & JIT are preferred
to ensure maximum inventory turn (Ratio of sales to average level
of Inventory).

Inventory Decisions

These refer to means by which inventories are

managed.
Inventories exist at every state of the supply chain as
either raw materials, Semi-finished or finished goods.
They can also be in-process between locations.
Inventory primary purpose is to buffer against any
uncertainty that might exist in the supply chain. Since
holding of inventories can cost anywhere between 20
to 40 percent of their value.
Efficient management of Inventory is critical in supply
chain operations. Therefore, top management
considerer it as one of the strategy for managing
operations effectively.

Inventory Decisions..
However, most researchers have approached the
management of inventory from an operational
perspective. These include deployment strategies (push
versus pull), control policies --- the determination of
the optimal levels of order quantities and reorder
points, and setting safety stock levels, at each stocking
location. These levels are critical, since they are
primary determinants of customer service levels.

INVENTORY FUNCTIONS

As the cycle of production & consumption never matches, goods

have to be kept in stock to get over the uncertainties in demand &
supply.
Company needs to strike a balance between two vital things i.e.
lower cost of Operations & higher level of Customer Service
(satisfaction).
Company blocks quite a good amount fund in inventories, which
would otherwise have been invested in other important &
productive areas. Inventories are held in the following general
categories.

Raw material & Components.

Work in progress.
Finished goods.
Maintenance, Repairs & Spares.
Pipeline or in-transit inventory.

TABLE I : INVENTORY AS % OF SALES

Company

Sales
turnover Rs.
Crore

RM &
Components

WIP

F.G.

Total
Inventaries

Larsen & Toubro Ltd.

31/03/2002

7917

10.13
0.12

685.66
(8.66)

24.33
(0.32

720.48
(9.10)

Hindustan Lever Ltd.

31/12/2001

10972

510.14
(4.65)

47.72
(0.43)

577.11
(5.26)

1134.98
(10.34)

Ranbaxy Labortories Ltd.

31/12/2001

2164

181.78
(8.39)

62.3
(2.88)

180.72
(8.35)

424.85
(19.62)

Sterlite Industries Ltd.

30/06/2001

3093

45.64
(1.47)

194.29
(6.28)

17.05
(0.55)

256.93
(8.33)

Sr.
No.

Source : Annual Reports & Stock Exchange Directory

Not only do external Customers make demands on inventories, internal

customers like top management & manufacturing, finance & distribution
department have different expectations as shown below.
TOP MANAGEMENT

FINANCE DEPARTMENT

High Inventory Turnover

Low operating cost
Excellent Customer service

Low Inventory levels

Low cost of operations
Higher inventory turn

Inventory
Expectations
SALES & MARKETING

MANUFACTURING
Less varieties
Economic batch quantity
Quick off-take
No rejection & Cancellation

Quick delivery
No stock outs
Variety & Volumes
Frequent & Small Deliveries

Inventory management is both an Art & Science & is concerned with

Right level of Inventory

Trade off between Customer service & Inventory cost
Liability or an Asset

COST RELATED TO INVENTORIES

I
N
V
E
N
T
O
R
Y

R
E
L
A
T
E
D
C
O
S
T

INVENTORY COST

CARRYING COST

ORDERING COST

WARE HOUSING COST

DAMAGE, PILFERAGE,
OBSOLESCENCE COST
EXCHANGE RATE DIFFERENCE

INVENTORY CONTROLS

The phenomenon of variability in customer demand, if not

conveyed properly or if conveyed with distortions, as it travels
upstream in supply chain, is called Bull whip effect.
It causes either stock outs or inventory pile ups in distribution
logistic chain.
Using latest inventory control techniques supported by efficient &
effective information flow system, the disturbance in supply chain
can be minimised.
Commonly used techniques :

ABC Analysis (Related to annual usage cost of a particular

item.
VED Analysis (Vital, Essential & Desirable status of inventory
items).
SAP Analysis (Scare, Available & Plenty).
FSN Analysis (Fast, Slow & Normal analysis of consumption
pattern.

Critically of Item
V
High
A

Consumption
Value

Low

Continuous Review
Product as needed
High safety stock
Low order Qty.

Continuous Review
Produce as per need.
Low safety stock
Low order Qty.

Periodic Review
High safety stock
High order Qty.

Periodic Review
Low safety stock
High order Qty.

COST RELATED TO INVENTORIES

GOALS
Cost
Profit
Service

TYPE
Purchase
Process
Transit

PROBLES
When?
Where?
How Much?

INVENTORY MODEL

STRATEGY
Make to order
Make to Stock
Mass Customising
FMS

ENVIRONMENT
Technology
Products segment

INVENTORY MODEL : SELECTION VARIABLES

INVENTORY CONTROLS
The modern approach to control inventories is focused on the following factors :
Flow :
This is concerned with movement of product from supplier to work centre to
ultimate Customer.
Flexibility :
This is concerned with Customer satisfaction and optimising stock levels.
Balancing :
This is concerned with Customer satisfaction and optimising stock levels.
Integration :
This is concerned with both forward and backward integration to meet objective
of lower inventory carrying cost and enhanced Customer satisfaction. (MRP,
DRP & JIT).