INVENTORY MANAGEMENT

Presented by : Prabhsimran Singh Kalsi

What is inventory?

 A physical resource that a firm holds in stock with

the intent of selling it or transforming it into a more
valuable state
 Inventories are stock of any kind like fuel and
lubricants, spare parts and semi-processed
materials to be stored for future use mainly in the
process of production or it can be known as the
ideal resource of any kind having some economic
values
Types of inventory
There are four types of inventory:

 Raw materials & purchased parts

 Partially completed goods called work in progress
(WIP)
 Finished-goods inventories
 Goods-in-transit to warehouses or customers (GIT)
Classification of inventory
Cycle stock
• Inventory for immediate
use
• Typically produced in
batches
Anticipatory inventory
• Carried in anticipation of
events
• Also called seasonal
inventory
Safety stock
• Extra inventory carried for
uncertainties in supply and
demand
• Also called buffer stock
Pipeline inventory
• Inventory in transit
• Consists of orders that
have been placed haven't
been served yet
Importance of inventory in system:
 Improves customer service by providing product
availability.
 Inventory encourages production, purchase and
transportation economies.
 Inventory would act as a hedge against price
changes.
 Inventory is a hedge against uncertainties in
demand and lead times.
 Inventory acts as a hedge against contingencies
because of events like strikes, natural calamities etc.
What Is inventory management?

 Inventory management is the management of

inventory and stock. As an element of supply chain
management, inventory management includes
aspects such as controlling and overseeing ordering
inventory, storage of inventory, and controlling the
amount of product for sale.
 A key function of inventory management is to keep
a detailed record of each new or returned
product.
Objective of Inventory Management

 To maintain a optimum size of inventory for efficient

and smooth production and sales operations
 To maintain a minimum investment in inventories to
maximize the profitability
 Effort should be made to place an order at the
right time with right source to acquire the right
quantity at the right price and right quality
An effective management should
 Ensure a continuous supply of raw materials, to
facilitate uninterrupted production.
 Maintain sufficient stocks of raw materials in
periods of short supply and anticipate price
changes.
 Maintain sufficient finished goods inventory for
smooth sales operation, and efficient customer
service.
 Minimize the carrying cost and time, and
 Control investment in inventories and keep it at an
optimum level.
 Costs to be reckoned while holding
inventory:
Inventory holding (carrying) cost
• cost of holding an item in inventory

Ordering cost
• cost of replenishing inventory

Storage and handling costs

• When a firm rents out space

Taxes, insurance and shrinkage related costs

• Insurance to manage risks , shrinkage costs due to obsolescence, deterioration
and pilferage
Shortage cost
• temporary or permanent loss of sales when demand cannot be met
Classification of inventory

 ABC Classification
 VED Classification
 HML Classification
 FSN Classification
ABC Analysis

 Always Better Control

 ABC analysis provides a mechanism for identifying
items that will have a significant impact on overall
inventory cost
 Inventory Managers use Pareto’s Principle for
classification.
 It's a system of categorization into three classes with
each class having a different management control
associated
ABC Analysis
 CLASS A: 10% of total inventories contributing towards 80%
of total consumption value.
 CLASS B: 30% of total inventories, which account for about
15-20% of total consumption value.
 CLASS C: 60% of total inventories, which account for only
5-10% of total consumption value.
VED Analysis

 Vital, Essential and Desirable categorization.

 The VED analysis is done to determine the criticality
of an item and its effect on production and other
services.
 It is specially used for classification of spare parts.
 For Vital items, a large stock of inventory is
generally maintained, while for desirable items,
minimum stock is enough.
VED Analysis

 This is an analysis whose classification is dependent on

the user’s experience and perception. This analysis
classifies inventory according to the relative importance
of certain items to other items.

 Vital – inventory that consistently needs to be kept in

stock.
 Essential – keeping a minimum stock of this inventory is
enough.
 Desirable – operations can run with or without this,
optional.
HML Analysis
 HML Analysis classifies inventory based on how much a product
costs/its unit price.
The classification is as follows:
 High Cost (H) = Item with a high unit value.

 Medium Cost (M) = Item with a medium unit value.

 Low Cost (L) = Item with a low unit value.

 The HML analysis is useful for keeping control over consumption

at departmental levels, for deciding the frequency of physical

verification, and for controlling purchases.
S.NO. UNIT PRICE CATEORY
1 Rs 20000 and above H
2 Rs 10000 - 20000 M
3 Less than 10000 L
FSN Analysis
 This analysis classifies inventory based on quantity, rate
of consumption and frequency of issues and use.

To carry out an FSN analysis, the date of Fast • Items that are
receipt or the last date of issue, whichever is Moving frequently
issued/used
later, is taken to determine the number of (F)
months, which have lapsed since the last
transaction. The items are usually grouped in Slow • Items that are
periods of 12 months. Moving issued/used less for
certain period of time
(S)
 FSN analysis is helpful in identifying active
items which need to be reviewed regularly and
surplus items which have to be examined Non- • Items that are not
further. Non-moving items may be examined Moving issued/used for more
than certain duration
further and their disposal can be considered. (N)
Thank you