FUNCTIONS OF INVENTORY

1. To meet anticipated customer demand.

2. To smooth production requirements.
3. To decouple operations
4. To protect against stock-outs.
5. To take advantage of order cycles.
6. To hedge against price increase.
7. To permit operations.

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 PRODUCTIVITY

VALUE OF GOODS AND SERVICES PRODUCED

PRODUCTIVITY=
INPUTS(LABOUR + MATERIALS + CAPITAL +ENERGY+…)

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 IMPORTANCE OF
REDUCING INVENTORY
FOR
PRODUCTIVITY

LABOUR OVERHEAD
20%
16%

64%
INVENTORY

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INVENTORY CONTROL
&
MANAGEMENT

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 INDICATORS OF LOW INVENTORY
MANAGEMENT EFFECTIVENESS

1. EXCESS INVENTORIES OR LOW INVENTORY TURNOVER RATIO

2. LARGE AMOUNT OF MATERIAL WASTAGE OR HIGH WASTIVITY

3. LONG AND UNCERTAIN PROCUREMENT LEAD TIMES

4. POOR STORAGE METHODS LEADING TO EXCESSIVE WASTAGE,

5. TOO MUCH VARIETY OF PARTS AND COMPONENTS DUE TO LACK OF

STANDARDIZATION AND CODIFICATION

6. TIGHT TOLERANCES ON THE PARTS AND COMPONENTS .

7. BUYING FROM A WRONG SOURCE, AT A HIGHER PRICE

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INVENTORY ON THE BALANCE SHEET
THE BALANCE SHEET SHOWS THE FINANCIAL POSITION OF A COMPANY
ON A SPECIFIC DATE BASED ON BASIC ACCOUNTING EQUATION:
ASSETS = LIABILITIES + EQUITY.
ASSETS REPRESENT A COMPANY’S RESOURCES, IN THE FORM OF
1)CURRENT ASSETS (CASH , INVENTORIES ETC.),
2)LONG TERM ASSETS (PLANT & MACHINARY)
3) INTANGIBLE ASSETS (PATENTS, COPYRIGHTS, AND GOODWILL).

LIABILITIES REPRESENT AMOUNTS OWED TO CREDITORS (DEBT,

ACCOUNTS PAYABLE, AND LEASE-TERM OBLIGATIONS).

EQUITY REPRESENTS OWNERSHIP OR RIGHTS TO THE ASSETS OF THE

COMPANY (ADDITIONAL PAID-IN CAPITAL, AND RETAINED EARNINGS).

INVENTORY IS COMPANY’S CURRENT ASSET

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 RATIO ANALYSES

Current ratio = Current assets ÷ Current liabilities

Quick ratio = (Current assets – Inventories) ÷ Current liabilities

Inventory Turnover Ratio = Cost of sales ÷ Average Inventory

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*Maximum stock-It is the highest quantity of a
product an organisation should have on hand at
anytime.
Maximum stock=Minimum stock + stock used between orders

*Lead time – The time between rise of demand and

receipt of material

*Safety OR Buffer stock-This is the stock held for

protection against the uncertainty of demand and,
where applicable also of supply.

*Anticipation or Investment stock-This is the

stock procured in advance of requirement

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*Minimum stock /re-order level- A level below
which the stock falls, the order is placed.
Minimum stock = lead time consumption + buffer stock

*Insurance spares- These are the vital spares

supplied by the equipment manufacturer at the time
of commissioning.

*Stock out- It is a situation when inventory level of

any item drops to zero & production hampers.

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JUST-IN-TIME OR JIT MODEL
**THIS MODEL IS TREMENDOUS SUCCESSFUL
IN THE CONTEXT OF JAPANESE COMPANIES
**JIT OR ZERO-INVENTORY SYSTEM IS AN
IDEALIZED CONCEPT OF INVENTORY
MANAGEMENT WHEREIN WE ARE ABLE TO:
*SUPPLY WHATEVER MATERIAL IS REQUIRED,
*WHEREVER REQUIRED,
*WHENEVER REQUIRED
*JUST IN TIME WITH 100 % SUPPLY
ASSURANCES
*WITHOUT KEEPING ANY INVENTORY ON HAND

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FIXED–ORDER QUANTITY MODEL
(Q-model)

An inventory control model where the

amount requisitioned is fixed and the
actual ordering is triggered by inventory
dropping to a specified level of inventory.

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Q MODEL FLOW CHART
Idle state waiting for demand

Demand occurs
Units withdrawn from inventory or backordered

Compute inventory position

Position = On-hand + On-order – Backorder

Is
NO position<= YES
Reorder
point?

Issue an order for

exactly Q units
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 FIXED–TIME PERIOD MODEL
(P-MODEL)

An inventory control model that specifies

inventory is ordered at the end of a
predetermined time period. The interval
of time between orders
is fixed and the order quantity varies

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 COMPARASION
Feature Q-MODEL P-MODEL
Fixed–Order Quantity Fixed–Time Period Model
Model
Order quantity Q—constant (the same q—variable (varies each time
amount ordered each time) order is placed)
When to place R—when inventory position T—when the review period
order drops to the reorder level arrives
Recordkeeping Each time a withdrawal or Counted only at review period
addition is made
Size of Less than fIxed–time period Larger than fixed–order
inventory model quantity model
Time to Higher due to perpetual
maintain recordkeeping
Type of items Higher-priced, critical, or
important
items

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ECONOMIC ORDER QUANTITY
(EOQ)

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 ANNUAL COST

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VALUE
ANALYSIS

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 PARETO’S LAW OF MALDISTRIBUTION
Noted Italian economist Vilfredo Pareto enunciated one of the
most universal and powerful law which now has found
enormous applications in the design of cost effective
management control.
It says that in a large number, a characteristic tends to be
maldistributed (unevenly distributed) so that we have
“significant few” and “insignificant many.”

It is also very popularly known as 20:80 rule. It enables a

manager to identify the “significant few” and give a more
thorough attention to these and may attend to “insignificant
many” in a less rigorous manner.

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ABC ANALYSIS

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SDE ANALYSIS

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FSN ANALYSIS

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HML ANALYSIS

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XYZ ANALYSIS

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STANDARDISATION

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 STANDARDIZATION
&
VARIETY REDUCTION
• A UNIFORM IDENTIFICATION OF
PRODUCT OR PROCESS THAT IS AGREED
UPON IS CALLED STANDARDIZATION
• STANDARDIZATION CAN BE OF THINGS
THEIR SIZE, SHAPE, COLOR, AND
PHYSICAL AND CHEMICAL PROPERTIES
& OPERATING PROCEDURES AND
SYSTEMS
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ADVANTAGES OF STANDARDIZATION
1. Simplification and variety reduction which reduces overall
costs and improves competitive advantage
2. Streamlines production process,
3. Consumers get the products certified by independent
national technical organization and get assurances on
quality and safety. BIS certification can help firming up a
contract.
4. Exporters are exempted from pre-shipment inspection
whenever admissible and reduction in inspection efforts.
5. Overseas buyers are assured of quality as per BIS standard
and free replacement of substandard goods.
6. Reduced variety lowers purchasing, receiving, inspection,
and stockholding costs, lower inventory carrying costs
reduce lead times and further reduce inventory levels
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THANKS
FOR
PATIENCE HEARING