INVENTORY MANGAEMENT

AUTHOR:Miss Chanchal Gupta Mobile: 09975124097 RCOEM MBA semester-II (shift-A) Email id: chanchal.gupta1911@gmail.com SHRI RAMDEOBABA COLLEGE OF ENGINEERING AND MANAGEMENT

ABSTRACT Tha aim of this paper is to help you to understand the concept, scope, importance, techniques and effects of inventory management. Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished.Inventory management is the process of efficiently overseeing the constant flow of units into and out of an existing inventory. This process usually involves controlling the transfer in of units in order to prevent the inventory from becoming too high, or dwindling to levels that could put the operation of the company into jeopardy. Scope: - The scope of inventory management concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Objective:-The objectives of inventory management is to ensure that the supply of raw material & finished goods will remain continuous, minimise carrying cost of inventory,keep investment in inventory at optimem level,reduce the losses of theft, obsolescence & wastage, make arrangement for sale of slow moving items,minimise inventory ordering costs. Techniques:-Techniques of inventory mangement are ABC Analysis, EOQ model; Re-order level, Safety Stock, Quality discount Importance:-Inventory management is vital for a business because an inventory very often incurs the biggest expense, and so it needs to be carefully controlled in order for the business to run effectively. Having the wrong inventory, or too much inventory can deplete resources to dangerous levels, so by managing it efficiently, the business will be aware of what stock they need to replenish and what needs to be shifted.

INTRODUCTION Inventory management is primarily about specifying the shape and percentage of stocked goods. It is required at different locations within a facility or within many locations of a supply network to precede the regular and planned course of production and stock of materials. Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. It also involves systems and processes that identify inventory requirements, set targets, provide replenishment techniques, report actual and projected inventory status and handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. It also may include ABC analysis, lot tracking, cycle counting support, etc. Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution system, functions to balance the need for product availability against the need for minimizing stock holding and handling costs. INVENTORY MANAGEMENT must tie together the following objectives, to ensure that there is continuity between functions: Companys Strategic Goals Sales Forecasting Sales & Operations Planning Production & Materials Requirement Planning. Inventory Management must be designed to meet the dictates of market place and support the companys Strategic Plan. The many changes in the market demand, new opportunities due to worldwide marketing, global sourcing of materials and new manufacturing technology means many companies need to change their Inventory Management approach and change the process for Inventory Control. Inventory Management system provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities and communicate with customers. Inventory Management does not make decisions or manage operations; they provide the information to managers who make more accurate and timely decisions to manage their operations.

There are three basic reasons for keeping an inventory: 1. Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this "lead time." However, in practice, inventory is to be maintained for consumption during 'variations in lead time'. Lead time itself can be addressed by ordering that many days in advance. 2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. 3. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory. All these stock reasons can apply to any owner or product. Scope of inventory management The scope of inventory management concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods, and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment. The Inventory Management discipline encompasses all system and data network elements from the mainframe to the server level throughout the enterprise. All mainframe and data network based hardware and software assets must be identified and entered into the Inventory System. Any changes to these environments must be reflected in the Inventory System. Financial and technical product information must be available through the Inventory System, as needed to support the functional responsibilities of personnel within the finance and contracts management departments.

Asset criticality must be included with asset descriptive and financial information, so that the Recovery Management department is supplied with the information it requires. Recovery actions must be implemented to safeguard critical assets. Asset status must be included in the Inventory Management system, so that the component(s) can be serviced in adherence to legal, environmental, business, and industry requirements. This process should be used to drive the facilities management department via form routing when components change status from active to redeploy, donate, and terminate, of scrap. An audit trail of activities associated with equipment status changes and associated actions must be maintained to certify actions and eliminate legal and civil exposures. Process of inventory management The process of Inventory Management receives input from Systems Management Controls (SMC) disciplines and other functions within the I/S organization as well as other areas throughout the enterprise.The vehicle used to control the Inventory Management discipline is Change Management. Without adequate Change Management the integrity of an Inventory Management process cannot be ensured. These SMC disciplines and functions encompass

both system and data network elements and feed the Configuration Management discipline.Inventory Management inputs can come from either the Network or System area and can include a variety of input methods: 1. Network: The Network area must account for new acquisitions installed into the configuration. Because the complexity of todays networks makes tracking new acquisitions difficult, it is advisable that tracking be accomplished through the use of discovery type applications which monitor and interrogate asset changes automatically. This

type of tracking would capture vital product data (VPD), or perform product identification which is generally imbedded on PC-type products by the manufacturer.

2. System: Within the system area changes to the physical environment are systematically reported through the integrated change process. This discipline incorporates all

hardware and software reconfigurations or updates. All inputs to the centralized data base will be subject to the change process. The following page contains an overview of the Inventory Management process.

Inventory Management Process

Inventory management flow:

TECHNIQUES OF INVENTORY MANAGEMENT As in the case of any other current assets, the decision making in inventory involves a basic trade-off between risk & return. The risk is that if the level of inventory is very low, the various functions of the business do not operate independently. The return results because lower level of inventroy saves money. As the size of the inventory increases, the shortage and other costs also rise. Therefore, as the level of inventory increases, the risk running out of the inventory decreases but the cost of carrying inventory increases. Out of different current assets being maintained by the firm, inventor inventory increases, the risk running out of the inventory decreases but the cost of carrying inventory increases. Out of different current assets being maintained by the firm, inventory is one which requires to be monitered and managed not only in terms of money value but also in terms of nunber of physucal unit. Moreover since the investment in inventories is the least liquid of all the current assets, any error in its management cannot be readily rectified and hence may be costly to the firm. The goal of inventory management should therefore be established a level. There are various techniques to deal with inventory management. Some of the techniques are as follows:

ABC analysis: The ABC analysis is based on the propositions that: (i) (ii) Managerial time and efforts are scarce and limited. Some items of the inventory are more important than other.

It classifies various inventory items into three sets of groups according to the priority and according to the priority the managerial efforts are provided. The most important items are classified in class A, the items of intermitant imprtance is classified in class B, and rest of the items are classified in class C. Major attention is required by the items present in class A followed by class B & the least to class C. In ABC analysis, the different items may be placed in different groups as follows: 1. Different items are given priority order on the basis of total value of annual consumption. Items with the highest value are given highest priority and so on.the annual consumption value of all the items, already arranged in priority order, are then shown in cumalitive terms in each and evey item. 2. The running cumalative tataols of the annual value of consumption are expressed as a percentage of tatal value consumption. 3. Then these cumulative percentage of comsumption values are divided into 3 catagories i.e., A, B and C. Usually, class A consist of items having cumulative percentage value of 60 to 70 % ; group B consists of 20 to 25% and remaining items are placed in group C. Under ABC analysis an item included in the group on the basis of attention it requires. The Abc analysis helps in allocating managerial efforts in proportion to the improtance ot various items of inventory. The ABC analysis can be presented graphically to have visual

of importance of different items. Graphical presentation of ABC analysis is as follows:

Economic order quantity model: Economic order quantity is the order quantity that minimizes total inventory holding costs and ordering costs. It is one of the oldest classical production scheduling models. The framework used to determine this order quantity is also known as Wilson EOQ Model or Wilson Formula. The model was developed by Ford W. Harris in 1913, but R. H. Wilson, a consultant who applied it extensively, is given credit for his in-depth analysis. EOQ applies only when demand for a product is constant over the year and each new order is delivered in full when inventory reaches zero. There is a fixed cost for each order placed, regardless of the number of units ordered. There is also a cost for each unit held in storage, sometimes expressed as a percentage of the purchase cost of the item. We want to determine the optimal number of units to order so that we minimize the total cost associated with the purchase, delivery and storage of the product. The required parameters to the solution are the total demand for the year, the purchase cost for each item, the fixed cost to place the order and the storage cost for each item per year.

Note that the number of times an order is placed will also affect the total cost, though this number can be determined from the other parameters. Assumptions related to EOQ model are:1. The ordering cost is constant. 2. The rate of demand is known, and spread evenly throughout the year. 3. The lead time is fixed. 4. The purchase price of the item is constant i.e. no discount is available 5. The replenishment is made instantaneously; the whole batch is delivered at once. 6. Only one product is involved. EOQ is the quantity to order, so that ordering cost + carrying cost finds its minimum

Q = order quantity Q * = optimal order quantity D = annual demand quantity S = fixed cost per order (not per unit, typically cost of ordering and shipping and handling. This is not the cost of goods)

H = annual holding cost per unit (also known as carrying cost or storage cost) (warehouse space, refrigeration, insurance, etc. usually not related to the unit cost)

The single-item EOQ formula finds the minimum point of the following cost function: Total Cost = purchase cost + ordering cost + holding cost - Purchase cost: This is the variable cost of goods: purchase unit price annual demand quantity. This is PD - Ordering cost: This is the cost of placing orders: each order has a fixed cost S, and we need to order D/Q times per year. This is S D/Q - Holding cost: the average quantity in stock (between fully replenished and empty) is Q/2, so this cost is H Q/2

To determine the minimum point of the total cost curve, set the ordering cost equal to the holding cost:

Solving for Q gives Q* (the optimal order quantity):

Therefore:

Q* is independent of P; it is a function of only S, D, H. Graphical repesentation of EOQ model is:

Reorder level: The Re-Order level is the point at which stock on a particular item has diminished to a point where it needs to be replenished. The Re-Order level takes into account the following:

The ongoing usage of the Item The lag time between the point at which stock is ordered and the time in which it is delivered.

Optionally, a level of 'Safety Stock' to cover instances where the normal delivery leadtime has not been met.

Safety stock or minimum inventory level: Safety stock also known as buffer stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts (shortfall in raw material or packaging) due to uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans. Safety stock is held when there is uncertainty in the demand level or lead time for the product; it serves as an insurance against stockouts. With a new product, safety stock can be utilized as a strategic tool until the company can judge how accurate their forecast is after the first few years, especially when used with a material requirements planning worksheet. The less accurate the forecast, the more safety stock is required. With material requirements planning (MRP) worksheet a company can judge how much they will need to produce to meet their forecasted sales demand without relying on safety stock. However, a common strategy is to try and reduce the level of safety stock to help keep inventory costs low once the product demand becomes more predictable. This can be extremely important for companies with a smaller financial cushion or those trying to run on lean manufacturing, which is aimed towards eliminating waste throughout the production process.

The amount of safety stock an organization chooses to keep on hand can dramatically affect their business. Too much safety stock can result in high holding costs of inventory. In addition, products which are stored for too long a time can spoil, expire, or break during the warehousing process. Too little safety stock can result in lost sales and, thus, a higher rate of customer turnover. As a result, finding the right balance between too much and too little safety stock is essential. Safety stocks are mainly used in a "Make To Stock" manufacturing strategy. This strategy is employed when the lead time of manufacturing is too long to satisfy the customer demand at the right cost/quality/waiting time. The main goal of safety stocks is to absorb the variability of the customer demand. Indeed, the Production Planning is based on a forecast, which is (by definition) different form the real demand. By absorbing these variations, safety stock improves the customer service level. By creating a safety stock, you will also prevent stock-outs from other variations:

an upward trend in the demand A problem in the incoming product flow (machinery breakdown, supplies delayed, strike etc.

Just-in-time inventory (JIT): Just in time (JIT) is a production strategy that strives to improve a business return on investment by reducing in-process inventory and associated carrying costs. If implemented correctly, JIT focuses on continuous improvement and can improve a manufacturing organization's return on investment, quality, and efficiency. To achieve continuous improvement key areas of focus could be flow, employee involvement and quality. Quick notice that stock depletion requires personnel to order new stock is critical to the inventory reduction at the center of JIT. This saves warehouse space and costs. JIT is a mordern approach to inventory management and the goal is essentially to minimize the invnetory carrying large cost and are costly to maintain and ultimately maximising the profits. The bsic philosophy of JIT is simple: inventory is waste. JIT inventory systems expose hidden cost of keeping inventory, and are therefore not a simple solution for a company to adopt. The company must follow an array of new methods to manage the consequences of the

change. The ideas in this way of working come from many different disciplines including statistics, industrial engineering, production management, and behavioral science. The JIT inventory philosophy defines how inventory is viewed and how it relates to management. Inventory is seen as incurring costs, or waste, instead of adding and storing value, contrary to traditional accounting. This does not mean to say JIT is implemented without an awareness that removing inventory exposes pre-existing manufacturing issues. This way of working encourages businesses to eliminate inventory that does not compensate for manufacturing process issues, and to constantly improve those processes to require less inventory. Secondly, allowing any stock habituates management to stock keeping. Management may be tempted to keep stock to hide production problems. These problems include backups at work centers, machine reliability, and process variability, lack of flexibility of employees and equipment, and inadequate capacity. In short it means right material at right place at right time and in right quantity Main benefits of JIT include:

Reduced setup time. Cutting setup time allows the company to reduce or eliminate inventory for "changeover" time. The tool used here is SMED (single-minute exchange of dies).

The flow of goods from warehouse to shelves improves. Small or individual piece lot sizes reduce lot delay inventories, which simplifies inventory flow and its management.

Employees with multiple skills are used more efficiently. Having employees trained to work on different parts of the process allows companies to move workers where they are needed.

Production scheduling and work hour consistency synchronized with demand. If there is no demand for a product at the time, it is not made. This saves the company money, either by not having to pay workers overtime or by having them focus on other work or participate in training.

Increased emphasis on supplier relationships. A company without inventory does not want a supply system problem that creates a part shortage. This makes supplier relationships extremely important.

Supplies come in at regular intervals throughout the production day. Supply is synchronized with production demand and the optimal amount of inventory is on hand

at any time. When parts move directly from the truck to the point of assembly, the need for storage facilities is reduced.

Minimizes storage space needed. Smaller chance of inventory breaking/expiring.

Inventory control: Managing a business is not an easy task. One of the most important tasks of entrepreneurs and businessmen is controlling their stocks. Inventory control, otherwise known as Stock Control, is the management of stocks and maintaining the balance of expenses and profits by keeping stocks on hand. The importance of having items on hand is crucial to the success of every business because demands may arise in any situation. Knowing how the quantity of the items to be stored and implementing a good control of inventory can help entrepreneurs maximize their profits. It is very important for businessmen and entrepreneurs to full understand the related costs in having stocks on hand, running out of stocks and when to place orders in order to obtain the right formula and create the best inventory management scheme for the business.Keeping an unlimited supply of goods is next to impossible and it is not the best option for keeping items available whenever needed. Not all businesses can make great profits to buy unlimited goods to keep their inventories large. Another reason is not all goods can be stored without losing their quality. The cost of purchasing items and the storage costs to keep the items in good condition are not always profitable and in most cases, can make businesses lose huge profits. However, supply shortage is inevitable and the need to stock up on goods will always be necessary. Entrepreneurs must know when to purchase and the quantity to be purchased, plus the additional costs of storage. In some situations, when entrepreneurs are too cautious about losing profit by stocking up on goods, the business may encounter frequent out-of-stock incidents that can cause negative impacts on the business. An effective inventory control scheme is necessary to ensure that out-of-stock incidents are minimized and unwanted profit losses are avoided. Businesses must not always expect that out-of-stock incidents will be rare occasions; once it occurs, it is about time to revise the inventory management scheme. If an effective plan is carried out, the business can avoid shortage, save more money and earn higher profits. Another important concept in controlling inventory is the re-order point, which refers to the time when new stocks are purchased and stored. Based on the business needs and demands of the clients, entrepreneurs can make a prediction of the best time when to do the re-ordering of goods. The time between two orders

must not be very short to ensure that the storage room will not run out of space, keep goods in their best conditions and avoid possible financial losses due to either shortage or surplus of goods. Determining the perfect time to do the re-ordering will require a businessman to know the timeframe of delivery and the right amount of quantities needed by the business by the time it arrives. In addition, the overhead costs, miscellaneous fees and shipping expenses of ordering small quantities versus ordering large quantities must carefully evaluated to ensure that the re-ordering point will be highly beneficial to the business. Businessmen and entrepreneurs must keep in mind that inventory control plays a vital role in managing a business. An efficient scheme for controlling goods can save a businessman from unnecessary trouble and can help him save and earn a lot of money. Moreover, the pleasant feeling of satisfying the needs of customers and earning their loyalty is the best part of running the business through effective control of inventory. High level inventory management It seems that around 1880 here was a change in manufacturing practice from companies with relatively homogeneous lines of products to horizontally integrated companies with unprecedented diversity in processes and products. Those companies (especially in metalworking) attempted to achieve success through economies of scope - the gains of jointly producing two or more products in one facility. The managers now needed information on the effect of product-mix decisions on overall profits and therefore needed accurate product-cost information. A variety of attempts to achieve this were unsuccessful due to the huge overhead of the information processing of the time. However, the burgeoning need for financial reporting after 1900 created unavoidable pressure for financial accounting of stock and the management need to cost manage products became overshadowed. In particular, it was the need for audited accounts that sealed the fate of managerial cost accounting. The dominance of financial reporting accounting over management accounting remains to this day with few exceptions, and the financial reporting definitions of 'cost' have distorted effective management 'cost' accounting since that time. This is particularly true of inventory.Hence, high-level financial inventory has these two basic formulas, which relate to the accounting period: 1. Cost of Beginning Inventory at the start of the period + inventory purchases within the period + cost of production within the period = cost of goods available

2. Cost of goods available cost of ending inventory at the end of the period = cost of goods sold The benefit of these formulae is that the first absorbs all overheads of production and raw material costs into a value of inventory for reporting. The second formula then creates the new start point for the next period and gives a figure to be subtracted from the sales price to determine some form of sales-margin figure.Manufacturing management is more interested in inventory turnover ratio or average days to sell inventory since it tells them something about relative inventory levels. Inventory turnover ratio (also known as inventory turns) = cost of goods sold / Average Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2) And its inverse is: Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio = 365 days a year / Inventory Turnover Ratio This ratio estimates how many times the inventory turns over a year. This number tells how much cash/goods are tied up waiting for the process and is a critical measure of process reliability and effectiveness. So a factory with two inventory turns has six months stock on hand, which is generally not a good figure (depending upon the industry), whereas a factory that moves from six turns to twelve turns has probably improved effectiveness by 100%. This improvement will have some negative results in the financial reporting, since the 'value' now stored in the factory as inventory is reduced.While these accounting measures of inventory are very useful because of their simplicity, they are also fraught with the danger of their own assumptions. There are, in fact, so many things that can vary hidden under this appearance of simplicity that a variety of 'adjusting' assumptions may be used. These include Specific Identification, Weighted Average Cost, Moving-Average Cost, FIFO and LIFO.Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily a management tool. Inventory management should be forward looking. The methodology applied is based on historical cost of goods sold. The ratio may not be able to reflect the usability of future production demand, as well as customer demand.Business models, including Just in Time (JIT) Inventory, Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI), attempt to minimize on-hand inventory and increase inventory

turns. VMI and CMI have gained considerable attention due to the success of third-party vendors who offer added expertise and knowledge that organizations may not possess. FIFO: FIFO is an acronym for First In, First Out, an abstraction related to ways of organizing and manipulation of data relative to time and prioritization. This expression describes the principle of a queue processing technique or servicing conflicting demands by ordering process by first-come, first-served (FCFS) behaviour: where the persons leave the queue in the order they arrive, or waiting one's turn at a traffic control signal. FCFS is also the jargon term for the FIFO operating system scheduling algorithm, which gives every process CPU time in the order they come. In the broader sense, the abstraction LIFO or Last-In-First-Out is the opposite of the abstraction FIFO organization. The difference perhaps is clearest with considering the less commonly used synonym of LIFO, FILO (meaning First-In-Last-Out). In essence, both are specific cases of a more generalized list (which could be accessed anywhere). The difference is not in the list (data), but in the rules for accessing the content. One sub-type adds to one end, and takes off from the other, its opposite takes and puts things only on one end.A slang variation on an ad-hoc approach to removing items from the queue has been coined as OFFO, which stands for On-Fire-FirstOut. A priority queue is a variation on the queue which does not qualify for the name FIFO, because it is not accurately descriptive of that data structure's behavior. Queueing theory encompasses the more general concept of queue, as well as interactions between strict-FIFO queues. LIFO: LIFO, which stands for "last-in-first-out," is an inventory costing method which assumes that the last items placed in inventory are the first sold during an accounting year. Thus, the inventory at the end of a year consists of the goods placed in inventory at the beginning of the year, rather than at the end. LIFO is one method used to determine Cost of Goods Sold for a business. HIFO:

In accounting, an inventory distribution method in which the inventory with the highest cost of purchase is the first to be used or taken out of stock. This will impact the company's books such that for any given period of time, the inventory expense will be the highest possible. Advantages of inventory management Inventory is necessary for many businesses including retail and manufacturing facilities. Maintaining appropriate inventory levels is crucial, as too much inventory can be costly. An inventory management system helps to control and balance the flow of incoming and outgoing merchandise. For most businesses, a strong inventory management system is advantageous for several reasons. 1. Supply and Demand: Having an adequate supply of a particular product to meet customer demand is crucial to both sales increases and customer service. If a customer comes to a business to purchase a product and it is out of stock, the sale is lost forever and the customer will probably go to a competitor to find what they need. A good inventory management system, whether computerized or manual, will identify sales trends and prepare for customer needs. 2. Streamline Operations: Manufacturing facilities should always maintain proper inventory of the supplies necessary to produce their products. If one component is missing from the inventory, the whole production process is interrupted. Streamlined operations are an important benefit of an effective inventory management system. 3. Lead Time Adjustments: Inventory management systems are important for determining when to order certain items, especially for products with varying lead times. Some products take longer to receive from the manufacturer than others, and its important to have an inventory management system that accounts for lead time. If for example, a grocery store was going to have a sale on hotdogs, relish and mustard, but the hotdogs took longer than

three days to receive while the condiments took five days, the inventory management system would need to ensure that all items were in stock in time for the sale. 4. Reduce Liabilities: Another significant advantage to an inventory management system is it reduces the liabilities and loss created by overstock. Similar to monitoring supply and demand, a good inventory management system will notice declines in sales or identify one-time occurrences to prevent over-ordering certain products. For instance, if a clothing store was having a sale on a certain style of jeans, it may order additional stock to meet customer demands. The inventory management system should take the sale into account before ordering more of the jeans based on the spike in sales. Otherwise, they store may have to offer even deeper discounts to get rid of the excess inventory. Disadvantages of inventory management: The cost of maintaining the inventory control system (ICS) is based on the number of items managed, how many transactions are performed, and whether the inventory control system is tied to a resource planning system. The ICS is a module within many Enterprise Resource Planning software applications. 1. Inventory Diversity Drives up Costs: Businesses with 100,000 products require about ten times as many database entries as a business with only 10,000 products. This fact alone drives up the set up cost of an inventory control system. Furthermore, more types of items in inventory results in greater costs to maintain the inventory control system. This disadvantage of an inventory control system may be mitigated by bulk loading of part data into the ICS database. However, the information on those parts must still be reviewed, verified and kept up to date. 2. Inventory Turnover Drives up Cost: Each stock pull or entry into stock requires a record within the inventory control system. As more orders and inventory pulls that are done, more transactions that must be performed. This disadvantage of an inventory control system may be partially

mitigated with bar-code scanners, radio frequency identifiers and other means of digitally capturing lot information and quantity as items are pulled from the inventory. However, the cost of this solution is another disadvantage of using an inventory control system. 3. Inventory Control Systems and Accounting: Each accounting work order is tied to a customer contract or to overhead. Inventory control systems, especially when part of a material requirements planning or material resource planning system, can be tied to accounting databases. This allows each material item to be charged to the customer work order when pulled from inventory. Inventory control accuracy or availability may now be impacted by errors in accounting. If the accounting work order is closed by mistake, the stock pullers will be denied permission to use the part or have to contact accounting or technical support to have the problem resolved. 4. Inventory Control By The Inventory Control System May Hurt the Product: Inventory control systems can plan order dates, the stock overage to be ordered, and the time parts are to be pulled from stock. Inventory control systems also allow this information to be input by part, by part family, by top level assembly and even by company standard. If the inventory manager knows that a part has a 10 percent failure rate, he may input a 10 percent stock overage so that 110 are ordered to build 100 good products. If an accountant over-rides that with a 5 percent overage value for all orders, production may suffer. Case study Dell low inventory:low inventory has such a great effect on Dell's overall performance. The reason is quite simple: computers depreciate at a very high rate. Sitting in inventory, a computer loses a ton of value. As Dell's CEO, Kevin Rollins, put it in an interview with Fast Company: The longer you keep it the faster it deteriorates -- you can literally see the stuff rot," he says. "Because of their short product lifecycles, computer components depreciate anywhere from a half to a full point a week. Cutting inventory is not just a nice thing to do. It's a financial imperative."

The assumption is that the depreciation is a full point per week (1%/week) and uses that to determine how much money high inventory turns can save Dell. This means that for every 7 days a computer sits in Dell's warehouses, the computer loses 1% of its value. inventory turnover 4.79 5.16 9.4 9.8 24.24 1.7 52.4 52.4 51.4 63.5 week's inventory 10.856 10.078 5.532 5.306 2.149 1.247 0.992 0.992 1.012 0.819

year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Keep a point to notice here that Dell was carrying over 10 weeks worth of inventory in 1993. By 2001, Dell was carrying less than 1 week's worth of inventory. This essentially means that inventory used to sit around for 11 weeks and now it sits around for less than 1 week. It is known to everyone that computers lose 1 percent of their value per week. This isn't like the canned food industry where managers can let their supplies sit around for months before anyone bats an eye. Computers arent canned goods, and as Kevin Rollins of Dell put it, computers rot. The longer a computer sits around, the less it is worth. That said, due to depreciation alone, in 1993 Dell was losing roughly 10% per computer just by allowing computers to sit around before they were sold. In 2001, Dell was losing less than a percent. Based on holding costs alone, Dell reduced costs by nearly 9%. Since 2001, Dell has continueed to lower inventory. Conclusion Thus inventory management is very essential for any organisation because it helps in supply and demand, to streamline operations, for adjustments in lead time and reduces the liabilities. It should be done by people having expertise lest it can lead to Inventory Diversity Drives up Costs, in Inventory Turnover Drives up Cost, Inventory Control Systems and Accounting and Inventory Control by the Inventory Control System May Hurt the Product. As the size and complexities of an organisation increases the importance of inventory management can be realized and associated with each and every department of the organization. Excess inventory is like a leech the slowly sucks resources and money out of a business. Thus the importance of inventory management and with change in business environment there is a need to follow the most suitable technique for inventory management.

References 1. Financial management by Rustagi. 2. Operations management by Russell and Taylor. 3. Financial management by Khan & Jain. 4. Essentials of inventory management by Max Muller.