LECTURE NO: 2

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TITLE: Study of Inventory Management

Definition of Inventory Management:

Inventory management is primarily about specifying the size and placement of stocked
goods. Inventory management is required at different locations within a facility or within
multiple locations of a supply network to protect the regular and planned course of
production against the random disturbance of running out of materials or goods.
Scope of Inventory Management

1. Replenishment Lead Time: We can supply the order immediately after use of product
or shortage of product is occurred in company. We can minimize the lead time by
meeting production needs immediately.

2. Carrying Costs of Inventory: We can minimize the holding cost of inventory in

godowns by stocking goods in bulk quantity.

3. Asset Management: We can manage the second largest asset of company by storing
goods in efficient manner.

4. Inventory Forecasting: We can forecast demand of production through stocking of

material.

5. Inventory Valuation :We can evaluate the inventory material when demand and price
of product is rises in the market

6. Physical Inventory :We can maintain actual stock and avoid discrepancies/Theft
happened in godowns

7. Quality Management: We can provide qualitative goods and materials to production

department.

8. We can meet delivery commitments of suppliers or vendors

9. Record keeping helps in avoiding theft in godown. It also helps in price forecasting of
goods and products.
Objectives of Inventory Management:
A. Operating Objectives
a) Uninterrupted Supply of Materials : The inventory control has to ensure the
provision of the required quantity of material of the required quality at the required

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 time with the minimum amount of capital. For this, there should be proper control
with the time orders are placed with the suppliers till the materials have been
effectively utilised in production. This requires efficient purchasing, storing,
consumption and accounting of materials.
b) Uninterrupted Productions: Inventory of raw materials and spares should be
maintained at such a level so that smooth and uninterrupted production is ensured
without obstructions.
c) To Minimize the Risks and Losses: The firm should try, to the extent possible, to
minimize the possibility of risk and losses due to stock out obsolescence,
deterioration, pilferage, th , waste and unauthorized use.
d) Better Customer Services: Holding adequate stock of finished goods at reasonable
level is the objective of inventory management. This ensures timely execution of
orders from the customers.
e) Avoiding Stock-Out Danger: Information about availability of materials or finished
goods should be made available to the management so that planning for procurement
at right time can be done by it. If inventories are maintained at the optimum level
keeping in view the operational requirements, the danger of stock out is eliminated.

B. Financial objectives
a) To Minimize Capital Investment : Over-stocking of raw material and finished
goods results in unnecessary tied-up ofthe firm's funds and loss of profit. Investment
of funds in inventory costs in the form of opportunity cost and carrying cost. It
reduces the firm's profitability. Moreover, holding assets in the form of excessive
inventories for long period results in decrease in the liquidity of the firm. Therefore,
the objective of inventory control system in a manufacturing firm is to minimize the
funds tied-up in inventories.
b) Economies of Purchasing: A proper inventory control brings certain economies in
purchasing by taking quantity discount in bulk purchases or taking advantages of
favourable market conditions. But, while purchasing materials, it should be noted that
utility is not to be sacrificed at the cost of lower price.
c) Minimize Inventory Costs: The objective of inventory management is to minimize
the direct and indirect costs of holding inventories. This requires purchase of material
at such quantities where purchasing and carrying costs are minimum.
Symptoms of Poor Inventory Management:

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 1. Uneven production with overtime working
2. Disproportiate increase in inventory investment as compared to increase in sales
volume
3. Irregular economical production runs to meet sales target
4. Higher down time of machines and equipments
5. Frequent failure in delivery commitment
6. Backlog of orders
7. Frequent complaints from suppliers
8. Large scale discrepancies in physical stock
A. Solve the following questions:
1. Define Inventory Management. State its scope and objectives.
2. Explain components of Inventory.
3. State Symptoms of Poor Inventory Management.
B. Fill in the blanks.
1. --------------------------- is primarily about specifying the size and placement of stocked
goods.

2. -------------------------------maintain as a buffer stock to meet uncertain losses happened

during production or during natural calamities.

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