By Deepak kumar nayak (07318) Vaibhav Srivastava(07319)

Inventory
Inventory is a detailed list of those movable items which are necessary to manufacture a product and to maintain the equipment in good working condition. It includes: raw materials, finished products, component parts, supplies, work-in-process.

Inventory control
Inventory control is the technique of maintaining the size of the inventory at some desired level keeping in view the best economic interest of an organization. Inventory control concerns with achieving an optimum balance between two competing objectives. -to minimize investment in the inventory, -to maximize the service levels to the firms customers and its own operating departments.

Type of Inventory
(1)

Advantage for holding the Inventory

To reap the price advantage available on seasonal raw materials.

Raw materials

(2) Work in progress

To balance the production flow.

(3) Ready made components (4) Scraps

When the components are bought rather than made. They are disposal of in bulk.

(5) Finished Goods

Lying in stock rooms and waiting dispatches

Objectives of inventory control

Protection against fluctuations in demand;

Better use of men, machines and material;

Protection against fluctuations in output; Control of stock volume;

Control of stock distribution.

Major activities of inventory control

Planning the inventories Procurement of inventories Receiving and inspection of inventories Storing and issuing the inventories Recording the receipt and issues of inventories Physical verification of inventories Material standardization and substitution

Inventory Decisions
Basic issues while dealing with inventories; (a) How much of an item to order when the inventory of that item is to be replenished. (b) When to replenish the inventory of that item. By definition, inventory facilitate production or satisfy customer demands. Inventory system is a set of policies and controls which monitors and determines the levels of inventory. Operations is a transformation process in which the inputs are raw materials and output is the finished goods.

Steps in Inventory control

Deciding the maximum- minimum limits of inventory;

Determination of Reorder point;

Determination of reorder quantity; Perpetual inventory control;

ABC analysis;
Method of control through turn over.

Maximum stock level

Quantity of inventory above which should not be allowed to be kept. This quantity is fixed keeping in view the disadvantages of overstocking; Factors to be considered: Amount of capital available. Godown space available. Possibility of loss. Cost of maintaining stores; Likely fluctuation in prices; Seasonal nature of supply of material; Restriction imposed by Govt.; Possibility of change in fashion and habit.

Minimum stock level

This represents the quantity below which stocks should not be allowed to fall . The level is fixed for all items of stores and the following factors are taken into account: 1. Lead time 2.Rate of consumption of the material during the lead time.

Re-ordering level
It is the point at which if stock of the material in store

approaches, the store keeper should initiate the purchase requisition for fresh supply of material.

Economic Order Quantity

CONCEPT
Economic order quantity is the amount of raw material

purchased which results in the lowest cost per unit and is the most advantageous. In case of a bolts manufacturing unit which purchases steel bars, the Economic Order Quantity is optimum length of steel bars which permits lowest cost per unit.

QUANTITY STANDARDS
Maximum Quantity - It is the upper or maximum limit to

which inventory can be kept in the stores at any time. Minimum Quantity - It is the lower or minimum limit of the inventory which must be kept in the stores at any time. Standard Order - It is the difference between maximum and minimum quantity and it is known as the economical purchase inventory size. Reorder point - It indicates that it is high time to initiate a purchase order and if not done so the inventory may exhaust, and even reserve stock utilized before new order arrives.

QUANTITY STANDARDS
Requisition Time - It is the time taken to prepare

purchase requisition and placing the order. Procurement Time - It consists of three components ; a) Time taken to deliver purchase order to vendor. b) Time for vendor to prepare inventory. c) Time for the inventory to be dispatched from the vendors end and to reach the customer. Requisition Time and Procurement Time together are known as Lead Time.

ECONOMIC ORDER QUANTITY

Avg. working inventory Maximum Avg. inventory Reserve Stock

ABC Analysis
It is efficient control of stores requires greater in case of costlier items.
Item Quality Quantity order Checking

Costlier

Less

Regular system to see that there is no overstocking as well as that there is no danger of production being interrupted for unwanted material.

Less costlier

Order may be on Position being viewed review basis. in each month Larger Order in large quantity so that cost can be avoided

Economical

ABC Curve Analysis

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ECONOMIC ORDER QUANTITY

The lot size of the economic order quantity depends on two

types of costs 1. Inventory procurement costs ; a. Receiving quotations b. Following up and expediting purchase order c. Processing purchase requisition d. Receiving and then inspecting material e. Processing vendors invoice Procurement costs decrease as order quantity increases.

ECONOMIC ORDER QUANTITY

2. Carrying Costs ; a. Interest on capital investment b. Cost of storage facility c. Depreciation d. Cost of insurance, property tax etc.
Carrying costs are almost directly proportional to the order size.

ECONOMIC ORDER QUANTITY

MATHEMATICAL DERIVATION
Q C I P U EOQ Cost for one item Carrying cost Procurement cost Total quantity used per period

No. of purchase orders to be furnished = Total quantity/EOQ = U

Q

MATHEMATICAL DERIVATION
U .P Total Procurement cost = Q

Average annual inventory =

Q 2

Q.C.I Inventory carrying cost = 2 U .P Q.C.I Total Cost, T = Q + 2

To minimize cost , T is differentiated w.r.t Q and equated to zero. It yields the EOQ as 2.U .P Q= C .I