chapter 19-inventory mangement

Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat

Copyright © 2008, Dr Sudhindra Bhat

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INVENTORY MANAGEMENT

19

Chapter




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LEARNING OBJECTIVES

Define inventory management

List out components of inventory

Explain the motives for holding inventory

Identify the areas, objectives and need for balanced investment in inventory

Highlight costs, risks and benefits of holding inventory

Explain the techniques of inventory management



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Inventory Management Motives

The Transaction Motive: Transaction motive includes production of goods and

sale of goods. Transaction motive facilitates uninterrupted production and

delivery of order at a given time (right time).

The Precautionary Motive: This motive necessitates the holding of inventories

for unexpected changes in demand and supply factors.

The Speculative Motive: This compels to hold some inventories to take the

advantage of changes in prices and getting quantity discounts.



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Objectives of Inventory Management

Ensure a continuous supply of raw materials to facilitate uninterrupted production

Maintain sufficient stock of raw materials in periods of short supply and anticipate

price changes

Maintain sufficient finished goods inventory for smooth sales operations and

efficient customer service

Minimise the inventory costs

Control inventory investment by maintaining optimum inventory



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Nature of Inventory

Stocks of manufactured products and the material that make up the product.

Components:

raw materials

work-in-process

finished goods

stores and spares (supplies)

consumables



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Need for Inventories

Transaction motive

Precautionary motive

Speculative motive



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Inventory Investment Analysis

Estimation of incremental operating profit

Estimation of incremental investment in inventory

Estimation of the incremental rate of return (IRR)

Comparison of the incremental rate of return with the required rate of return (RRR)

Optimum inventory:

IRR = RRR



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Tools and Techniques of Inventory Management / Control

(1). ABC Analysis

(2). Economic Order Quantity (EOQ)

(3). Order Point Problem.

(4). Two-Bin Technique

(5). VED Classification

(6). HML Classification

(7). SDE Classification

(8). FSN Classification

(9). Order Cycling System

(10). Just in Time (JIT)



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Selective Inventory Control

ABC analysis

classify inventory into three categories according to value

control by importance and exception: maximum attention to “A” items



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Inventory Management Techniques

Economic order quantity (EOQ)

ordering costs: requisitioning, order placing, transportation, receiving, inspecting

and storing, administration

carrying costs: warehousing, handling, clerical and staff, insurance, depreciation

and obsolescence

ordering and carrying costs trade-off:

2EOQ =

AO

c



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Inventory Management Process

Explicitly state the inventory policy

Create an inventory monitoring cell

Management group for controlling purchases

Periodic meetings between purchase, materials planning and production

executives

Monthly reviews of total inventory at plant/corporate level

Dovetail inventory control to the total budgeting system

Identify critical inventory items for closer scrutiny

chapter 19-inventory mangement

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