Mohammad Ali Jinnah University

GROUP MEMBERS

ABDUL NAVEED MB083009

EHSAN AFZAL MB083086

FAWAD IFTHIKAR MB083010

SUBMITTED TO:

FAIZ-UL-RHEMAN

DATE: 04/07/2011

INVENTORY MANAGEMENT

ACKNOWLEGMENT

Deepest thanks and gratitude to Almighty ALLAH, the most merciful, the most beneficent and

source of all knowledge and wisdom that enable and strengthen us to complete this projectreport.

We extend our deepest gratitude and profound regards to Mr. FAIZ-UL-RHEMAN who remain

a source of inspiration for us through her guidance and teaching.

Esteemed appreciation and recognition to our friends, colleagues and family for their support and

encouragement throughout this endeavor

Dedication

We dedicated this report to our beloved parents who always pray for our success. And also to our

project instructor MR.FAIZ-UL-RHEMAN who gave us opportunity to do this project and also

help us in doing that project.

1. Introduction…………………………………………………………………

1.1 Objective of the Study1.2 Meaning of inventory1.3 Nature of inventory1.4 Functions of Inventory1.5 Inventory management1.6Concept of inventory management1.7 Inventory Management Process

8. Literature

review………………………………………………….................

2. Inventory Counting

Systems…………………………………………….

2.1 Types of inventory system2.2 Inventory Cost

3. Objective of inventory

management……………………………………

4. Importance of inventory

management……………..................................

4.1 Advantages and disadvantages of inventory management

5. Essentials of inventory control

system……………..................................

6. Role of Manager in inventory

management……………………………

7. Data analysis………………………………………………………………..

7.1Classification System7.2 Method

9. Conclusion…………………………………………………………………...

INVENTORY MANAGEMENT

1. INTRODUCTION

1.1 Objective of the Study

Inventories constitute the principal item in the working capital of the majority of trading

and industrial companies. In inventory, we include raw materials, finished goods, work in

progress, supplies and other accessories. To maintain the continuity in the operations of business

enterprise, a minimum stock of inventory required.

However, the physical control of inventory is the operating responsibility of stores

superintendent and financial personnel have nothing to do about it but the financial control of

these inventories in all lines of activity in which they comprise a substantial part of the current

assets is a frequent problem in the management of working capital. Management of inventory is

designed to regulate the volume of investment in goods on hand, the types of goods carried in

stock to meet the needs of production and sales while at the same time, the investment in them is

to kept at a reasonable level.

1.2 Meaning of inventory

Inventory is the physical stoke of goods maintained in an organization for its smooth

sunning. In accounting language it may mean stock of finished goods only. In a manufacturing

concern, it may include raw materials, work-in-progress and stores etc. In the form of materials

or supplies to be consumed in the production process or in the rendering of services.

In brief, Inventory is unconsumed or unsold goods purchased or manufactured.

1.3 Nature of inventories

Inventories are stock of the product a company is manufacturing for sale and components that

make up the product. The various forms in which inventory exist in a manufacturing company

are raw materials, work in progress and finished goods.

Raw materials Raw materials are those inputs that are converted into finished product

though the manufacturing process. Raw materials inventories are those units which have

been purchased and stored for future productions.

Work in progress These inventories are semi manufactured products. They represent

products that need more work before they become finished products for sales.

Finished goods Finished goods inventories are those completely manufactured products

which are ready for sale. Stock of raw materials and work in progress facilitate

production. While stock of finished goods is required for smooth marketing operation.

Thus, inventories serve as a link between the production and consumption of goods.

The level of three kinds of inventories for a firm depends on the nature of its business. A

manufacturing firm will have substantially high levels of all three kinds of inventories, while a

retail or wholesale firm will have a very high and no raw material and work in progress

inventories. Within manufacturing firms, there will be differences. Large heavy engineering

companies produce long production cycle products, therefore they carry large inventories. On the

other hand, inventories of a consumer product company will not be large, because of short

production cycle and fast turn over. Firms also maintain a fourth kind of inventory, supplies or

stores and spares.

1.4 Functions of Inventory

1. To meet anticipated customer demand. These inventories are referred to as anticipation

stocks because they are held to satisfy planned or expected demand.

2. To smooth production requirements. Firms that experience seasonal patterns in

demand often build up inventories during off-season to meet overly high requirements

during certain seasonal periods. Companies that process fresh fruits and vegetable deal

with seasonal inventories

3. To decouple operations. The buffers permit other operations to continue temporarily

while the problem is resolved. Firms have used buffers of raw materials to insulate

production from disruptions in deliveries from suppliers, and finished goods inventory to

buffer sales operations from manufacturing disruptions.

4. To protect against stock-outs. Delayed deliveries and unexpected increases in demand

increase the risk of shortages. The risk of shortages can be reduced by holding safety

stocks, which are stocks in excess of anticipated demand.

5. To take advantage of order cycles. Inventory storage enables a firm to buy and produce

in economic lot sizes without having to try to match purchases or production with

demand requirements in short run.

6. To hedge against price increase. The ability to store extra goods also allows a firm to

take advantage of price discounts for large orders.

7. To permit operations. Production operations take a certain amount of time means that

there will generally be some work-in-process inventory.

1.5 Inventory management

Inventory management refers to the process of managing the stocks of finished products,

semi-finished products and raw materials by a firm. Inventory management, if done properly, can

bring down costs and increase the revenue of a firm. In simple words inventory management can

be described as an activity of planning a inventory control policy, implement that policy and

controlling it that help the organization in a achieving its goals in a sufficient manner.

Inventory management, or inventory control, is an attempt to balance inventory needs and

requirements with the need to minimize costs resulting from obtaining and holding inventory.

There are several schools of thought that view inventory and its function differently. These will

be addressed later, but first we present a foundation to facilitate the reader's understanding of

inventory and its function

1.6 Concept of inventory management

The term inventory management is used in two ways- unit control and value control.

Production and purchase officials use this word in term unit control whereas in accounting this

word is used in term of value control. As investment in inventory represents in many cases, one

of the largest asset items of business enterprises particularly those engaged in manufacturing,

wholesale trade and retail trade. Sometimes the cost of material used in production surpasses the

wages and production overheads. Hence, the proper management and control of capital invested

in the inventory should be the prime responsibility of accounting department because resources

invested in inventory are not earning a return for the company. Rather, on the other hand, they

are costing the firm money both in terms of capital costs being incurred and loss of opportunity

income that is being foregone.

The reasons for keeping stock

All these stock reasons can apply to any owner or product stage.

Buffer stock is held in individual workstations against the possibility that the upstream

workstation may be a little delayed in providing the next item for processing. Whilst

some processes carry very large buffer stocks, Toyota moved to one (or a few items) and

has now moved to eliminate this stock type.

Safety stock is held against process or machine failure in the hope/belief that the failure

can be repaired before the stock runs out. This type of stock can be eliminated by

programmers like Total Productive Maintenance

Overproduction is held because the forecast and the actual sales did not match. Making to

order and JIT eliminates this stock type.

Lot delay stock is held because a part of the process is designed to work on a batch basis

whilst only processing items individually. Therefore each item of the lot must wait for the

whole lot to be processed before moving to the next workstation. This can be eliminated

by single piece working or a lot size of one.

Demand fluctuation stock is held where production capacity is unable to flex with

demand. Therefore a stock is built in times of lower utilization to be supplied to

customers when demand exceeds production capacity. This can be eliminated by

increasing the flexibility and capacity of a production line or reduced by moving to item

level load balancing.

Line balance stock is held because different sub-processes in a line work at different

rates. Therefore stock will accumulate after a fast sub-process or before a large lot size

sub-process. Line balancing will eliminate this stock type.

Changeover stock is held after a sub-process that has a long setup or change-over time.

This stock is then used while that change-over is happening. This stock can be eliminated

by tools like SMED.

Where these stocks contain the same or similar items it is often the work practice to hold

all these stocks mixed together before or after the sub-process to which they relate. This

'reduces' costs. Because they are mixed-up together there is no visual reminder to

operators of the adjacent sub-processes or line management of the stock which is due to a

particular cause and should be a particular individual's responsibility with inevitable

consequences. Some plants have centralized stock holding across sub-processes which

makes the situation even more acute.

1.7 Inventory Management Process:

This process allows users to manage all the Materials/items purchased, manufactured, sold, or

kept in stock. For each Material item, users enter the data relevant for a particular area in the

system. This data is used automatically by the system for purchasing, sales, production,

inventory management, accounting and etc...

It provides optimum support for business. Helps create orders, delivery notes, and outgoing

invoices, automatically calculating prices, sales units, and gross profit. Enables complete control

over stock quantities at all times and lets users analyze the financial aspects of stockholding at

the same time. Allows users to control production on the basis of the items that are used for

production and on the basis of the finished product and any by-products created.

Requirements for Effective Inventory Management

To be effective, management must have the following:

A system to keep track of the inventory on the hand on order.

A reliable forecast of demand that includes an indication of possible forecast error.

Knowledge of lead times and lead time variability.

Reasonable estimates of inventory holding costs, ordering costs, and shortage costs.

A classification system for inventory items.

2. Literature review

(1) A decision-making engine for optimal inventory management of the manufacturing

assembly companies

Dmitry Brusilovsky

Kvant Soft Inc., Thornhill, Canada

In this presentation (article), the problem of optimal inventory management for the small

or medium-size manufacturing assembly companies is described. The system for optimal

inventory management of the manufacturing assembly companies and the mathematical model,

which the inventory management decision-making engine is based on, are presented.

Development of demand planning decision making engine for the demand-driven manufacturing

assembly companies based on a high precision demand forecasting is described. A complex

unstructured problem of demand forecasting is defined. A separate problem of how to forecast

demand for the new articles that do not have the demand history is discussed.

Quantitative approaches to demand forecasting, concentrating mainly on new approaches that

were developed in the last decade, are reviewed. Typical forecasting demand situations, based on

availability and accuracy of the demand data/information, are singled out. These situations

correspond to different demand measurement scales: dichotomy (binary demand forecasting

implemented using binary dependent variable regression models), ordinal, count (based on

Poisson regression), and interval.

(2) The ups and downs of inventory management. Materials Management in Health Care,

13(2), 22-26.

Neil, R. (2004, February).

This article discusses the advantages and disadvantages of using stockless and just-in-time (JIT)

purchasing programs in hospitals.  The author states that the terms JIT and stockless have

slightly different meanings to hospitals and vendors, but they can be used in conjunction.  JIT is

defined as a program that establishes regular, frequent deliveries from a hospital’s distributor,

and which reduces a hospital’s inventory from a 30-day or 60-day to a 10-day supply.  A hospital

with a stockless program can carry an even lower amount of inventory and receives items in low

units of measure from a distributor.

Since less inventory is kept, a hospital can reduce space and warehouse space used to store

products.  This also reduces the chance of losing money on obsolete, stolen, spoiled, or damaged

products.  However, according to Bob Majors, materials management director for Bloomington

(Ind.) Hospital, the JIT model that originated from the manufacturing industry does not fit well

into health care supply chain logistics because hospital volume is not predictable and thus the

demand of inventory is uncertain.  He claims that the JIT or stockless programs peaked in

popularity in the mid-1990s and have now become less popular than when they were first

introduced.

The article ends by stating that the new distribution trend may go back to the traditional

approach of operating a big warehouse and taking more control over products. An example of

this move is HCA, Nashville, which is the industry’s largest hospital system. It has higher

holding costs due to carrying more inventories, but it has a lower distributor fees than it would

have with a stockless or JIT program.

(3) Efficient approach to health care industry material resource management: An

empirical research. Hospital Material Management Quarterly, 13(3), 10-25.

Kim, G. C., & Rifai, A. K. (1992).

This article presents a research study examining the feasibility of implementing a just-in-

time (JIT) system in health care industry.  The study compared health care institutions that have

adopted a JIT system and those that have not.  The results show that the introduction of JIT

philosophy in the health care industry’s material management system improved the system and

reduced implementation problems.  Moreover, the introduction of JIT philosophy had a positive

impact on the institutions' inventory management, service quality, and competitiveness.

The article starts by discussing the impact of JIT philosophy.  The authors define JIT as a

continuous flow of products adapted to demand changes that produces only necessary quantities

of products at predetermined points in time.  To achieve this flow-like system, JIT needs to be

supported by JIT purchasing, total quality control, multiple-process layout designing, job

standardizing, and production smoothing.  In the manufacturing industry, the major benefit of

JIT purchasing is that the levels of parts inventories in the assembly plant and the carrying costs

for those parts are significantly reduced.  The success of JIT systems in the manufacturing

industry has driven many service sector industries to adopt JIT as their material management

system.

(3) Adapting just-in-time inventory control to the hospital setting. Hospital Materials

Management, 11(10), 8-12.

Chapman, S. (1986)

This article discusses the applicability of just-in-time (JIT) inventory control to hospitals. 

The author believes that the difficulty in implementing a JIT inventory control is the uncertainty

in supply or demand, which is directly related to lead time.  The two major uncertainties are the

actual lead time demand and the actual replenishment lead time.  First, the uncertainty of the

actual lead time demand may create stockouts and poor customer service, which can be

prevented with safety stock (buffer inventory).  Second, the uncertainty of the actual

replenishment lead time may create a need for additional safety stock.  These problems can be

solved by using a JIT approach because lead time will be reduced as the average inventory level

is lower with a JIT system.  Thus, the “danger zone” when a stockout could occur is much

smaller.  As a result, the safety stock needed to maintain the same level of customer service is

reduced.

Due to the reduction in cycle stock with a JIT system, the lot size is reduced, which in

turn lowers the inventory holding cost.  However, this benefit of a JIT system may increase the

risk of stock out unless the uncertainties mentioned above are reduced.  For a properly working

JIT system, cost reduction and uncertainty reduction have to be accomplished together.

(4) Risk Aversion in Inventory Management

Prof. David Simchi-Levi &Massachusetts Institute of Technology

Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing

replenishment strategies that maximize expected total profit, or equivalently, minimize expected

total cost over a planning horizon. In this paper, we propose a framework for incorporating risk

aversion in multi-period inventory models as well as multi-period models that coordinate

inventory and pricing strategies. In each case, we characterize the optimal policy for various

measures of risk that have been commonly used in the finance literature. In particular, we show

that the structure of the optimal policy for a decision maker with exponential utility functions is

almost identical to the structure of the optimal risk-neutral inventory (and pricing) policies.

These structural results are extended to models in which the decision maker has access to a

(partially) complete financial market and can hedge its operational risk through trading financial

securities. Computational results demonstrate the importance of this approach not only to risk-

averse decision makers, but also to risk-neutral decision makers with limited information on the

demand distribution.

(5) Just-In-Time Inventory Management Strategy & Lean Manufacturing

Written by David Broyles, Jennifer Beims, James Franko, & Michelle Bergman 

Kansas State University 

April, 2005

Just-in-time is a movement and idea that has gained wide acceptance in the business

community over the past decade. As companies became more and more competitive and the

pressures from Japans continuous improvement culture, other firms were forced to find

innovative ways to cut costs and compete. The idea behind JIT, or lean manufacturing, is to have

the supplies a firm needs at the exact moment that they are needed. In order to accomplish this

goal a firm must constantly be seeking ways to reduce waste and enhance value. A recent survey

of senior manufacturing executives showed that 71% used some form of JIT in their processes

(Pragman). This simple statistic illustrates that JIT is here to stay and also that firms must

constantly be searching for ways to cut costs and achieve an advantage. JIT is one way to

achieve that end result. 

In order to understand how JIT works a common vocabulary needs to be established from which

to further discuss the topic and gain insight into why so many firms have adopted it. As

previously stated, one of the key components of JIT is to reduce waste and add value. There are

several activities that a company must monitor as targets for reducing waste. Among these are,

excessive waste times, inflated inventories, unneeded people or material movement, unnecessary

processing steps, numerous variabilities throughout a firm's activities and any other non-value

adding activity. A key example of this is a new plant that Caterpillar is bringing on-line in the

near future. By reducing the number of times a bucket had to be repositioned while it was being

welded, Caterpillar was able to reduce the amount of time the bucket spent in the welding line,

reduce labor costs by limiting idle time at the welding station and increase the efficiency of the

entire manufacturing process

(7) Applying just-in-time systems in health care. IIE Solutions, 29(8), 32-37.

Whitson, D. (1997)

Since the government switched from cost-plus reimbursement to flat fees regardless of

complications or a provider’s actual expense for medical services in 1983, hospitals continue to

search for innovative ways to reduce costs while maintain quality.  This article discusses how

hospitals can reduce the acquisition price of supplies when using a just-in-time (JIT) system.  It

covers the benefits of JIT, the opportunities for JIT application in health-care, and the accounting

implications of using a JIT system.  The benefits of JIT briefly described in this article are cost

savings as a result of inventory reduction and associated holding costs, space for other revenue

generating activities, and the transfer of labor costs to the distributor.

The article heavily focuses on the possibilities of using JIT in the healthcare industry. 

The areas where JIT can be applied in health care include central supply, materials management

and pharmacy, nursing, swing beds, relationships between nursing units and supplying

departments, and physician practices.  First, under JIT the central supply function is minimized

because the need to store goods between supplier delivery and internal delivery to units or

department is decreased by adopting a JIT method where an individual unit directly receives

items from the supplier.

(8) INVENTORY MANAGEMENT IN SMALL BUSINESS: A DECISION MATRIX

APPROACH

S. Altan Erdem, University of Minnesota, Duluth Tom K. Massey, Jr., University of

North Texas

This article provides a decision tool to assist small business managers in their search for

an appropriate inventory management system. In the article, a functional taxonomy that would

match various small business sectors with certain operational consideration points is proposed.

This taxonomy is basically a two-dimensional decision matrix that can equip these managers

with various perspectives which are broad enough to reveal potential gains of different systems.

The management processes associated with maintaining optimal inventory levels presents

numerous and continual challenges to the goods-oriented small business. In each of these firms

the design and implementation of a particular inventory planning system should originate with

the underlying strategic planning policies within the business. These decisions are conditioned

by numerous financial and structural concerns. It is important to note that research has shown

that inventory planning discrepancies have created difficulties for small business, each of these

areas must be carefully considered.

3. Inventory Counting Systems

3.1 Types of inventory management

1) Periodic System

This is a physical count of items in inventory is made at periodic intervals (e.g. weekly, monthly)

in order to decide how much to order of each item. Major users: Supermarkets, discounts stores,

and department stores.

Advantage

Orders for many items occur at the same time, which can result in economies in processing and

shipping orders

Disadvantages

a) Lack of control between reviews.

b) The need to protect against shortages between review periods by carrying extra stock.

c) The need to make a decision on order quantities at each review

2) Perpetual Inventory System (also known as a continual system)

This keeps track of removals from inventory on a continuous basis, so the system can provide

information on the current level of inventory for each item.

Advantages

1. The control provided by the continuous monitoring of inventory withdrawals.

2. The fixed-order quantity; management can identify an economic order size.

Disadvantage

1. The added cost of record keeping.

Two-bin-system method

Is two containers of inventory; reorder when the first is empty. The advantage of this system is

that there is no need to record each withdrawal from inventory; the disadvantage is that the

reorder card may not be turned in for a variety of reasons.

Tracking System

Universal Product Code (UPC) bar code printed on a label that has information about the item

to which it is attached. Bar coding represents an important development for other sectors of

business besides retailing. In manufacturing, bar codes attached to parts, subassemblies, and

finished goods greatly facilitate counting and monitoring activities.

Demand Forecast and Lead time Information

Managers need to know the extent to which demand and lead time might vary; the greater the

potential variability, the greater the need for additional stock to reduce the risk of a shortage

between deliveries.

Lead time is time interval between ordering and receiving the

order.

3.2 Inventory Cost (Three Basic Costs)

1. Holding or Carrying Cost is the costs to carry an item in inventory for a length of time

usually a year. Cost includes interest, insurance, taxes, depreciation, obsolescence,

deterioration, spoilage, pilferage, breakage, etc.

2. Ordering Cost is cost of ordering and receiving inventory. These include determining

how much is needed, preparing invoices, inspecting goods upon arrival for quality and

quantity, and moving the goods to temporary storage.

3. Storage Cost is cost resulting when demand exceeds the supply of inventory on hand.

These costs can include the opportunity cost of not making a sale, loss of customer

goodwill, late charges, and similar costs

4. Objectives of inventory management

The basic managerial objectives of inventory control are two-fold; first, the avoidance

over-investment or under-investment in inventories; and second, to provide the right quantity

of standard raw material to the production department at the right time. In brief, the

objectives of inventory control may be summarized as follows:

A. Operating Objectives:

1. Ensuring Availability of Materials: There should be a continuous availability of all

types of raw materials in the factory so that the production may not be help up wants of

any material. A minimum quantity of each material should be held in store to permit

production to move on schedule.

2. Avoidance of Abnormal Wastage: There should be minimum possible wastage of

materials while these are being stored in the go downs or used in the factory by the

workers. Wastage should be allowed up to a certain level known as normal wastage. To

avoid any abnormal wastage, strict control over the inventory should be exercised.

Leakage, theft, embezzlements of raw material and spoilage of material due to rust, bust

should be avoided.

3. Promotion of Manufacturing Efficiency: If the right type of raw material is available to

the manufacturing departments at the right time, their manufacturing efficiency is also

increased. Their motivation level rises and morale is improved.

4. Avoidance of Out of Stock Danger: Information about availability of materials should

be made continuously available to the management so that they can do planning for

procurement of raw material. It maintains the inventories at the optimum level keeping in

view the operational requirements. It also avoids the out of stock danger.

5. Better Service to Customers: Sufficient stock of finished goods must be maintained to

match reasonable demand of the customers for prompt execution of their orders.

6. Designing poorer organization for inventory management: Clear cut accountability

should be fixed at various levels of organization.

B. Financial Objectives:

1. Economy in purchasing: A proper inventory control brings certain advantages and

economies in purchasing also. Every attempt has to make to effect economy in

purchasing through quantity and taking advantage to favorable markets.

2. Reasonable Price: While purchasing materials, it is to be seen that right quality of

material is purchased at reasonably low price. Quality is not to be sacrificed at the cost of

lower price. The material purchased should be of the quality alone which is needed.

3. Optimum Investing and Efficient Use of capital: The basic aim of inventory control

from the financial point of view is the optimum level of investment in inventories. There

should be no excessive investment in stock, etc

C. Others objective

Inventory management help to reduce martial handling costs-accumulating parts between

operations It also helps to utile people and equipment reasonably .secondly it facilitate product

displays and services to customer

To minimize in total cost associated with stocks.

These costs can be categorized into three groups

To ensure smooth flow of stock

Minimizing risk and uncertainty

To provide required quality of material

5. Importance of Inventory Management Systems

?Inventory management is an important part of a business because inventories are usually the

largest expense incurred from business operations. Most companies will use an inventory

management system that will track and maintain the inventory required to meet customer

demand. Most systems used by companies are linked to the management or accounting

information system, increasing the effectiveness of their operations.

Provides the following information

Price preferences of customers

Right quarters to buy

Amount of given item sold

Seasonal time a given item sells

Time to engage in promotional activities

5.1 Advantages and disadvantages of inventory management

Advantages

Business

Guarantees prompt service delivery

Reinforces profitability – no stock out

Disadvantages

Carrying costs

Associated risks

cost

Enhances customer satisfaction

6. Essentials of inventory control system

For an efficient and successful inventory control there are certain important conditions that are a

follows:

(1) Classification and Identification of inventories: The usual inventory of manufacturing

firm includes raw-material, stores, work-in-progress and component etc. To facilitate prompt

recording the dealing, each item of the inventory must be assigned a particular code number

and it must be classified in suitable group or sub-divisions. ABC analysis of material is very

helpful in this context.

(2) Standardization and simplification of inventories: In order to facilitate inventory control,

the inventory line should be simplified. It refers to the elimination of excess types and sizes

of items. Simplification leads to reduction in classification of inventories and its carrying

costs. Standardization, on the other hand, refers to the fixation of standards of raw material

to be purchased and specification of the components and tools to be used.

(3) Setting the Maximum and Minimum limits for each part of inventory: The third step in

this process is to set the maximum and minimum limits of each item of the inventory. It

avoids the chances of over-investment as well as running a short of any item during the cost

of producing. Reordering point should also be fixed beforehand.

(4) Economic Order Quantity: It is also a basic inventory problem to determine the quantity as

how much to order at a time. In determining the EOQ, the problem is one to set a balance

between two opposite costs, namely, ordering costs and carrying costs. This quantity should

be fixed beforehand.

(5) Adequate storage Facilities: To make the system of inventory control successful and

efficient one, it is also essential to provide the adequate storage facilities. Sufficient storage

area and proper handling facilities should be organized.

(6) Adequate Reports and Records: Inventory control requires the maintenance of adequate

inventory record and reports. Various inventory records must contain information to meet

the needs of purchasing, production, sales and financial staff. The typical information

required about any class of inventory may be relating to quantity on hand, location,

quantities in transit, unit cost, code for each item of inventory, reorder point, safety level etc.

Statements forms and inventory records should be so designed that the clerical cost of

maintaining these records must be kept a minimum.

(7) Intelligent and Experienced Personnel: An important requirement of successful inventory

control system is the appointment of qualified and experienced staff in purchase and stores

department. Mere establishment of procedures and the maintenance of records would not

give the desired results as there is no substitute for sincere and devoted as well as

experienced hands. Hence, the whole inventory control structure should be manned with

trained, qualified, experienced and devoted employees.

(8) Coordination: There must be proper coordination of all departments involved in the process

of inventory control, such as purchase, finance, receiving, approving, storage and accounting

departments. These all departments have different outlook and objects in inventory

management but financial manager has to coordinate them all.

(9) Budgeting: An efficient budgeting system is also required. Preparation of budgets

concerning materials, supplies and equipment to ensure economy in purchasing and use of

material is also necessary.

(10) Internal Check: Operating of a system of internal check is also vital in inventory

management so that all transactions involving material supplies and equipment purchase are

properly approved and automatically checked.

7. Financial manager’s role in inventory management

Inventory represents a large investment by manufacturing concern: therefore, great emphasis

must be placed on its efficient management. Though, the operative responsibility for Inventory

management lies with the inventory manager, the financial manager must also be concerned with

all types of inventories- raw materials, work-in-progress and finished goods. He must monitor

Inventory levels and see that only an optimum amount is invested in Inventory. He should be

familiar with the Inventory control techniques and ensure that Inventory is managed well.

He should try to resolve the conflicting view points of all the departments in order to have

efficient inventory management. He has to act as a careful inspector levels. He should introduce

the policies which reduce the lead time, regulate usage and thus, minimize safety stock. All these

techniques of Inventory management lead to the goal of wealth maximization.

Keep operations running?

A manufacturer must have certain purchased items (raw materials, components, or

subassemblies) in order to manufacture its product. Running out of only one item can

prevent a manufacturer from completing the production of its finished goods.

Inventory between successive dependent operations also serves to decouple the dependency

of the operations. A machine or work center is often dependent upon the previous operation

to provide it with parts to work on. If work ceases at a work center, then all subsequent

centers will shut down for lack of work. If a supply of work-in-process inventory is kept

between each work center, then each machine can maintain its operations for a limited time,

hopefully until operations resume the original center.

Lead time

Lead time is the time that elapses between the placing of an order (either a purchase order or

a production order issued to the shop or the factory floor) and actually receiving the goods

ordered.

If a supplier (an external firm or an internal department or plant) cannot supply the required

goods on demand, then the client firm must keep an inventory of the needed goods. The

longer the lead time, the larger the quantity of goods the firm must carry in inventory.

A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain

extremely low levels of inventory. Nissan takes delivery on truck seats as many as 18 times

per day. However, steel mills may have a lead time of up to three months. That means that a

firm that uses steel produced at the mill must place orders at least three months in advance of

their need. In order to keep their operations running in the meantime, an on-hand inventory

of three months’ steel requirement would be necessary.

Hedge

Inventory can also be used as a hedge against price increases and inflation. Salesmen

routinely call purchasing agents shortly before a price increase goes into effect. This gives

the buyer a chance to purchase material, in excess of current need, at a price that is lower

than it would be if the buyer waited until after the price increase occurs.

Quantity discount

Often firms are given a price discount when purchasing large quantities of a good. This

also frequently results in inventory in excess of what is currently needed to meet demand.

However, if the discount is sufficient to offset the extra holding cost incurred as a result

of the excess inventory, the decision to buy the large quantity is justified.

Smoothing requirements

Sometimes inventory is used to smooth demand requirements in a market where demand

is somewhat erratic. Consider the demand forecast and production schedule outlined in

Table 1.

Notice how the use of inventory has allowed the firm to maintain a steady rate of output

(thus avoiding the cost of hiring and training new personnel), while building up inventory

in anticipation of an increase in demand. In fact, this is often called anticipation

inventory. In essence, the use of inventory has allowed the firm to move demand

requirements to earlier periods, thus smoothing the demand.

Controlling inventory

Firms that carry hundreds or even thousands of different part numbers can be faced with

the impossible task of monitoring the inventory levels of each part number. In order to

facilitate this, many firm's use an ABC approach. ABC analysis is based on Pareto

Analysis, also known as the "80/20" rule. The 80/20 comes from Pareto's finding that 20

percent of the populace possessed 80 percent of the wealth. From an inventory

perspective it can restated thusly: approximately 20 percent of all inventory items

represent 80 percent of inventory costs. Therefore, a firm can control 80 percent of its

inventory costs by monitoring and controlling 20 percent of its inventory. But, it has to be

the correct 20 percent.

The top 20 percent of the firm's most costly items are termed "An" items (this should

approximately represent 80 percent of total inventory costs). Items that are extremely

inexpensive or have low demand are termed "C" items, with "B" items falling in between

A and C items. The percentages may vary with each firm, but B items usually represent

about 30 percent of the total inventory items and 15 percent of the costs. C items

generally constitute 50 percent of all inventory items but only around 5 percent of the

costs.

By classifying each inventory item as an A, B or C the firm can determine the resources

(time, effort and money) to dedicate to each item. Usually this means that the firm

monitors A items very closely but can check on B and C items on a periodic basis (for

example, monthly for B items and quarterly for C items).

Another control method related to the ABC concept is cycle counting. Cycle counting is

used instead of the traditional "once-a-year" inventory count where firms shut down for a

short period of time and physically count all inventory assets in an attempt to reconcile

any possible discrepancies in their inventory records. When cycle counting is used the

firm is continually taking a physical count but not of total inventory.

A firm may physically count a certain section of the plant or warehouse, moving on to

other sections upon completion, until the entire facility is counted. Then the process starts

all over again.

The firm may also choose to count all the A items, then the B items, and finally the C

items. Certainly, the counting frequency will vary with the classification of each item. In

other words, an item may be counted monthly, B items quarterly and C items yearly. In

addition the required accuracy of inventory records may vary according to classification,

with items requiring the most accurate record keeping.

8. Data analysis and methods

8.1 Classification System

An important aspect of inventory management is that items held in inventory are not of equal

importance in terms of dollars invested, profit potential, sales or usage volume, or stock-out

penalties. Example: A producer of electrical equipment might have electric generators, coils of

wire, and miscellaneous nuts and bolts among the items carried in inventory. It would be

unrealistic to devote equal attention to each of these items.

Analysis the inventory handling using the following techniques

ABC analysis (control mechanism).

EOQ

Control levels.

Control Mechanism:

Usually the firm has to maintain several types of inventories. It is not desirable to keep

same degree of control on all items the firm should play maximum attention to these whose is

the highest value. The firm should receive the most effort in controlling. The firm should

beselective in it approach to control inventory handling in various types of  inventories

This analytical approach is called the ABC analysis, and tends to measure the significance of

each item ate inventories in terms of its value

1. A-B-C Approach

A-B-C Approach classifies inventory items according to some measure of importance, usually

annual dollar usage, and then allocates control efforts accordingly.

The key questions concerning cycle counting for management are:

1. How much accuracy is needed?

2. When should cycle counting be performed?

3. Who should do it?

Rules of implementing ABC techniques:

Classify the item of inventories.

Determine the price per unit of each item.

Find the total cost of each item

Rank the items in accordance with total costs, allotting first rank to the item with highest

total cost and so on (i.e. arrange in descending order).

Find out the total number of items and calculate the percentage of each item.

Calculate the percentage of Total cost of each item to total cost of all items.

ADVANDAGES:

Preference for keeping inventory can be placed properly after Preference for keeping

inventory can be placed properly after ABC analysis

Three Classes of Items Used:

A (very important)

B (moderately important)

C (least important)

Store personnel are placed better with this analysis Store personnel are placed better with

this analysisi.ei.their time can be utilized better

Storing, handling and delivery of materials to production department become better.

2. ECONOMIC ORDER QUANTITY MODELS

Economic Order Quantity (EOQ) is the order size that minimizes total cost. EOQ models

identify the optimal order quantity in terms of minimizing the sum of certain annual costs that

vary with order size.

Three (3) Order Size

1. The economic order quantity model.

2. The economic order quantity model with non instantaneous delivery.

3. The quantity discount model.

Inventory carrying cost:

It is the cost of holding the materials in the store and includes:

Cost of storage space which could have been utilized for some other purpose.

Cost of bins and racks that have to be provided for the storage of materials.

Cost of maintaining the materials to avoid deterioration.

Amount of interest payable on the money locked up in the materials.

Cost of spoilage in stores and handling.

Transportation costs in relation to stock.

Cost of obsolescence on account of some of the materials becomingobsolete after

some time of storage either due to change in the process or product.

Insurance cost.

Clerical cost etc.

Ordering cost:

It is the cost of placing orders for the purchase of materials and includes:

1) Cost of staff posted in the purchasing department, inspection section and payment

department.

2) Cost of stationery, postage and telephone charges

3. Stock levels

Reorder level:

Re-order level is the level of inventory at which the firm should place an order to replenish

the inventory. In case, the order is placed at this level, the new goods will arrive before the

runs out of goods to sell. In order to determine reorder level, information is required about

two things.

(a) The lead time and

(b) The usage rate. The term lead time refers to the time normally taken in receiving the

delivery of inventory after the order has been placed in case there is no uncertainty about the

usage rate and the lead time, the order level cans be determined by simply applying the

formula.

Re-order level = Average usage X lead time + safety stock. Safety stock level:

The actual usage as well as the lead time may be different from the normal usage or the

normal lead time. In order to guard against such a contingency the firm maintains a safety

stock the minimum buffer stock as a cushion against possible increase in usage or delay in

delivery time. The level of safety stock can be calculated by applying the following formula.

Safety stock = Average usage X period of safety stock. Maximum inventory:

It is the quantity of materials beyond which a firm should not exceed its stocks. If the

quantity exceeds maximum level limit then it will be over-stocking. A firm should avoid

over-stocking because it will result in high material costs. Over-stocking will mean blocking

of more working capital, more space for storing the materials,  more  wastage  of  materials,

and  more  chances  of  losses  from obsolescence. This can be calculated by using the

following formula.

Maximum inventory = Economic Order Quantity + safety stock

9. Conclusion

To sum up, we can say Inventory management is an essential part of any organization.

Every essential is a part of any organization. Every organization has manly two objective one

disorganizations have manly two objectives one is Profit maximization &another is wealth Profit

maximization &another is wealth maximization. Inventory management helps the maximization.

Inventory management helps the organization to achieve its objectives. Inventory management

can use techniques like TQM, JIT& ABC etc. to have an effective control on its& ABC etc. to

have an effective control on its inventory.

10. Practical examples of Pakistani companies

Inventory management survey

We targeted and conduct survey from two different type of organization which uses

inventory management system efficiently. The names of those organizations are as followed.

Matro cash & carry

Unimark pharmaceutical

1. Matro cash and carry

METRO Cash & Carry announced its operations in Pakistan in January 2006 & since then it has

established itself as a potential market leader in self service wholesale. Under the supervision

of Giovanni Soranzo, Managing Director, METRO Cash & Carry Pakistan has opened its

first wholesale centre in Lahore in October 2007. METRO Cash & Carry Pakistan is now

successfully operating 5 wholesale centers, 2 in Lahore, 1 in Karachi, 1 in Faisalabad & 1 in

Islamabad. The company’s country head office is based in Lahore at Thokar Niaz Baig near

motorway. The current Head count of employees is approx 1176 including Head Office & 5

wholesale centres.METRO Cash & Carry plans to invest in Pakistan on a sustained and reliable

basis in the years to come.

SKU Inventories (Scanned or Key Entered)

Metro Inventory Service can scan your readable bar-code, or key enter the information to

provide you with a file detailing all of the information you need in reconciling your

inventory.The file will be in ASCII format defined to your specifications.

Financial Retail Inventories

Metro Inventory Service can inventory your entire retail store providing you with both a retail by

location physical inventory and a retail by department inventory. We complete a set up prior to

your first inventory in which we break down your retail store into small easily identifiable

locations. Departments are isolated within all locations. Upon completion of the inventory,

Metro Inventory Service can provide management with a complete detailed printout of the

physical inventory

Financial Cost Inventories

Metro Inventory Service can provide management with a complete financial cost inventory

where product is cost-coded or has a readable bar code.

Fixed Asset Inventories

Metro Inventory Service can provide management with a detailed fixed asset inventory showing

a complete description of the asset and its current location. We can help you set up your system

to establish control over your fixed assets. Included in this service (where requested), we can

identify your assets with labels.

2. Unimark pharmaceutical inventory system

It started in 1983 and it vision is “To be a global Life sciences company through

innovation, cost leadership, optimizing economic value creation for share holders”

Point of Sales

POS an inventory system in which the item is deducted from inventory as it is sold or dispensed

Reorder Points

Minimum and maximum stock levels which determine when a reorder is placed and for how

much

Computers and Inventory

Automatically adjust inventory

Continuous picture of the inventory

Generate orders

Automatic

Manual

Only as accurate as the information entered

Receiving the Order

Checking in the Order Compare the invoice with products

Right drug, strength, size, quantity, in date?

Pharmacist will check in controlled drugs

Report any discrepancies