Corporate Finance Assignment

Submitted to: Mrs. Neha Garg

Submitted by: Nakul Pawar
19001701034
MBA-2A
Q. Define inventory management and explain the technique
of inventory management.
Inventory management is the supervision of non-capitalized
assets, or inventory, and stock items. As a component of supply
chain management, inventory management supervises the flow of
goods from manufacturers to warehouses and from these facilities
to point of sale. A key function of inventory management is to
keep a detailed record of each new or returned product as it
enters or leaves a warehouse or point of sale.

Organizations from small to large businesses can make use of

inventory management to manage their flow of goods. There
are numerous inventory management techniques, and using the
correct one can lead to providing the correct goods, at the correct
amount, place and time.

Inventory control is a separate area of inventory management that

is concerned with minimizing the total cost of inventory while
maximizing the ability to provide customers with products in a
timely manner. In some countries, the two terms are used as
synonyms.

The inventory management process:

Inventory management is a complex process, particularly for

larger organizations, but the basics are essentially the same
regardless of the organization's size or type. In inventory
management, goods are delivered in the receiving area of a
warehouse –typically in the form of raw materials or components
-- and are put into stock areas or shelves.
 Compared to larger organizations with more physical space, in
smaller companies, the goods may go directly to the stock area
instead of a receiving location. If the business is a wholesale
distributor, the goods may be finished products rather than raw
materials or components. Unfinished goods are then pulled from
the stock areas and moved to production facilities where they are
made into finished goods. The finished goods may be returned to
stock areas where they are held prior to shipment, or they may be
shipped directly to customers.

Inventory management uses a variety of data to keep track of the

goods as they move through the process, including lot numbers,
serial numbers, cost of goods, quantity of goods and the dates
when they move through the process.

Inventory management techniques:

Economic Order Quantity

Economic order quantity is the lowest amount of inventory
you must order to meet peak customer demand without
going out of stock and without producing obsolete inventory.
Its purpose is to reduce inventory as much as possible to
keep the cost of inventory as low as possible.
To help you calculate EOQ, here is the formula from Kenneth
Boyd, author of Cost Accounting for Dummies:
Economic order quantity uses three variables: demand,
relevant ordering cost, and relevant carrying cost. Use them
to set up an EOQ formula:
 Demand: The demand, in units, for the product for a specific
time period.
 Relevant ordering cost: Ordering cost per purchase order.
 Relevant carrying cost: Carrying costs for one unit.
Assume the unit is in stock for the time period used for
demand.
Note that the ordering cost is calculated per order. The
carrying costs are calculated per unit. Here’s the formula for
economic order quantity:
Economic order quantity = square root of [(2 x demand x
ordering costs) ÷ carrying costs]
That’s easier to visualize as a regular formula:

Q is the economic order quantity (units). D is demand (units,

often annual), S is ordering cost (per purchase order), and H
is carrying cost per unit.

Minimum Order Quantity

Minimum order quantity (MOQ) is the lowest set amount of
stock that a supplier is willing to sell. If you can’t purchase
the MOQ of a specific product, then the supplier won’t sell it
to you.
The purpose of minimum order quantities is to allow
suppliers to increase their profits while getting rid of more
inventory more quickly and weeding out the “bargain
shoppers” simultaneously.
A minimum order quantity is set based on your total cost of
inventory and any other expenses you have to pay before
reaping any profit – which means MOQs help wholesalers
stay profitable and maintain a healthy cash flow.

ABC Analysis
 ABC analysis of inventory is a method of sorting your
inventory into 3 categories according to how well they sell
and how much they cost to hold:
 A-Items – Best-selling items that don’t take up all your
warehouse space or cost
 B-Items – Mid-range items that sell regularly but may cost
more than A-items to hold
 C-Items – The rest of your inventory that makes up the bulk
of your inventory costs while contributing the least to your
bottom line
ABC analysis of inventory helps you keep working capital
costs low because it identifies which items you should
reorder more frequently and which items don’t need to be
stocked often – reducing obsolete inventory and optimizing
the rate of inventory turnover.

Just In Time Inventory Management

Just-in-Time Inventory Management is simply making what is
needed, when it’s needed, in the amount needed.
Many companies operate on a “just-in-case” basis – holding
a small amount of stock in case of an unexpected peak in
demand.
JIT attempts to establish a “zero inventory” system by
manufacturing goods to order; it operates on a “pull” system
whereby an order comes through and initiates a cascade
response throughout the entire supply chain – signaling to
the staff they need to order inventory or begin producing the
required item.
Here are some of the benefits of just-in-time inventory:
 Minimize costs such as rent and insurance by reducing your
inventory
 Less obsolete, outdated, and spoiled inventory
 Reduce waste and increase efficiency by minimizing or
eliminating warehousing and stockpiling, while
maximizing inventory turnover
 Maintain healthy cashflow by ordering stock only when
necessary
 Production errors can be identified and fixed faster since
production happens on a smaller, more focused level,
allowing easier adjustments or maintenance on capital
equipment

Safety Stock Inventory

Safety stock inventory is a small, surplus amount of
inventory you keep on hand to guard against variability in
market demand and lead times.
Safety stock plays an integral role in the smooth operations
of your supply chain in various ways.
Here are just a few:
 Protection against unexpected spikes in demand
 Prevention of stockouts
 Compensation for inaccurate market forecasts
 And a buffer for longer-than-expected lead times
You probably noticed that the benefits of safety stock are all
tied to mitigating problems that could seriously harm your
business.
That’s because without safety stock inventory you could
experience:
 Loss of revenue
 Lost customers
 And a loss in market share
A safety stock formula is relatively straightforward and
requires only a few inputs for calculation.
Here’s the formula we recommend using if you’re just
starting out:
(Max Daily Sales x Max Lead Time in Days) – (Average
Daily Sales x Average Lead Time in Days) = Safety Stock
Inventory
FIFO and LIFO
FIFO and LIFO are accounting methods used to value your
inventory and report your profitability.
FIFO (first in, first out) is an inventory accounting method
that says the first items in your inventory are the first ones
that leave – meaning you get rid of your oldest inventory
first.
LIFO (last in, first out) is an inventory accounting method
that says the last items in your inventory are the first ones
that leave – meaning you get rid of the newest inventory
first.
If you handle food inventory management or operate any
business with perishable items, then you pretty much have to
use FIFO. Otherwise, you’ll end up with obsolete
inventory that you’ll have to write-off as a loss.
With that said, LIFO is a great method for non-perishable
homogeneous goods like stone or brick. So, if you get a
fresh batch of items like these, you don’t need to rearrange
your warehouse or rotate batches since they’ll be the first
ones out anyway.

Reorder Point Formula

A reorder point formula tells you approximately when you
should order more stock – that is, when you’ve reached the
 lowest amount of inventory you can sustain before you need
more.
Here’s the reorder point formula you can use today:
(Average Daily Unit Sales x Average Lead Time in Days)
+ Safety Stock = Reorder Point
This equation can help you stop being a victim to market
spikes and slumps and instead, consistently order the right
amount of stock each month.

Batch Tracking
Batch tracking is sometimes referred to as lot tracking, and
it’s a process for efficiently tracing goods along the
distribution chain using batch numbers.
From raw materials to finished goods, batch tracking allows
you to see where your goods came from, where they went,
how much was shipped, and when they expire if they have
an expiration date.
What are the benefits of batch tracking?
 Easy and Fast Recall
 Streamlined Expiry Tracking
 Improved Relationships with Suppliers
 Fewer Accounting Errors from Manual Tracking
Consignment Inventory
Consignment Inventory is a business arrangement where the
consignor (a vendor or wholesaler) agrees to give their
goods to a consignee (usually a retailer) without the
consignee paying for the goods up front – the consignor still
owns the goods, and the consignee pays for the goods only
when they actually sell.
 This inventory management technique creates a win-win
partnership between suppliers and retailers as long as
they’re both willing to share the risks – and rewards.
Pros for Vendors:
 New Markets
 Low Inventory Carrying Costs
 Direct-to-Retailer Shipping
Pros for Retailers:
 Lower Cost of Ownership
 Minimal Risk
 Improved Cashflow
Perpetual Inventory Management
A perpetual inventory management system is also known as
a continuous inventory system.
Here’s how it works:
Perpetual inventory systems track sold and stocked
inventory in real-time; they update your accounting system
whenever a sale is made, inventory is used, or new inventory
has arrived.
All of this data is sent to one central hub that any authorized
employee can access.
These are the advantages of perpetual inventory:
 Proactive monitoring of inventory turnover
 Manage multiple locations with ease
 More informed forecasting

Dropshipping
Dropshipping is a business model that allows you to sell and
ship products you don’t own and don’t stock.
 Your suppliers – wholesalers or manufacturers – produce the
goods, warehouse them, and ship them to your customers
for you.
The process is simple:
 You receive an order
 You forward the order to your supplier
 Your supplier fulfills the order

Here are the benefits of dropshipping:

 Low startup costs
 Low cost of inventory
 Low order fulfillment costs
 Sell and test more products with less risk

Lean Manufacturing System

The Lean Manufacturing System, often referred to as lean
manufacturing, lean production, or simply “Lean” is a system
for maximizing product value for the customer while
minimizing waste without sacrificing productivity.
This system originated in the Toyota Production System
(TPS). There were 3 things TPS attempted to prevent:
 Muda – Everything in your manufacturing process that
creates waste or causes constraints on creating a valuable
product.
 Mura – Everything that creates inconsistent and inefficient
work flows.
 Muri – All tasks or loads that put too much stress on your
employees or machines.
There were also 5 principles that every Lean manufacturing
system adhered to:
1. Value – A company delivers the most valuable product to the
customer.
2. Value Stream – Map out the steps and processes required
to manufacture those valuable products.
3. Flow – Undergo the process of ensuring all of your value-
adding steps flow smoothly without interruptions, delays, or
bottlenecks.
4. Pull – Products are built on a “just-in-time” basis so that
materials aren’t stockpiled and customers receive their
orders within weeks, instead of months.
5. Perfection – Make Lean thinking and process improvement
a core part of your company culture.
By minimizing or eliminating Muda, Mura, and Muri while
adhering to the 5 principles, the proponents of Lean
Manufacturing believe this inventory management technique
can produce the highest-quality products while increasing
your revenue and productivity.

6 Sigma
6 sigma, or Six Sigma is a data-driven process that seeks to
reduce product defects down to 3.4 defective parts per
million, or 99.99966% defect-free products over the long-
term.
In other words, the goal is to produce nearly perfect products
for your customers.
By using statistical models, 6 Sigma practitioners will
methodically improve and enhance a company’s
manufacturing process until they reach the level of 6 Sigma.
The first and most-used method in Six Sigma is a 5-step
process called DMAIC:
 Define
 Measure
 Analyze
 Improve
 Control
 The DMAIC process uses data and measured objectives to
create a cycle of continuous improvement in your
manufacturing methods.
While DMAIC is useful for improving your current
processes, DMADV is used to develop a new process,
product, or service.
DMADV stands for:
 Define
 Measure
 Analyze
 Design
 Verify
The DMADV process uses data and thorough analyses to
help you create an efficient process or develop a high-quality
product or service.
Through intensive training, focused projects, and effective
statistical analyses, 6 Sigma could save your business a lot
of money.
Fortune 500 companies have saved an estimated $427
billion after implementing the 6 Sigma methodology,
according to 6Sigma magazine.

Lean Six Sigma

Lean Six Sigma is the fusion of Lean Manufacturing with Six
Sigma to create a complete system that removes waste and
reduces process variation for streamlined manufacturing and
optimal product output.
Lean Six Sigma primarily uses Six Sigma processes and
methods as the backbone of the system – such as DMAIC
and the belt system – to drive focused improvements in
 manufacturing while incorporating many techniques and
tools from Lean to reduce wasteful steps and processes.

Demand Forecasting
Demand forecasting is a process of predicting what your
customers will buy, how much they’ll buy, and when they’ll
buy it.
You can use informal methods such as guessing, or
quantitative methods such as analyzing past sales data.
From production planning to inventory management to
entering a new market, demand forecasting will help you
make better decisions for managing and growing your
business.
Here are some demand forecasting best practices:
 Create a repeatable monthly process
 Determine what to measure and how often
 Integrate data from all of your sales channels
 Measure forecast accuracy at the SKU, location, and
customer planning level
 Maintain real-time, up-to-date data