PRESENTATION ON: Chapter

INVENTORY
AND
INVENTORY CONTROL
Content:
1. Inventory:- Stock of items kept to
meet future demand.
2. Types of Inventory:- Raw
materials, Purchased parts and
supplies, Work-in-process
(partially completed) products
(WIP), Items being transported,
Tools and equipment
3. Two forms of Demand:-
dependent and independent.
4. Functions of inventory.
5. Inventory Control.
11. Types of Ordering System.
◦ Periodic inventory system.
◦ Perpetual Inventory System
12. Methods of Inventory Control.
◦ Deterministic Methods
◦ Probabilistic Methods
13. Economic Order Quantity
(EOQ).
14. Example of EOQ.
15. Case Study on AMAZON INDIA.
Inventory Management

Inventories today: a curse, a

blessing, a must..?
 What is
inventory?
Stock of
items kept to
meet future
demand

Purpose of
inventory
manageme
nt
 how many
units to order
 when to
order
INVENTORY
The inventory may be defined as
the physical
stock of good, units or economic
resources
that are stored or reserved for
smooth,
efficient and effective functioning
of business.
Inventories are referred to :
Raw materials,
Finished goods,
Castings, and
 Types of
Inventories
Raw materials

Purchased parts and supplies

Work-in-process (partially completed)
products (WIP)
Items being transported

Tools and equipment

Two Forms of Demand

Dependent Independent
 Demand for items  Demand for items
used to produce used by external
final products customers
 Tires stored at a  Cars, appliances,
Goodyear plant are computers, and
an example of a houses are
dependent demand examples of
item independent
Distribution of Inventory
Account
Raw WIP Finished Finished
Material Inventor goods goods at
s y at distributio
factory n
Capital 60% 20% 20% 00%
goods

Garment 30% 55% 5% 10%

industry

Consume 5% 10% 30% 55%

r product
WHY DO WE KEEP
INVENTORIES
Financial Objectives.
To create a buffer stock b/w the
input and output.
To ensure against delay in
deliveries.
To allow for a possible increase in
output if so required.
To ensure against scarcity of
material in the marked.
To make use of quantity
discounts.
FUNCTIONS OF
INVENTORY
The primary function of inventory is to
use marketing and production to
increase profitability, to get the
maximum amount for the business
investment.
Balancing supply and demand.
Safety stock.
Geographical specialization.
Retailer 1

Retailer 2
CENTRAL
(Warehouse)
Retailer 3

Retailer 4
 INVENTORY CONTROL
OBJECTIVE :
(a) To minimize capital
investment.
(b) To ensure availability
of needed inventory for
uninterrupted production
and for meeting
consumer demand.
(c) To provide scientific
basis for planning of
inventory needs.
(d) To tiding over the demand
fluctuation.
 Scope of Inventory Control

SCOPE OF INVENTORY CONTROL

Determinati Determining Determining

on of economic order lead time
inventory size Examining
policies. the work
Determini of
ng various Safety or
inventory
stock buffer stock
policy
levels
ADVANTAGES AND
DISADVANTAGES OF INVENTORY
CONTROL
ADVANTAGES DISADVANTAGES
Ensures smooth Reduce but can’t
production. eliminate
Regular and business risk.
timely supply. Control of
Protects the firm inventory is
against variation complex.
in raw materials Expensive
delivery time. software and
Avoid shortage of technology.
material. It requires
Minimize loss by constant
damage, attention.
TERMINOLOGY USED IN INVENTORY
 MAXIMUM LIMIT : Upper limit to which the
stock of an inventory item shall be allowed.
 MINIMUM LIMIT : Lower limit to which the
stock can be allowed to fall in the course of
replenishment of the stock of an item.
 SAFETY STOCK : Stock to counter the
variation in demand of an item.
 DEMAND OR USAGE : Average quantity of an
item consumed in a particular period of time.
 LEAD TIME : It is the total time taken from
the day procurement action has been
initiated to the day the stock is replenished.

Thus; Total Lead time (LT) = Internal

Lead time + External Lead time.
Inventory Control Policy of an
Organization
This article throws light upon the
four main factors affecting
inventory control policy of an
organization.
The factors are:
1. Manufacturing
Characteristics.
2. Amount of Protection
against Shortages.
3. Organizational Factors.
4. Miscellaneous Factors.
1. Manufacturing
Characteristics:
The nature of the manufacturing
process,
product development & design, process
planning, production planning, layout
design has
significant impact on inventory control
policy.
Some of these factors are:
a) Degree of specialization and
processing stages of the product.
b) Process capability and flexibility.
c) Production Capacity and Storage
Facilities.
2. Amount of Protection against
Shortages:
The variation in demand and supply is a
routine
phenomenon. The protection against such
unpredictable variations is possible by
providing safety
or buffer stocks.
The factors responsible for such
variations are:
a) Changes in Size and Frequency of Orders.
b) Unpredictable Sales.
c) Physical and Economical Structure of the
Distribution Pattern.
d) Cost of Shortages.
e) The Accuracy of Demand Forecasts:
3. Organizational Factors:
There are some factors related to
the
policies, traditions and working
Environment
of any organization/enterprise.
Some of these are listed as
follows:
a) Human relations policies of the
organization
b) Amount of capital available for
inventory purposes and
c) Rate of returns on un-invested capital
4. Miscellaneous Factors:
These are the factors related
with the
overall business environment
of the
region or area like:
a) Inflation rate.
b) Wars or some unforeseen
natural calamities, floods,
earthquakes etc.
c) Uncertainties in communication
facilities.
 ABC analysis
ABC(Always Better Control)
Group A : Group A consist of costly
items which are 10% to 20% of the
total items and may account for
about 50% of the total values of the
store.
Group B : Group B consist of 20% to
30% of the store items and
represent about 30% of the total
value of stores.
Group C: Group C consists of 70% to
80% of the items covered costing
Graph for ABC Analysis
Advantages of ABC
Analysis
It provides better control over the
costly items in which a large
amount of capital is invested.
It ensures considerable reduction
in the storage charges.
It help in maintaining enough
safety stock of ‘C’ category of
items.
Example :
ABC analysis is used to maintain
the inventory of Raw Material.
Category Volume Cost Range Example
Range

A <5% 70 – 90 % Engine
B 5 – 20 % 10 – 20 % Tires
C 60 – 80 % <10% Nut & Bolt
Cost

A
B
C

Inventory Volume
Cost Structure In
Inventory
Ordering Cost.
a)cost of ordering excess.
b)cost of ordering too less.
[cost of ordering excess + cost
of ordering too less = Total
stocking cost]
Example : Transportation
cost ,Salary of purchase
demand ,Loading & unloading
charge etc.
Carrying Cost.
a) Inventory Storage Cost
b) Cost of Capital

Example : Space Rent , Refrigeration

Cost, Salary of store department
Insurance Cost.
Shortage of stock out Cost & Cost
of Replenishment.

a) Cost of Loss, pilferage, shrinkage

and obsolescence etc.
b) Cost of Logistics
c) Sales Discounts, Volume discounts
and other related costs.
Types of Inventory System
 constant
amount
Continuous ordered
system when
(fixed-order- inventory
quantity) declines to
predetermi
ned level

 order
Periodic placed for
system variable
(fixed-time- amount
period) after fixed
passage of
time
A) Periodic Inventory
System
Under this method, the
merchandise
company does not maintain a
detailed
record of inventory for the result
the cost
of goods sold is calculated at the
end of the
accounting period (periodically).
Characteristics
Easier to operate in relatively
small firms.
Lack of control over inventory.
Less cost to handle the method.
Does not keep inventory record
up-to-date.
The system applies to those
concerns usually that sell low-
value items (such as stationery
items) in large quantity.
Example
Hallmark may follow this inventory
method
because they sell low-value items at a
large
quantity. They need not maintain a
record of
inventory each a purchase or sales is
made.
Under the periodic inventory system,
we must
have good concepts of the following:
Opening inventory (At the
beginning of the
accounting period)
B) Perpetual Inventory
System
Under this method, a detailed
record of the cost of inventory is
maintained each time a purchase
or a sale is made.
As a result, the system
consciously shows the up-to-date
record of inventory that should be
on hand. The cost of goods sold is
calculated each time a purchase
or a sale is made, not at the end of
an accounting period.
Characteristics
Itrequires more efforts to
maintain inventory under this
method.
Close control over inventory
The method is comparatively
costly
Keeps inventory record up-to-
date and decent.
The method applies to those
concerns usually that sell high-
value items (Such as car,
Example
Volvo Car Overseas Corporation AB
Sells
Volvo car in Bangladesh. It needs
to
maintain inventory record each
time the
car is sold to
a customer
INVEN0TORY MODELS
 Deterministic Model
MODEL: 1 (THE EOQ MODEL OR WILSON
MODEL OF INVENTORY)
Assumptions:
• Annual demand is deterministic
(known)
• No – shortage allowed
• Infinite replenishment or supply rate
• Lead Time is also constant
• Fixed quantity order
• Consumption rate is constant with
time
GRAPHICAL REPRESSENTATION
OF THE MODEL IS SHOWN IN
FIRGURE
TERMS USED IN INVENTORY
ANALYSIS
D : Annual demand (units per
year)
Co : Ordering cost
(Rs./order)
Ch : inventory Carrying
Costs or holding
costs(Rs./unit/unit time)
Q : Order Quantity
Q* : Economic order Quantity
N : number of orders placed
Holding cost/ Carrying Cost
(Cc)
Space rent
Refrigeration
cost
Salary of store
department
Insurance cost
Ordering (Co)

A confirmed
request by one
party to another
to buy sell deliver
or receive goods
Examples
Transportation
Cost
Loading
&unloading
charge
Salary of
As shown in figure.
Average inventory level =Q/2
Total holding cost/year = Ch*Q/2
Total cost of inventory per year
T.C./year= ordering cost/year +
Holding cost/year + material
Cost/year
T.C./year = Co*D/Q +Ch*Q/2 +Cu*D
d(T.C.)/dQ = -Co*D/Q2 +Ch/2 +0
For Economic Quantity order (EQO)
d(T.C.)/dQ= 0
QEOQ = 2CoD/Ch

No of Economic order

placed /year = D/ QEOQ
Inter order time = QEOQ /D
MODEL : 2 (Economic order
Quantity when Stock
Replenishment is Non
Instantaneous (production
Model)
Assumptions
All assumption as per model
(1) Expect Infinite
replenishment rate
TERMS USED IN ANLYSIS OF
MODEL :2
P = procurement rate
tp = procurement time
P-C = Inventory build –up
C = Consumption rate
Q = Quantity order =P*tp
Q` = Maximum inventory
level
Q`= (P-C)*tp
QEOQ = 2CoD/Ch * P/(P-
C)
 T.C./year = 2CoChD *
(P-C)/P
MODEL 3:
Assumptions
All assumption as per as
Model (1) expect shortage
allowed
Graphical representation of
model 3
TERMS USED IN ANLYSIS OF
MODEL :3
Cs = Shortage Cost (Stock out
cost) per unit per period
S = Balance units after back
order are satisfied
Q-S = number of Shortages
per order
t1 = Time Period during which
inventory is positive
t2 = Time during which
shortage exists
MODEL 4: (Discount
available on bulk
purchase)
When items are bought in
large quantities the supplier
often gives discounts.
However , if the material is
purchased to take advantage
of discount, the average
inventory level and so the
inventory carrying costs will
increase
 PRICE DISCOUNT MODEL
D = Annual Consumption
(Demand)
C1 = is the price per unit (Basic
price)
C2 = is the discounted price
price per unit
Co = is the ordering cost
I = is inventory carrying cost
expressed as a percentage of
PROCEDURE (Decision
Rules)
Calculate Q2(Economic order
Quantity at Discounted Price (C2))
Compare Q2 with Qb (price break
Qty.)
If Q2 > Qb , order Quantity Q2
If Q2 < Qb
Compute Q1 (Economic order Qty.
at basic price C1 )and Calculate
PROCEDURE (Decision
Rules)
 Example:
Given D = 10000
Co = 100
Cc = 25% of Cu
 Order Quantity Rs Cu
 < 500 10
 >500 9
Solution
QEOQ = 2CoD/Cc
 T.C./year = Co*D/Q + Cc*Q/2 +
CuD
Step 1 Calculate EOQ at least Cu
Price
QEOQ =94.28
Step 2 Compare QEOQ with Qb
(price break Qty.)
Step 3 QEOQ < 500
Step 4 Again find QEOQ at next
higher Cu
QEOQ = 89.44
Step 5 Now find T.C./year as
under
(T.C./year) at 89.44 = 101241
(T.C./year) at 500 = 92062
Step 6: QEOQ is given by
minimum T.C./ year
QEOQ = 500
B) Probabilistic Methods
 The probabilistic method employs the known
economic, geological and engineering data to
produce a
Collection of approximate stock
reserve
quantities
and their
related
probabilities.
CASE STUDY: AMAZON
TODAY Initially On an
started as average,
online added a
One of the book new
first store, product
shopping later once in
site added every six
launched considera week
in year ble items (from
1995 to year
consolidat 1999).
e its
position
 Inventory Management at
AMAZON
Establishe
Company d 10
was Each ware warehous
negative Later house e in U.S.A
on started establish by making
spending maintainin ment cost its bonds
time in g its own was worth $2
opening warehous estimated billion
stores and e to be $50 public
warehous million
e
 Innovative Inventory
Management
Stocked
In early only
2001, popular
Amazon The step items and
decided was in request
to order to less
outsource increase popular
its the profit item to
inventory margin. dealer
managem
ent.
 Thus
Amazon
started
Received acting as
goods are trans
packed and shipment
shipped to company.
the
Distributer correspondi
shipped the ng
item customer.
ordered to
the
company.
THE END