INVENTORY MANAGEMENT
Meaning of inventory management :- It is practice of tracking and controlling inventory orders, its usage and storage along with management of finished goods that are ready for sale.
Inventory Management Objectives
- Preventing Dead Stock or Perishability
- Reducing Purchase Cost of Goods
- Enhancing Cash Flow
- Optimizing Storage Cost
- Maintaining Sufficient Stock
>Inventories are assets of the firm.
> How much inventories be maintained by firm- the firm must have an optimal level of inventories.
> Maintaining the level of inventories is like maintaining the level of water in a bath with an open drain.
> The basic financial problem is to determine the proper level of investment in the inventories and to decide how much inventory must be acquired during each period to maintain that level.
> Objectives of Inventories are maximum satisfaction to customer,minimum investment in inventory, achieving low cost plan operation, and high satisfaction – low investment.
> Inventories are called current assets.
> The purpose of holding inventory is to achieve efficiency through cost reduction and increased sales volume.
Three motives are there for holding the inventories are:-
1)Transaction motive.
2)Precautionary motive.
3) Speculation motive.
Costs of maintaining Inventories are:
1) Material cost- It is the costs of purchasing the goods & related costs, transportation & handling costs
2) Ordering cost–The expenses incurred to place orders with suppliers and replenish the inventory of raw materials are called ordering cost.
3) Carrying cost- cost incurred for maintaining the inventory in warehouse is called carrying cost.
4) Shortage costs or stock out cost- these are the costs associated with either a delay in meeting the demand or inability to meet the demand at all due to shortage of stock also called hidden cost.
VARIOUS MANAGEMENT TECHNIQUES
ABC ANALYSIS
Here inventory items are classified into three categories namely:
A (Highly expensive), B (Moderately Expensive), and C (Lease Expensive).
Always best control .It is based on the propositions that
1)managerial time and efforts are scare and limited.
2) Some items of inventory are more important than others
JUST IN TIME
In this method, the company keeps only that much of inventory which is needed. during production. This saves insurance and storage cost.
JUST IN TIME is an inventory management system which aims at procuring raw material and labour as and when require without investing in storing it
MRP
Material Requirement Planning (MRP) is a technique in which order is placed after considering sales forecast.
EOQ MODEL (ECONOMIC ORDER QUANTITY)
In this model, the store manager will reorder the inventory when it reaches the minimum level.
It refers to the optimal order size that will result in the lowest ordering and carrying cost for an item of inventory based on its expected cycle.
Assumptions are:
1) Constant or uniform demand.
2) Known demand or usage .
3) Constant per unit price .
4) Constant carrying cost.
5) Constant ordering cost.
Inventories can be replenished immediately as the stock level reaches exactly equal to zero constantly there is no shortage of inventory.
EOQ= √2AO/C,A= Annual cost, O= Ordering cost, C=Carrying cost per unit.
MIN. SAFETY STOCK
It is the level of inventory which an organization maintains to avoid the stock-out situation.
VED ANALYSIS
Vital Essential and Desirable (VED) is used for controlling the spare parts of inventory
FSN METHOD
Fast Slow and Non Moving (FSN) Method is very useful for controlling obsolescence.
FSN ANALYSIS is an inventory management technique which is based on the rate of consumption of spares and goods in an organization.
Fast Moving Inventory which moves in and out of stock fastest and most often. It comprises less than 20% of total inventory.
Slow Moving Inventory moves slowly in comparison to fast moving. It comprises of 35% of the total inventory. respectively.
Non-Moving Inventory is the least moving portion of inventory and is dead stock. It has high as 55%-60% of the total inventory.
IMPORTANCE
- Helps in identifying Dead Stock
- It also helps in space management.
- Best for identification of seasonal product
- Effectively allocate money to beneficial items (fast moving).
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