TOOLS & TECHNIQUES
OF INVENTORY
MANAGEMENT
Inventory Management
An efficient system of inventory management will determine:
1) What to purchase?
2) How much to purchase?
3) From where to purchase?
4) Where to store?
The purpose of inventory management is to keep the stock in such a
way that neither there is overstocking nor under – stocking.
(1) Economic Order Quantity
EOQ is a quantity of
inventory which can
reasonably be ordered
economically at time.
Ordering Cost – Cost of
placing an order.
Carrying Cost – Cost of
storage, loss of value, cost
of obsolescence.
Ordering costs and
Carrying costs are
taken in to
consideration.
S = Setup cost ( includes shipping &
handling )
D = Demand ( quantity sold per year)
H = Holding cost (per year)
The Economic Order
Quantity (EOQ) also refer
to as the optimum lot size.
It refers to the greatest
quantity of an item that a
seller should buy at one
time. This helps to cut the
combined annual costs of
ordering and storing the
inventory.
(2) ABC Analysis
Under this inventory is classified in to 3 categories-;
Category A : Items of high value and in small number.
Category B : Items of moderate value and in moderate in number
Category C : Items of small value and larger in number.
A
B
C
Accurate forecast
Approximate forecast
No forecast
Senior level involvement
Middle level involvement
Lower level involvement
Strict degree of control
Moderate degree of control
Relaxed degree of control
WHY ABC ANALYSIS ?
• Ensures control over costly item.
• Reduction in the storage expenses.
• Economical.
• Resource Allocation.
(3) VED Analysis
Vital items without which
production process would come
to standstill.
Desirable items which are
required but do not
immediately cause a loss of
production.
Essential items whose
stock out would
adversely affect the
efficiency of the
production system. Their
non – availability might
cause temporary losses.
(4) FSN Analysis
Classification based on frequency of issue or use
1) Fast moving
2) Slow moving
3) Non- moving
This Classification helps in establishing most suitable layout by
locating all fast moving items near the dispensing window to
reduce handling efforts.
(5) 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.
(6) FIFO & LIFO
LIFO and FIFO are
methods to determine
the cost of inventory.
FIFO, or First in, First
out, assumes the
older inventory is sold
first.
FIFO is a great way to
keep inventory fresh.
LIFO, or Last-in, Firstout, assumes the
newer inventory is
typically sold first. LIFO
helps prevent inventory
from going bad.
(7) Just in Time
Also known as Zero
Inventory System.
No need to block
money/ capital in
storage of material.
Applicable only if you
have surety about
your delivery system.
Inventory is managed
in such a manner so
that as and when the
firm requires material
for its production it
may be available.
(8) Aging Schedules of inventory
(9) Determination of stock level
If the inventory level is too little, the firm will face frequent
stock-outs involving heavy ordering cost
If the inventory level is too high it will be unnecessary tie-up
of capital. Therefore, an efficient inventory management
requires that a firm should maintain an optimum level of
inventory.
The four major types of stock levels of inventory.
1. Minimum Level
2. Maximum Level
3. Danger Level
4. Average Stock Level.
POINTS TO BE CONSIDERED IN MINIMUM LEVEL
(1) Lead Time
(2) Rate of Consumption
(3) Nature of Material
(4) Re-ordering Level
Maximum stock level will depend upon the following factors:
1. The availability of capital for the purchase of materials in the firm.
2. The maximum requirements of materials at any point of time.
3. The availability of space for storing the materials as inventory.
4. The rate of consumption of materials during lead time.
5. The cost of maintaining the stores.
6. The possibility of fluctuations in prices of various materials.
7. The nature of materials.