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INVENTORY MANAGEMENT
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By
Vimal Raj K

DEFINITION
INVENTORY is the stock of any item
or resource used in an organization.
It may consists of Raw materials,
Spare parts/consumable, and Finished
Goods.
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INVENTORY TYPES
 Movement Inventories
 Buffer Inventories
 Anticipation Inventories
 Decoupling Inventories
 Cycle Inventories
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MOVEMENT INVENTORY
 Inventory is moved from one location to
another.
 Transportation time is involved in
transferring substantial amount of
resources.
 Example : Coal is transported from the
coal fields to an industrial town by trains.
 It is also called as transit or pipeline
inventories
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BUFFER INVENTORY
 Protect against the uncertainties of
demand and supply.
 Actual demand may not exactly
match the average and could well
exceed it.
 Also known as Safety stock.
 Idea of keeping buffer stock is to
render high level of customer service
and consequently reduce number of
stockouts and back-orders.
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ANTICIPATION INVENTORY
 Anticipation inventories are held for
reason that a future demand for the
product is anticipated.
 Underlying idea is to smoothen the
production process for a longer
duration on a continuous scale
rather than operating with excessive
over time in one period.
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DECOUPLING INVENTORY
 Idea of the decoupling inventories is to decouple,
different parts of the production system.
 Inventory shared by two operations to prevent
breakdown or unevenness for machines.
 Provides a cushioning effect in the face of varying
work-rates, and machine breakdowns and failures.
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CYCLE INVENTORY
 Purchase are usually made in lots rather than for
the exact amounts which may me needed at a point
of time.
 If all purchase are made exactly, then there is no
use of cycle inventory.
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INVENTORY COST
 Purchase cost
 Ordering cost / Setup cost
 Carrying cost
 Stockout cost
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PURCHASE COST
 Purchase price – items that are
bought from outside sources.
 Production cost – items that are
produced with in the organisation.
 This cost may be constant per unit, or
it may vary as the quantity
purchased/produced increases or
decreases.
 Also known as nominal cost of
inventory.
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ORDERING COST / SETUP-COST
 Ordering cost is incurred whenever the
inventory is replenished.
 It includes cost associated with the
processing (setup cost) and chasing of
the purchase order, transportation,
inspection for quality, expediting overdue
orders, and so on.
 Also known as procurement cost.
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CARRYING COST
 Cost associated with storing an item in
inventory.
 Carrying cost includes – cost of capital
invested in the stock, costs directly
associated with storing goods,
deterioration costs, general insurance,
etc.
 Also known as holding cost or storage
cost.
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STOCKOUT COST
 Stockout imply shortages.
 If stock out is internal, it
would imply that some
production is lost.
 If stock out is external, it
would result in a loss of
potential sales and loss of
customer goodwill.
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ECONOMIC ORDERING QUANTITY
The Economic Order Quantity
(EOQ) is the number of units that a
company should add to inventory
with each order to minimize the
total costs of inventory—such as
holding costs, order costs, and
shortage costs.
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TYPES OF MODEL IN EOQ
 Purchase model without shortage
 Manufacture model without shortage
 Purchase model with shortage
 Manufacture model with shortage
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PURCHASE MODEL WITHOUT SHORTAGE
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ASSUMPTIONS
 Demand is known and uniform
 Purchasing at equal interval
 Zero lead time
 No shortages
 Instantaneous replenishment.
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MANUFACTURING MODEL WITHOUT SHORTAGE
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ASSUMPTIONS
 Demand is at a constant rate (D).
 All cost coefficients (C1, C2, C3) are constants.
 There is no shortage cost.
 The replacement rate is finite and greater than the
demand rate. This is also called replenishment rate
or manufacturing rate, denoted by R.
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PURCHASE MODEL WITH SHORTAGE
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MANUFACTURING MODEL WITH SHORTAGE
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SELECTIVE APPROACHES
 ABC analysis
 VED analysis
 HML analysis
 SDE analysis
 S-OS analysis
 FSN analysis
 XYZ analysis
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ABCANALYSIS
 The inventory items in an organization are
classified on the basis of their usage in monetary
terms.
 A – high consumption value items.
 B – moderate consumption value items.
 C – low consumption value items.
 By plotting the usage value of the items to obtain
the ABC distribution curve.
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VEDANALYSIS
 The items are classified on the basis of their
criticality to the production process.
 V – vital items with out which production process
would come to a standstill.
 E – essential item whose stock out would
adversely affect the efficiency of the production
system.
 D – desirable item which are required but do not
immediately cause a loss of production.
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HML ANALYSIS
 The items are classified on the basis of the unit
cost.
 H – high rate.
 M – medium rate.
 L – low rate.
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SDE ANALYSIS
 The items are classified based on the availability.
 S – scarce items which are in short supply.
 D – difficult items means that might be available in
the indigenous market but cannot be procured
easily.
 E – easily available items which are from local
markets.
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S-OS ANALYSIS
 Analysis is based on the nature of supplies.
 S – seasonal items.
 OS – off seasonal items.
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FSN ANALYSIS
 Based on the consumption pattern the items are
classified in this analysis.
 F – fast moving items.
 S – slow moving items.
 N – non moving items.
 This classification helps in the arrangement of
stocks in the stores.
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XYZ ANALYSIS
 In this analysis the classification is based on the
closing inventory value of different items.
 X – item with high investment.
 Z – item with low investment.
 Y – item with moderate investment.
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