INVENTORY MANAGEMENT MATERIAL

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INVENTORY MANAGEMENT

INVENTORY

Definition- Inventory:

Inventory refers to stocks of anything necessary to do business. Raw materials, goods in process
and finished goods all represent various forms of inventory. Each type represents money tied up
until the inventory leaves the company as purchased products.

Inventory is an idle stock of physical goods that contain economic value, and are held in various
forms by an organisation in its custody awaiting packing, processing, transformation, use or sale
in future.

Characteristics of inventory:

 All organisations engaged in production or sale of products hold inventory in one form
or other.
 Inventory can be in complete or incomplete state.
 Inventory is held to facilitate future consumption, sale or further processing/value
addition.
 All inventoried resources have economic value and can be considered as assets of the
organisation.

Principles of inventory management: Page16

The five principles of inventory management are:
 Demand forecasting
 Warehouse flow
 Inventory turns/stock rotation
 Cycle counting
 Process auditing

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Demand forecasting

Depending on the industry, inventory ranks in the top five business costs. Accurate demand
forecasting has the highest potential savings for any of the principles of inventory management.
Both over supply and under supply of inventory can have critical business costs. Whether it is
end-item stocking or raw component sourcing, the more accurate the forecast can be.

Establishing appropriate max-min management at the unique inventory line level, based on lead
times and safety stock level help ensure that you have what when you need it. This also avoids
costly overstocks. Idle inventory increases incremental costs due to handling and lost storage
space for fast-movers.

Warehouse flow

The old concept of warehouses being dirty and unorganised is out dated and costly. Lean
manufacturing concepts, including 5S have found a place in warehousing. Sorting, setting order,
systemic cleaning, standardising, and sustaining the discipline ensure that no dollars are lost to
poor processes.

The principles of inventory management are not any different from other industrial processes.
Disorganization costs money. Each process, from housekeeping to inventory transactions needs
a formal, standardized process to ensure consistently outstanding results.
Inventory turns/stock rotation

In certain industries, such as pharmaceuticals, foodstuffs and even in chemical warehousing, Page16
managing inventory can be critical to minimizing business costs. Inventory turns is one of the
key metrics used in evaluating how effective your execution is of the principles of inventory
management. Defining the success level for stock rotation is critical to analysing your demand
forecasting and warehouse flow.

Cycle counting

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One of the key methods of maintaining accurate inventory is cycle counting. It helps measure the
success of your existing processes and maintains accountability of potential error sources. There
are financial implications to cycle counting. Some industries require periodic 100% counts.
These are done through perpetual inventory count maintenance or through full-building counts.

Proactive

One of the cornerstone principles of inventory management is to audit early and often. Error
source identification starts with process audits. Process audits should occur at each transactional
step, from receiving to shipping and all inventory transactions in between.

Nature of Inventory

Inventory of materials occurs at various stages and departments of an organization. A

manufacturing organisation holds inventory of raw materials and consumables required for
production. It also holds inventory of semi-finished goods at various stages in the plant with
various departments. Finished goods inventory is held at plant, FG Stores, distribution centers
etc. Further both raw materials and finished goods those which are in transit at various locations
also form a part of inventory depending upon who owns the inventory at the particular juncture.
Finished goods inventory is held by the organization at various stocking points or with dealers
and stockiest until it reaches the market and end customers.

Besides raw materials and finished goods, organizations also hold inventories of spare parts to
service the products. Defective products, defective parts and scrap also form a part of inventory
as long as these items are inventoried in the books of the company and have economic value. Page16

Generally, inventory types can be grouped into four classifications:

 RAW MATERIALS

 WORK IN PROGRESS

 FINISHED GOODS

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 MRO GOODS

Raw Materials

Raw materials are inventory items which are used in the manufacturer’s
conversion process to produce components, subassemblies, or finished products. These
inventory items may be objects or elements that the firm has purchased from outside the
organization. They also may be commodities or extracted materials that the firm or its
subsidiary has produced or extracted. Even if the item is partially assembled or is considered a
finished good to the supplier, the purchaser may classify it as a raw material if his or her firm
had no input into its production. Usually, raw materials are commodities such as ore, grain,
minerals, petroleum, chemicals, paper, wood, paint, steel, and food items. However, items such
as nuts and bolts, ball bearings, key stock, casters, seats, wheels, and even engines may be
considered as raw materials if they are purchased from outside the firm.

The bill-of-materials file in a material requirements planning system (MRP) or a manufacturing

resource planning (MRP II) system utilizes a tool known as a product structure tree to clarify the
relationship among its inventory items and provide a basis for filling out or “exploding,” the
master production schedule. Consider an example of a rolling cart. This cart consists of a top that
is pressed from a sheet of steel, a frame formed from four steel bars, and a leg assembly
consisting of four legs, rolled from sheet steel, each with a caster attached.

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Commonly, raw materials are used in the manufacture of components. These components are
then incorporated into the final product or become part of a subassembly. Then, the
subassemblies are used to manufacture or assemble the final product. A part that goes into
making another part is known as a component, while the part it goes into is known as its
parent. Any item which does not have a component is regarded as a raw material or purchased
item. From the product structure tree it is clear that the rolling cart’s raw materials are steel,
bars, wheels, ball bearings, axles, and caster frames.

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Work-In-Process
Work-in-process (WIP) is made up of all the materials, parts
(components), assemblies, and subassemblies that are being processed or are waiting to be
processed within the system. This generally includes all material from raw material that has
been released for initial processing up to material that has been completely processed and is
awaiting final inspection and acceptance before inclusion in finished goods.

Finished Goods
A finished good is a completed part that is ready for a customer
order. Therefore, finished goods inventory is the stock of completed products. These goods have
been inspected and have passed final inspection requirements so that they can be transferred out
of work-in-process and into finished goods inventory. From this point, finished goods can be
sold directly to their final user, sold to retailers, sold to wholesalers, sent to distribution centres
or held in anticipation of a customer order.

Any item that does not have a parent can be classified as a finished good. By looking at the
rolling cart product structure tree example one can determine that the finished good in this case
is a cart.

MRO Goods Inventory

Maintenance, repair, and operating supplies, or MRO goods, are
items that are used to support and maintain the production process and its infrastructure. These
goods are usually consumed as a result of the production process but are not directly a part of

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the finished product. Examples of MRO goods include oils, lubricants, coolants, janitorial
supplies, uniforms, gloves, packing material, tools, nuts, bolts, screws, shim stock, and key
stock. Even office supplies such as staples, pens and pencils, copier paper, and toner are
considered part of MRO goods inventory.

Functions of inventory management/ Inventories/ Inventory Control:

Getting your inventory management right can affect your entire business helping you keep your
costs under control by contributing to managing your supply chain seamlessly. 

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Automating all your inventory management functions, an Inventory Management Software is a

computer-based solution that provides an organization with a comprehensive solution for their
inventory management requirements. It will keep track of orders, inventory levels, sales and
deliveries in point of sales and more for you making your inventory management process more
streamlined. 

Inventory Management Software provides great value to an organization. Below we’ve listed 10
basic functions of the Inventory Management Software.

Simplified Inventory Management

One of the key functions of an Inventory Management Software is that it makes the process of
managing your inventory a whole lot easier saving time and money. It automates the key
business processes and guides you to make smarter decisions.

Increased productivity and efficiency

By automating the daily manual tasks that are required an Inventory Management Software
enables to increase productivity and efficiency which aids in maximizing the growth of your
business. It also saves countless hours and the software also creates the opportunity to print
shipping labels, manage stock, process and dispatch orders, create and update listings all from
the same dashboard.

Increase Profitability 
The software also uses marketing and production to increase profitability and to reach the
maximum amount for the business investment.  With the ability to automate key business
operations there is the possibility to efficiently and accurately fulfil tasks such as managing stock
levels, updating listings across all selling channels and processing orders which will, in turn,

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reduce expenses and maximize profitability.

Avoid stock-outs and excess stock

The Inventory Management Software offers multi-level stock management. It is often a
challenging task to manage and maintain the exact balance in inventories. Having too little stock
can lead to a stock-out and disappoint customers and lead to a possible loss while excess stock
can take up warehouse space. Either way, it is an additional expense to the business. An
Inventory Management Software tracks low stock levels and set automatic re-ordering for each

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product. It can also be set to re-order points while estimating product demand, further reducing
the risk of ordering excess.

Quality Management
This software identifies and tracks various issues that can occur such as delayed shipments,
broken packages…etc. and through analytics provides guidance regarding the factors impacting
quality.

Balancing Supply and Demand

Delivering demands at the exact time, for the least amount of money without a surplus is a
feature of a quality Inventory Management Software.

Forecasting and planning

You can identify the viability of opening multiple regional warehouses located near key
customers to increase efficiencies and improve service levels through insights provided by the
Inventory Management Software.

Inventory Reports
The software will automatically generate reports. You will receive reports such as low-stock
reports, perpetual inventory validation reports, and inventory forecast reports.

An all-in-one solution
It is a key feature of a reputed Inventory Management Software to include order management,
listing management functionality and shipping management and will assist in streamlining the
entire selling process.

Serial-number tracking

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Another function of Inventory Management Software is serial-number tracking. The software
manages a limitless amount of serial numbers from the time, the inventory is received and to the
time it is issued. The data is recorded permanently in the system for further reference.

Investing in an inventory management system can reap you instant benefits in managing your
inventory increasing profits and decreasing the complexity of processes. For businesses looking
to taking their business to the next level, the software is a fundamental necessity to grow your
business.

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Types Of Inventory:

Inventories can be further classified according to the purpose they serve. These
types include transit inventory, buffer inventory, anticipation inventory, decoupling inventory, cycle
inventory, and MRO goods inventory. Some of these also are know by other names, such as
speculative inventory, safety inventory, and seasonal inventory.

 TRANSIT INVENTORY

 BUFFER INVENTORY

 ANTICIPATION INVENTORY

 CYCLE INVENTORY

 MRO GOODS INVENTORY

Transit Inventory
Transit inventories are the ones that need to transport items or material from one
location to another, and from the fact that there is some transportation time involved in getting
from one location to another. Sometimes this is referred to as pipeline inventory. Merchandise
shipped by truck or rail can sometimes take days or even weeks to go from a regional warehouse
to a retail facility. Big companies such as automobile manufacturers, employ freight
consolidators to pool their transit inventories coming from various locations into one shipping

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source in order to take advantage of economies of scale. Of course, this can greatly increase the
transit time for these inventories, hence an increase in the size of the inventory in transit. Take
the case of HPCL, the transports are done from refinery to the customer through different modes
of transport i.e., Pipeline, Roadways (Tankers), Shipping, etc. the time taken for goods to reach
from refinery to the customer is called transit inventory.

Buffer Inventory

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Some inventory used to protect against the uncertainties of supply and demand, as well as
unpredictable events such as poor delivery reliability or poor quality of a supplier’s products.
These inventory cushions are often referred to as safety stock. Safety stock or buffer inventory
is any amount held on hand that is over and above that currently needed to meet demand.
Generally, the higher the level of buffer inventory, the better the firm’s customer service. This
occurs because the firm suffers fewer “stock-outs” (when a customer’s order cannot be
immediately filled from existing inventory) and has less need to backorder the item, make the
customer wait until the next order cycle, or even worse, causes the customer to leave empty-
handed to find another supplier. Obviously, the better the customer service the greater the
likelihood of customer satisfaction.
Anticipation Inventory
Some firms will purchase and hold inventory that is in excess of their current need in
expectation of a possible future event. Such events may include a price increase, a seasonal
increase in demand, or even an impending labor strike. This tactic is commonly used by
retailers, who routinely build up inventory months before the demand for their products will be
unusually high (i.e., at Halloween, Christmas, or the back-to-school season). For
manufacturers, anticipation inventory allows them to build up inventory when demand is low
(also keeping workers busy during slack times) so that when demand picks up the increased
inventory will be slowly depleted and the firm does not have to react by increasing production
time (along with the subsequent increase in hiring, training, and other associated labour costs).
Therefore, the firm has avoided both excessive overtime due to increased demand and hiring
costs due to increased demand. It also has avoided layoff costs associated with production
cutbacks, or worse, the idling or shutting down of facilities. This process is sometimes called

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“smoothing” because it smoothes the peaks and valleys in demand, allowing the firm to
maintain a constant level of output and a stable workforce.

Cycle Inventory
Those who are familiar with the concept of economic order quantity (EOQ) know that the EOQ
is an attempt to balance inventory holding or carrying costs with the costs incurred from
ordering or setting up machinery. When large quantities are ordered or produced, inventory
holding costs are increased, but ordering/setup costs decrease. Conversely, when lot sizes

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decrease, inventory holding/carrying costs decrease, but the cost of ordering/setup increases
since more orders/setups are required to meet demand. When the two costs are equal
(holding/carrying costs and ordering/setup costs) the total cost (the sum of the two costs) is
minimized. Cycle inventories, sometimes called lot-size inventories, result from this process.
Usually, excess material is ordered and, consequently, held in inventory in an effort to reach this
minimization point. Hence, cycle inventory results from ordering in batches or lot sizes rather
than ordering material strictly as needed.
Classification of inventories:
Classifying inventory will allow the Supply Manager to set up a review schedule to check
inventory levels to establish inventory control.

 ABC classification
ABC inventory analysis is a method used to classify a business’s stock items into three
categories – A, B and C, based on their value to the business. A items are the most
important in terms of the value they bring a company, whilst C items are the least valuable.
The objective of ABC inventory analysis is to help managers focus their time on their most
valuable / important products and adapt their inventory control policies accordingly.

A classification items are very important and sometimes business critical. These typically
have a high value or are sold in large volumes.

B classification items are important, but less important than ‘A’ items and more important
than ‘C’ items. These are typically mid-range in inventory value and demand.

C classification items are marginally important. Typically, they have a low inventory value.

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 HML classification

 XYZ classification

 VED classification

 FSN classification

 SDF classification

 GOLF classification

 SOS classification

 MNG classification

While the ABC analysis is based on the assumption on value, XYZ analysis is based on Page16
the value of inventory undertaken during the closing of annual accounts. X items are those
having high value, Y items are those whose inventory values are medium and Z items are those
whose inventory values are low.
The percentages are similar to ABC analysis. This analysis helps find items with heavy
stock.

FSN Analysis

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This analysis classifies inventory based on quantity, the rate of consumption and frequency of
issues and uses. Here is the basic depiction of FSN Analysis:

F stands for Fast moving, S for Slow moving and N for Nonmoving items.

 Fast Moving (F) – Items that are frequently issued/used

 Slow Moving (S) – Items that are issued/used less for a certain period

 Non-Moving (N) – Items that are not issued/used for more than a certain duration

VED Analysis
This is an analysis whose classification is dependent on the user’s experience and perception.
This analysis classifies inventory according to the relative importance of certain items to other
items, like in spare parts.

In VED Analysis, the items are classified into three categories which are:

 Vital – inventory that consistently needs to be kept in stock.

 Essential – keeping a minimum stock of this inventory is enough.

 Desirable – operations can run with or without this, optional.

HML Analysis
HML Analysis classifies inventory based on how much a product costs/its unit price. The
classification is as follows:

 High Cost (H) – Item with a high unit value.

 Medium Cost (M) – Item with a medium unit value.

 Low Cost (L) – Item with a low unit value. Page16

SDE Analysis
This analysis classifies inventory based on how freely available an item or scarce an item is, or
the length of its lead time. This is how the inventory is classified:

 Scarce (S) – Imported items and require longer lead time.

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 Difficult (D) – Items which require more than a fortnight to be available, but less than 6
months lead time.

 Easily available (E) – Items which are easily available

If you have time, you may test out all of these methods of Inventory Analysis to determine which
one you are most comfortable with. Likewise, certain businesses work better with one type of
method than the other. Once you find out which of these methods is perfect for you and your
company, a positive R.O.I. is just within reach.

SOS Classification:-

Raw materials, especially agricultural inputs are generally classified by the seasonal, off-
seasonal systems since the prices during the season would generally be lower.
The seasonal items which are available only for a limited period should be procured and stocked
for meeting the needs of the full year. The prices of the seasonal items which are available
throughout the year are generally less during the harvest season.
             The quantity required of such items should, therefore, be determined after comparing the
cost savings on account of lower prices, if purchased during season, with the higher cost of
carrying inventories if purchased throughout the year.
A Buying and stocking strategy for seasonal items depend on a large number of factors
and more and more sophistication is taken place in this sphere and operational techniques are
used to obtain optimum results.

GOLF Classification:-

The letter stands for Government, Ordinary, Local and Foreign. There are mainly

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imported items which are canalized through the State Trading Corporation (STC) Minerals and
Metals Trading Corporation, etc. Indian Drugs and Pharmaceutical Ltd (IDPL), Mica trading
corporation etc. These are special procedures of inventory control which may not applicable to
ordinary items as they require special procedures.

MNG Analysis:-

            The grouping of inventory items in this analysis takes place as:

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 M- Moving items – The items which are consumed from time to time are normally
referred to as moving items.

 N- Non moving items – These items which are not and consumed in last one year are
covered under this group.

 G- Ghost items – This group refers to such items which neither have been received nor
issued during the year. The balance of such items shown in stock registers of the organization
will be nil, both at the beginning and at the end of the previous financial year.

Advantages of Inventory Management:

1) Increased Sales

Businesses who actively manage their inventory report a 2-10% increase in sales.

2) Increased Information Transparency

Know when items are received, picked, packed, shipped, kitted, manufactured, etc. Also, know
when you need to order more, when you’re over-stocked, or under-stocked.

3) Shorter Lead Times

Businesses who actively manage their inventory report a 50% reduction in lead times.

4) Lower Costs

Effective inventory management practices help result in decreased inventory write-offs, plus Page16
lower inventory holding costs. Carrying extra inventory can be very costly for your firm. 

5) Improved Delivery Performance

Real-time inventory updates improve the flow of goods to customers.

6) Increased Employee Efficiency

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Good inventory management solutions save time. Less time spent on managing inventory results
in greater productivity for you and your clients.

7) Accurate Planning

Stay steps ahead of the game and always have the right amount of products on hand by making
decisions based on inventory trends.

8) Decreased Stock-Outs

Businesses who actively manage their inventory report a 10-25% decrease in stock-outs.

9) Increased Customer Loyalty

Improve your accuracy and efficiency, and your customers will love you for it. They’ll trust you
to fulfill their needs, and you’ll have exactly what they’re looking for when they come back for
more.

10) Increased Inventory Turnover

Optimize the value of goods you have and increase inventory turnover by keeping fewer slow-
moving products on hand, while increasing your stock levels on profitable goods.

Disadvantages of inventory management:

 Sometimes, the orders are placed at the irregular time periods which may not be

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convenient to the producers or the suppliers of the materials.
 The items cannot be grouped and ordered at a time since the reorder points occur
irregularly.

 If there is a case when the order placement time is very high, there would be two to
three orders pending with the supplier each time and there is likelihood that he may
supply all orders at a time.

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 EOQ may give an order quantity which is much lower than the supplier minimum
and there is always a probability that the order placement level for a material has been
reached but not noticed in which case a stock out may occur.

 The system assumes stable usage and definite lead time. When these change
significantly, a new order quantity and a new order point should be fixed, which is quite
cumbersome.

Factors affecting inventory management/ Inventory control:

When managing your inventory processes, there are a variety of factors which you need to
consider. Both external and internal factors can affect inventory management in different ways,
and it is important to be aware of these variables. Let’s look at the main factors that can affect
inventory processes.

Financial Factors

Factors such as the cost of borrowing money to stock enough inventory can greatly influence
inventory management. In this case, your finances may fluctuate according to the economy, and
it is wise to keep an eye on changing interest rates to help plan your spending.

The tax costs associated with stocking inventory is another factor that can influence inventory
management. This is especially salient when preparing for the end of year tax returns.

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Other financial factors include the expenses associated with warehouse operations
and transportation costs changes in these factors may require you to alter your inventory
management processes accordingly. Fluctuations in the cost of fuel, for example, may require
you to rethink your transportation methods to reduce costs. You may choose to purchase your
own trucks or use outside contractors for transportation, which again will change the way you
manage inventory.

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Suppliers

Suppliers can have a huge influence on inventory control. Successful businesses require reliable
suppliers in order to plan spending and arrange production. An unreliable or unpredictable
supplier can have huge knock-on effects for inventory control. It can be a good idea to ensure
you have a reliable back up supplier to prevent product shortages or delays in the manufacturing
process.

Lead Time

Lead time is the time it takes from the moment an item is ordered to the moment it arrives. Lead
time will vary widely depending on the product type and the various manufacturing processes
involved, and therefore changes in these factors can require changes to inventory management.

Outsourcing manufacturing processes to other countries due to lower production costs may result

in longer waiting times. Producing the same goods locally may cost more but take less time, and
therefore you may need to adjust your stock levels accordingly.

Product Type

Inventory management must take into consideration the different types of products in stock. For
example, some products may be perishable and therefore have a shorter shelf life than others. In
this case inventory must be managed to ensure that these items are rotated in line with expiration
dates.

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Management

Ultimately, responsibility for managing your business’ inventory sits with you and any co-
owners. While you may have multiple employees acting as managers to oversee inventory
processes, they typically will not have the same stake in the business as you do.

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External Factors

There are multiple external factors that may affect inventory control. For example, economic
downturns may occur and this is something that you will generally have very little control over.
Assessing the economy is a must in order to guard against stock outs or a buildup of excess
inventory.

Other factors may include the real estate markets or the extent of local competition. These factors
are also largely out of your control, so it is a good idea to assess the external climate regularly in
order to stay prepared.

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