Main Duniya Main Sabse Takatwar Hoon. Main Kisi Ki Partiksha Nahin Karta

Main Duniya Main Sabse
Takatwar Hoon. Main Kisi Ki

Partiksha Nahin Karta.
Main Hoon Kaun???.
Inventory
Management
Nature of Inventory
• Stocks of manufactured products and the material that make up the
product.
• Components:
• raw materials
• work-in-process
• finished goods
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Need for Inventories
• Transaction motive
• Precautionary motive
• Speculative motive
4
Objectives of Inventory
Management
• To maintain a large size of inventories of raw

material and work-in-process for efficient and
smooth production and of finished goods for
uninterrupted sales operations.
• To maintain a minimum investment in inventories

to maximize profitability.
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An effective inventory management
should:
• ensure a continuous supply of raw materials, to facilitate
uninterrupted production
• maintain sufficient stocks of raw materials in periods of
short supply and anticipate price changes
• maintain sufficient finished goods inventory for smooth
sales operation, and efficient customer service.
• minimize the carrying cost and time, and
• control investment in inventories and keep it at an
optimum level.
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Carrying Cost
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Ordering Cost
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Ordering Cost
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Deciding Optimum Level of
Inventory
• Optimal level of inventory involves a trade‐off between
* carrying costs and
* ordering costs.
At this trade‐off point the total cost is minimum.
This point is referred to as Economic Ordering Quantity (EOQ)
10
Deciding Optimum Level of
Inventory
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Economic order quantity (EOQ)
Model
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Inventory Management
Techniques
• How much should be ordered? EOQ
• When should it be ordered? ReOrder Point
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EOQ-Example
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Total Cost
• Total Cost = Ordering Cost + Carrying Cost + Purchase cost
Ordering Cost = (A/Q) x O
Carrying Cost = (Q/2) x C
Purchase cost = A x P
Total Cost = (A/Q) x O + (Q/2) x C + (A x P)
where A= Annual Usage
Q = Order Size
O = Ordering Cost per order
C = Carrying cost per unit per annum
P = purchase cost per unit
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Problem
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Problem
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Deciding When to Order (Reorder
Point)
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Reorder Point Under Certainty
Reorder point = Lead time x average usage
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Reorder Point Under Uncertainty
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Reorder Point Under Uncertainty
Reorder point = (Lead time x average usage) + safety stock
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Safety stock
• Safety stock is an additional level of inventory intended to

enable the firm to meet demand in case
• a) sales levels are higher than predicted and
• b) there are unexpected delays in either receiving raw
material or in producing goods.
• Safety Stock = Maximum possible usage - Normal usage

= (Maximum possible daily usage x Maximum possible lead
time)
Less : (Average daily usage x Average lead time)
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INVENTORY CONTROL SYSTEMS
• ABC Inventory Control System
• Just-in-Time (JIT) Systems
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ABC analysis
• ABC analysis is a selective approach to inventory
control and is used in firms that have multiple items in
inventory.
• Based on Pareto’s 80‐20 principle, it advocates a
greater emphasis on controlling those inventory items
that account for the bulk of the usage value.
• Inventory is categorized according to relative
importance for the purpose of monitoring and control.
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ABC classification
• ABC classification is also referred to as the VED (Vital, Essential,
and Desirable) classification.
• Categorization of items under the three categories can be
described as a four‐step process.
Step 1: Rank all the items of inventory in descending order,
on the basis of their usage value, and number them serially from 1
through n.
Step 2: Record the total of annual usage values of all the items and
express this as a percentage of the value of total usage. Also find
out the cumulative percentage of the total usage
Step 3: Classify the inventory items, looking at the cumulative
percentage of the total usage and the percentage of items, into
categories A, B, and C
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Graphic Presentation of ABC
Analysis
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JIT(Just-in-Time) inventory
• It is a Japanese concept of an inventory management.
• The underlying philosophy of JIT is to reduce the level
of inventory to zero so that the firm is able to cut down
its carrying cost.
• The focus of JIT is on shedding the excess inventory:
the safety stock that does not contribute to the
production process.
• JIT inventory system is all about having ‘the right
material, at the right time, at the right place, and in the
exact amount’.
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JIT example
• A good example would be a car manufacturer that operates with very

low inventory levels, relying on their supply chain to deliver the parts
they need to build cars. The parts needed to manufacture the cars do
not arrive before nor after they are needed, rather they arrive just as
they are needed.
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Methods of Inventory
Valuation
Valuation of inventory
• The valuation of inventory is significant from the standpoint of both

the balance sheet and the income statement.
• In the Balance Sheet, the inventory valuation influences the current
assets, the total assets, the ratio between current assets and current
liabilities
• In the Income Statement the inventory valuation may influence the
cost of goods sold and the net profits.
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Methods of Inventory
Valuation
• Average Cost Method
• FIFO(First In First Out)
• LIFO(Last In Last Out)
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Average Cost Method
• In this method normally weighted average prices are taken, purchase

of each type of material in stock are taken together and an average
price completed. If the price fluctuates considerably, many
calculations will be involved. It is usual to calculate a new average
after each delivery.
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Example
• A new company purchases four identical units in one month.
• 1 unit purchased on the 10th of the month at a cost of Rs100
• 1 unit purchased on the 16th of the month at a cost Rs120
• 1 unit purchased on the 20th of the month at a cost of Rs130
• 1 unit purchased on the 30th of the month at a cost of Rs 140
• Avg Cost of each unit = Rs 122.5
• If sale price is Rs 200 per unit,
• Profit = Rs 77.5 per unit
• Ending inventory balance would be Rs 367.5 (average cost per unit
122.5 × 3 remaining units)
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First-In First-Out (FIFO) Inventory
Method
• Items received first are assumed to be used first and therefore
prices charged are those paid for the early purchases. Prices
charged are actual prices and therefore there is no question of
having to recalculate a new price each time a new purchase in
received.
• If prices are rising, costs of products will be understated and
therefore profit will tend to overstated and vice versa
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Last-In First-Out (LIFO)
• Under LIFO it is assumed that the stocks sold or consumed

in any period are those most recently acquired or made. As
a consequence of this assumption the stocks to be carried
forwards as the inventories are considered as if they were
those earliest acquired or made.
• The result at the LIFO method is to change current revenues
with amounts approximating current replacement costs.
• To the goods owned at the end of any period are assigned
costs applicable to items purchased or made in earlier
periods.
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Main Duniya Main Sabse

Takatwar Hoon. Main Kisi Ki

• To maintain a large size of inventories of raw

• To maintain a minimum investment in inventories

This point is referred to as Economic Ordering Quantity (EOQ)

• When should it be ordered? ReOrder Point

• Safety stock is an additional level of inventory intended to

• Safety Stock = Maximum possible usage - Normal usage

• A good example would be a car manufacturer that operates with very

• The valuation of inventory is significant from the standpoint of both

• In this method normally weighted average prices are taken, purchase

• Under LIFO it is assumed that the stocks sold or consumed

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