Definition of Inventory

• Inventories means the stock of the product of a

company and components thereof that makes up
the product. It includes the raw materials, work in
progress and finished goods.

• It is the physical stock of items a business or

production organization kept in hand for the efficient
running of business or its production.
Inventories are
1. Items in stock.

2. Usable but idle resources.

Inventory control
Process of maintaining optimum needed quantity of
inventories for the smooth operation of organization.
Introduction to Inventory
What is Inventory?
•Inventory refers to the goods and materials a business holds
for the purpose of resale, production, or repair.
•Essential for effective supply chain management and
operational efficiency.
Types of Inventory Include:
1.Raw Materials
2.Work in Progress (WIP)
3.Finished Goods
4.Maintenance, Repair, and Overhaul (MRO) Supplies
Types of Inventories
1. Raw Materials (RM)
•Definition: Unprocessed, basic materials used to
produce goods.
•Role: Essential inputs in the manufacturing process.
These are transformed into finished goods.
•Examples: Wood, metal, fabric, chemicals, or any
unprocessed material.
•Importance: Sufficient raw materials ensure
uninterrupted production; however, excess inventory
ties up working capital.
Types of Inventories
2. Work-in-Progress (WIP)
•Definition: Partially completed products that are in the
production process but are not yet finished goods.
•Role: Represents the transformation process where raw
materials are worked on but are still in transition.
•Examples: Assembled but unfinished products, semi-
finished goods, or components in a production line.
•Importance: WIP inventory helps maintain a smooth
production flow but can also create inefficiencies if the
process is delayed.
Types of Inventories
Finished Goods
•Definition: Completed products ready for sale to
customers.
•Role: The final stage of production, available for sale
or distribution.
•Examples: Cars, electronics, clothing, or packaged
food items.
•Importance: Having the right amount of finished
goods ensures a company can meet demand without
overproduction, which leads to excess holding costs.
Types of Inventories
Maintenance, Repair, and Overhaul (MRO) Inventory
•Definition: Supplies used to maintain and repair
equipment, machinery, and facilities, not directly involved in
production.
•Role: Keeps operations running smoothly and helps reduce
downtime or failures in the production process.
•Examples: Spare parts, lubricants, tools, cleaning
materials, etc.
•Importance: MRO inventory helps prevent production
halts due to equipment failure but should be carefully
managed to avoid overstocking.
Objectives of inventory
control
The basic managerial objectives are:
1. Avoid over/under investment in inventories.

2. To provide right quantity and quality goods at right

time at proper value.
 Operatin
g
objective
Objective s
s of
inventory
control Financia
l
objective
s
Operating objectives
1. Availability of Materials: All type of material available
at all time so that production may not be held up for
want of supply of materials.

2. Minimizing the wastage : permit only

uncontrollable wastage. Avoid wastage by leakage
theft, embezzlement, spoilage( rust, dust , dirt)
3. Promotion of manufacturing
efficiency: When right type of raw
material is available at the right time.

4. Better service to the customers: Maintain

proper production flow to produce
sufficient finished goods to meet the
demand of of the customers
5. Control of production level: To increase or decrease the
production as per the demand as well as to maintain proper
buffer stock to meet any eventuality in difficult times.

6. Optimal level of inventories: It is done in view as per the

operational requirements.it also avoids the out of stock
danger.
Financial objectives
Economy in purchasing: management makes every attempt to
purchase the raw materials in bulk quantity and to take
advantage of favorable market condition.

Optimum investment and efficient use of capital: The finance

management should set up maximum and minimum levels of
stocks to avoid deficiency or surplus of stock position.

3. Reasonable price: Management should ensure supply of raw

materials at a reasonable low price without sacrificing the quality
of it thereby helping the cost of production and quality of
finished goods.
Advantages of inventory
1. Delivery in time: as inventory stored aids smooth production,
the manufacturing company can earn reputation as a reliable
supply.
- our finished goods can be raw materials for buyers.
- reputation can get more customers

2. Possibility of discount on bulk purchase

3. Efficiently handle unforeseen circumstances: harthal, bandh or

other transportation difficulties do not hinder production.

4. No idling of workers and machineries.

Disadvantages of
inventory
1. Working capital tied up: cant utilize the amount for
other purposes nor it yield any interest.

2. More space required: more inventories more is the space

needed and space accounts for rent.

3. Increase insurance charges: Increased cost of handling

and manufacturing.

4. Increased over head expenses: Security personnel

required to guard inventory.

5. Chances of damage: Pilferage, replacement, etc more.

6. Increased chance of obsolesce.

•Inventories constitute a significant part of the working
capital.

•When a firm feel shortage of finance it should

take more care in its inventories rather than anything
else.
Ordering cost or procurement
cost or purchasing cost
• The cost that has to be spent in making purchase order.

• Includes all the expenditure associated on placing an order.

- postal service expense
- expenditure on stationary and consumables.
- travelling expense.
- time spent by purchase department for
order and its equivalence in terms of money.
- expenses on supplies.
- rent for premises occupied by purchase department
- legal fee for lawyers in case such situations arises.
 Inventory carrying
cost
Cost of blocking material as inventory . This
includes:-

1.Cost of interest for the value of items stored

as inventory.
2.Salaries of personnel managing
various position including security
personnel.
3.Rent for the space occupied by the
inventories.
4.The potential scope of loss , pilferage,
obsolescence, etc.
Under stocking or
shortages.
It is the cost of not having an item when it is
needed, thus affecting the sales of the
company.

This may lead to 2 situations:-

1.Back logging
2.Cancellation of orders.
Backlogging: work is delayed beyond its schedule
and eats away the schedule time of next order
thereby delaying the next order.

Cancellation of order: When buyer is not in a

position to wait .

Both the above results in:

1. Penality cost: Purchase order will have an in built
provision for penality eg, 20% payment reduced
for 2 days delay, etc

2. Emergency replenishment: In an urgent situation

if you want good quality we may have to spent
extra amount eg. Emergency transportation
cost,etc.
 Over stocking
cost
This results when stock is left on hand when
the demand for the item has ended.

The left over inventory

may be
- Utilized at a later
stage.
- Thrown out as
scrap.
1. ABC analysis

2. VED analysis

3. SDE analysis

4. FSN analysis

5. HML analysis
 ABC
analysis
• Process of classifying items using values as
measure.
• Process of excursing selective control over
inventories.

Objectives of the analysis

1. Frame policy guidelines regarding
control of items.
2. This policy enables material managers
to exercise selective control when he is
confronted with large number of items.
3. Expensive items are branded as A
items(10%) the in between as B(20%)
and least expensive as C(70%)
The method.
1. All the item that are used in the
industry are identified.
2. Items are listed as per the value.
3. The number of high valued items ,
medium valued and low valued items
are counted.
4. Their percentage is found out.

The concept
It is practically not feasible to
exercise tight control over all items in a
large or in medium sized organization.
Hence we resort to classify the items
according to their importance.
 VED
analysis
•Based on the critical values and shortage
cost of the item. Thus helps focus on vital
items.

•Based on criticality the item can be

classified into 3 categories viz; Vital,
Essential and Desirable.

•Vital items are critically needed in a

manufacturing unit. The items with lower
criticality included in E and lowest in D.

•The status of each item will be discussed

with justification by the material
manager in consultation with other
 SDE
analysis
Classification based on lead time/
availability

•S( Scarce) those item which are imported

or which need a lead time more than 6
months.

•D(Difficult): The items which require less

than 6 months but more than a fort night.

•E( easily available): Items which are

available easily in less than a fort
night.
 FSN
analysis
Classification based on frequency of issue
or use.

•F = Fast moving items that are

frequently issued in a manufacturing unit.

• S = Slow moving items in a

manufacturing unit.

• N = Non moving item

This classification helps in establishing

most suitable layout by locating all fast
 HML
analysis
Classification based on unit
value.

H = high cost
M= medium cost
L= Low cost

This type of analysis helps in

exercising control at the use
point . Proper authorization
should be there for replacing
Definition of
EOQ
It is theparticular quantity at which
the sum of cost of both the
ordering and inventory carrying cost is
minimum.

Total cost = carrying cost + procurement cost

 Consumption
rate
It is the rate at which the raw materials are
consumed.

If we plot a graph between time and level of

inventory the slope of the graph gives the
consumption rate

Constant consumption rate.

If the raw material is consumed at same rate over
the same period of time.

Actual / irregular consumption rate

There will be variation in the production which
leads to different consumption rates at different
time intervals. Also influenced by factors like
 Replenishme
nt
The process of refilling the material as and
when it is consumed so that the inventory
level is maintained within a range .

Types:-
1.Instantaneous replenishment
2.Replenishment at constant rate
3.Replenishment at irregular rate.
1. Instantaneous replenishment: refilling is done at one
time, at one instant for the one full lot size.

2. Replenishment at constant rate: If we replenish the

used inventory at a constant rate . Usually practiced in
industries especially the ones which manufacture its
own raw material.

3. Replacement at irregular interval: The inventory is not

refilled at regular interval of time.
 Lead
Lead time is thetime
time gapbetween
starting or initiating the process of
ordering and receiving the ordered
quantity in stores.

This is estimated by the past experience.

Lead time includes the following:-

• Time taken to prepare purchase
requisition and placing the order.
• Time taken to deliver purchase order
to vendor.
• Time taken for the vendor to
manufacture.
 Reorder
point
This is the point which indicate that it is high
time we place the order failing which the
stokes may get exhausted.

Reorder point = lead time – predicted point of

exhaustion.

Eg. If we order once in every 10 days and the

lead time is 3 days then ROP = 10 – 3 = 7
days.
 Lead time
analysis.
Lead time depends on :-

1. The urgency or importance of the components in

the manufacturing process.

2. Reliability of the vendors.

 Reserve stock(O-RS)/
Safety stock/Buffer stock
•To guard against disturbances of production process
either due to uncertainties in consumption rates or lead
time some extra stock is maintained.

•It serve the purpose of minimizing the chances of running

out of stock.

•It should not be very less or excess.

Safety stock come to play when there is :-

1. An excess rejection or production

wastage in process than
normal.
2. Rejection at the time of receipt due to
-Poor production quality by vendor.
- Damage to raw material.
 Factor of
uncertainty
Uncertainty is the main reason for having safety stock.
It may be due to:-

1. Uncertainty of demand
2. Uncertainty of delivery.
3. Uncertainty of quantity.
•Uncertainty of demand: there will be a difference
between the expected demand and the actual demand
which is known as the forecast error. It is mainly
dependent on the buyers side.

•Uncertainty of delivery: depends on how long the lead

time is going to be. If something goes wrong with the
suppliers production the lead time may prolong.

•Uncertainty of quantity: this depends on how many

scrap or imperfect items the ordered quantity is going to
contain.
 Determination of
safety stock
The level of safety stock to be maintained depends on
various factors like:-
-Cost of item in question
-Uncertainties in demand
-Negative fall out of stock of this item
-Spoilage due to long storage , etc

Optimum safety stock = maximum lead time in amount-

normal lead time in amount.
Max. time = the worst possible
lead scenario Found out in
purchase
occurred. department or past
consultation
records. with the

Normal lead time = most expected lead time or the

average lead time.

e.g.. If the maximum lead time is 13 days and the

average lead time is 11.5 days then 13-11.5= 1.5, a
stock that last for 1.5 days is the optimum safety
stock.
 Disposal of obsolete and surplus
material.
Obsolete material: Those materials or equipments which
are not damaged and which have economic work but are
no longer useful for the company’s operation due to
change in production line.

The term can be associated with equipments, materials,

stocks, techniques, etc.

It is very difficult to predict when the technology will

change leading to obsolescence. The company should
have sharp eye on the competition so that it can have more
 Causes for
1.
Obsolescence
Adoption of standardization: lead to elimination of non standard
varieties.

2. Adoption of new technology.

3. Changes in production design

4. Cannibalization: when a machine breaks down, it is, sometimes

rectified by using components of an identical machine which is
already not functional.

5. Faulty purchases : it the purchases are made in bulk so that they

can last for a very long time.

Can be controlled by FSN analysis

 Surplus
material
Equipments which have no immediate use but had
accumulated due to faulty planning , forecasting and
purchasing. They have usage value in future.

•They are merely excess of what is in need.

•Easy to control compared to obsolete.

•Both surplus and obsolete are in good

materials condition.
 Common causes for surplus
and obsolete
materials
1. Over ordering

2. Faulty planning, purchasing and forecasting.

3. Reduced production.

4. Drastic reduction in wastage.

5. Modification of processes.
 They need to be
disposed ?
1. Keeping them is a costly affair.

2. They need space.

3. More security personnel

4. Separate store for maintaining them.

5. More chances of pilferage, damage etc.

 Stages of disposal of
obsolete and surplus.
1. Finding: Periodic study must be carried out of all
items stocked or staying as inventory.

2. Recrimination: Alternative ways of using

these items must be explored within the industry.

3. If they cannot be used any where then disposal act

is carried out.
 Priorities in the process of
disposal.
1. Explore possibility of sending in bulk.
2. Dispose to original supplier if they show interest.
3. Preference may be given to buyers or vendors
who have long term relation with the company.
4. Then think of others who may buy at best
possible price.
5. If it cannot be pushed off at best possible price, sell at
scrap value.
6. If it is not possible dispose them off free of cost
to someone who can use them.
( sometimes when distribute to employers it may lead to
 Process of disposal
of obsolete and
surplus material.
•By negotiation by which buyers approaches for
the

purchase of such materials.

•Auction.

•Tenders.
 Material
handling
Moving physical objects from one place to another as
parts, components, sub –assemblies, raw materials, or
finished goods ready for shipment.

Defined as the function dealing with the preparation,

placing and positioning of materials to facilitate their
movement or storage.

The moving of materials from raw material store to

through production to ultimate consumer with least
expenditure of time, effort so as to produce maximum
productive efficiency and lowest handling cost
 Salient principles of
material
- Planning principle: All handling
1. Principles related to planning.
handling activities must be properly
planned. Eg, use of same container throughout a handling
process.
- System principle: Plan a system integrating as many handling
activities as is practical and coordinate full scope of operation.
- Material flow principle: Plan an operation sequence and
equipment arrangement optimizing material flow. e.g plan
related work areas together.
- Simplification principle: Reduce or eliminate unnecessary
movements.
- Gravity principle: wherever practicable utilize gravity to move
material
-Space utilization principle: Avoid keeping too much of
inventory at temporary store.

-Unit size principle: Increase the size , weight, quantity of the

load handled at a time.

-Safety principle: provide safe handling method. Highlight

handling hazards or danger zones in a manufacturing unit.

-Equipment selection principle: consider all the aspects of of the

material to be handled and the method to be utilized in terms of
the lowest overall cost. Eg. Select versatile equipments.

-Standardization principle. Standardize methods, as well as type

and size of handling equipment.
-Motion principle: fix minimum period for loading, unloading and
other idleness.

-Idle time principle: reduce the unproductive time of both handling

of equipment anf manpower

-Maintenance principle: Set up regular maintanance schedule

-Obsolescence principle: Identify and replace obsolete matrrials.

-Flexibility principle: purchase equipments that can perform

a variety of tasks.

Light weight principle: opt for equipment that have less

dead weight.
Principles related to operations.

-Control principle: use martial handling principles to

improve production and inventory control. Materials may
be moved as per schedule.

-Capacity principle: Production capacity should be fully

achieved.

-Performance efficiency principle: Determine efficiency of

handling performance in terms of expense per unit handled.
 Store
keeping
Store keeping: custody of all materials stocked in stores
for which store keeper is the trustee.

Stores management responsible for proper receipt

, custody and issue of materials.
 Function of stores
1. To receive materials and check them for identification
department
2. To correctly position all materials and supplies within
the stores
3. Maintain stock safely in good condition.
4. Issue material only on requisition by
authorized person.
5. Maintain up to date record
6. Make sure the store is clean and in good
working condition.
7. Optimum utilization of store space
8. Initiate process of purchasing at the right time.
9. Coordinate and cooperate with various
departments like purchase, production, etc.
 Location of store
- Minimize total handling costs and other costs related
store operation.

-Location should be according to the nature and value

of materials to be stored.

-Raw materials are stored need to the first operation.

-In process material close to the next operation.

-Finished goods near the shipping area

-All departments should have easy assess.

List of available store
space
1. Platform
2. Floor space
3. Rack
4. Shelves
5. Bins
6. Trays
7. Drums
8. Barrels

they can be stored as a unit, a tier, a row or a section

 Stock
verification
1. Annual physical verification:

- Verification officer individually or in team verifies

stocks in the stores once in a year checking all
relevant documents like bin cards, stores ledger, etc.

- After verification a list consisting of shortages,

damages, surplus is given to the management.

- During verification the stores wont be functioning.

2. Perpetual inventory control

-Continuous check through out the year in such a way

that each item is checked at least once in a year.

-‘A method of recording stores balances after every

receipt and issue to facilitate regular checking and to
obviate closing down for stock taking”

-Priority given to A items then B and least to C.

-Incidentally help continuous stock taking.

 Errors in
stores
1. Clerical mistakes.

2. Improper storage e.g, camphor – volatile.

3. Pilferage ( steal items that are not that valuable)

4. Leakage.

5. Careless handling

6. Handling loss.
 Store
1. Section adjacentlayout
to store should be kept reserved for receipt of
materials and for its inspection before storage.

2. Minimize handling and transportation of materials.

3. Optimum utilization of floor space and height.

4. Shelves, racks etc should be situated in clearly defined leaves

so that he items are quickly stored and located for physical
counting and issuing.

5. Min lines should be between 1.5 to 3 m wide depending on the

type of material and amount of traffic involved.
6.Storage space should be clearly marked to ensure easy
and quick identification.
7.Storage space should be protected against waste
damages, pilferage, etc.
8.Place for storing material based on material
characteristics.
9.Lay out should be such hat it can make use of modern
material handling equipments like fork lifts, trucks,
conveyors, etc
10.Store keeper is not compelled to put newly arrived
material on the top of the old.
11.20 to 25% due space in each portion of the store for
further expansion.
Record
s
BIN card

Store
records
.
Store ledger
 Bin
•The document that records the exact quantity
card
of material available in the store at a give time.

• For each material a separate bin card is maintained.

• prepared by store keeper.

•Record of quantity only

•Entry made immediately after each transaction

•Kept inside store.

 Stores ledger/ perpetual
inventory cards
•Identical to bin card but here the money value is also
shown.

• Entries are made periodically.

• Prepared by Accounts department

•Outside store.
 Advantages of
record.
1. Efficiency of economy.

2. Settlements of disputes with credits, debits, insurance

etc.

3. Check against under stocking/ over stocking.