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Inventory Management

The document provides an overview of inventory management, detailing its importance in maintaining product availability, controlling costs, and meeting customer demand. It discusses various inventory management techniques such as Economic Order Quantity (EOQ), Just-in-Time (JIT), ABC Analysis, and others, along with the associated costs of inventory. Additionally, it emphasizes the significance of accurate demand forecasting and inventory valuation methods like FIFO and LIFO.

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4 views26 pages

Inventory Management

The document provides an overview of inventory management, detailing its importance in maintaining product availability, controlling costs, and meeting customer demand. It discusses various inventory management techniques such as Economic Order Quantity (EOQ), Just-in-Time (JIT), ABC Analysis, and others, along with the associated costs of inventory. Additionally, it emphasizes the significance of accurate demand forecasting and inventory valuation methods like FIFO and LIFO.

Uploaded by

njoshi2530
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Inventory Management

Prepared By
Nisha Joshi

School of Mathematical Sciences, TU


Balkhu, Kathmandu

Date:07/23/2024
Table of Contents

1 Introduction
1.1 Inventory
1.2 Inventory Management
2 Inventory Management Techniques
Inventory

The term inventory refers to the raw materials used in production as


well as the goods produced that are available for sale. A company's
inventory represents one of the most important assets because the
turnover of inventory represents one of the primary sources of
revenue generation and subsequent earnings for the company's
shareholders.There are three forms of inventory
1.Raw Material
2.Work-in-progress
3.Finished Goods
Inventory Management

Inventory management is the process of ordering, storing, using, and


selling a company's raw materials, components, and finished products.

Effective inventory management keeps a company organized. It also


provides critical data to help businesses respond to trends, avoid
breakdowns in supply chain management, and maintain profitability.
Why Inventory Management?

Managing inventory effectively is essential for ensuring product


availability, controlling costs, and meeting customer demand.
1. Keeping track of what we Have
2. Ordering More
3. Avoiding Wastage
4. Meeting Customer Demand
5. Reducing Costs
6. Supplier Relationships
7. Data-Driven Decision-Making
Inventory Costs

Inventory cost is defined as the cost incurred over procurement, storage


and management of inventory.Mainly ,there are three categories of
inventory costs
1. Ordering Cost
2. Holding cost
3. Shortage cost
1. Ordering Costs

These are costs that are associated with the purchasing or ordering
of materials. These are also know as buying costs and will arise
only when some purchases are made.These costs include:
(1) Cost of stationery, typing, telephone charges etc.
(2) Expenses incurred on transportation of goods purchased.
(3)Receiving cost(unloading and inspection)
2.Carrying Costs
• These are costs for holding the inventories. These costs will not
be incurred if inventories are not carried. These costs include:

1) The cost of capital invested in inventories. An interest will


be paid on the amount of capital locked up in inventories.
2) Cost of storage which could have been used for other
purposes.
3) Insurance Cost
4) Cost of spoilage in handling of materials
5) Depreciation cost
3. Shortage cost

Shortage cost is also named as Stock-out cost. Shortage cost or stock-


out cost and cost of replenishment is incurred when businesses
becomes out of stock due to unusual circumstances.It includes:

1. Disrupted Production Cost


2. Emergency Shipment Cost
3. Customer Loyalty & Reputation Cost
Inventory Management Techniques

1. Economic Order Quantity (EOQ)


2. Just-in-Time (JIT) Inventory
3.ABC Analysis
4. Safety Stock
5. Inventory Turnover Ratio
6. Demand Forecasting
6. FIFO and LIFO Inventory Valuation
1. Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) represents the optimal order size that
minimizes the total inventory cost, which includes both ordering and
carrying costs. This ideal order quantity is achieved when the costs
associated with ordering and holding inventory are balanced. EOQ
determines the most economical amount of inventory to purchase at a
time to reduce the annual total inventory cost. Larger orders can lower
the cost per unit, but we need to consider the extra cost of storing the
inventory longer .Therefore, EOQ helps in identifying the quantity that
strikes the best balance between these two costs, ensuring efficient
inventory management and cost savings.
So, According to assumption of EOQ
Total ordering cost = Total carrying cost
No of order x Ordering cost per order = Average Inventory xCarrying Cost
per Unit
or, xo = xc
or, =
or, Q2 C= 2AO
i.e Q =
Where,
= Number of order
= Average inventory
O = Ordering cost per order
C = Carrying cost per unit
Q =EOQ
Therefore,
EOQ =
Where ,
A = Annual Demand
From the diagram, it is clear
that carrying costs and ordering
costs behave in opposite ways
If high quantity is ordered at a
time, ordering costs will be low
and carrying costs will be high
and vice versa, if low quantity
is ordered at one time.
2. Just-in-Time (JIT) Inventory

JIT is a system where inventory is ordered and received just in


time for production or sale. It aims to minimize carrying costs
by reducing excess inventory and storage space.However, it
requires a well-coordinated supply chain and can be risky if
there are supply disruptions .
Advantages Of JIT

1.Less Space is needed


2.Waste Reduction
3.Smaller Investment
Disadvantages of JIT

1.Risk of running out of stock


2.Lack of control over time Frame
3.More Planing required
4.Little room for mistakes
3. ABC Analysis

• This technique categorizes inventory items into three categories: A,


B, and C, based on their importance and value. A items are the most
valuable and typically account for a small portion of the inventory
but a large portion of the value. B items are moderately valuable, and
C items are the least valuable. This helps prioritize inventory
management efforts
Contd...

ABC analysis is a valuable tool because it helps them allocate their


time and resources more effectively, ensuring that they prioritize the
items that have the greatest impact on the company's bottom line while
reducing the risk of overstocking or understocking less important items.
4. Safety Stock

Safety stock is a buffer inventory kept to account for unexpected


demand fluctuations or supply chain disruptions. The level of
safety stock is determined by analyzing historical data and lead
times
5. Inventory Turnover Ratio

It measures how many times a company's inventory is sold and replaced


over a specific period, usually a year. A higher inventory turnover ratio
generally indicates more efficient inventory management.
ITR =
6. Demand Forecasting

Accurate demand forecasting can help businesses plan the inventory


levels more effectively, reducing the risk of overstocking or under-
stocking.
It is the process of predicting how much of a product or material
customers will need in the future. It helps businesses optimize
inventory levels by ensuring they have enough stock to meet demand
without overstocking.
6. FIFO and LIFO Inventory Valuation

These are methods of valuing inventory. FIFO (First-In, First-Out)


assumes that the oldest items are sold first, while LIFO (Last-In,
First-Out) assumes that the newest items are sold first. The choice
between these methods can impact inventory valuation and taxes.
Thank You!!

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