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Inventory Management: Objectives, Types, Costs

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    Introduction : Introduction Inventory management is the system devised and adopted for controlling investment in inventory. The aim of inventory management is to attain a healthy balance between the cost of having inventory and the cost of not having inventory. Bad management of inventory may lead to overstocking or stock outs. Types of inventory : Types of inventory Direct inventories Raw material Work in Progress Finished goods Indirect inventories Transit or movement inventories Buffer inventories or safety stock Lot size inventories Seasonal inventories Fluctuation inventories Decoupling inventories

    Objectives of Inventory Control : Objectives of Inventory Control Hedge against inflation Protection against fluctuation in demand Protection against fluctuation in supply To avoid stock outs and shortages Quantity discounts Optimum use of men, machines and materials Helps prevent wastage Steps in inventory control : Steps in inventory control Formulation of policy Location of warehouses Determination of EOQ Determination of safety stock Determination of lead time

    Types of inventory models : Types of inventory models Deterministic models – these are simple models in which it is assumed that the demand or consumption rate is known with certainity Constant lead time is involved in procurement Probabilistic models – here the demand follows a known probability distribution, while the lead time may either be constant or variable with a known probabilistic distributiuon Static models – static models relate to a single decision process in which only a single purchase order can be placed to meet the demands. Eg.

    Bread and eggs at a grocer Dynamic – the decision on one procurement process will affect the subsequent procurement decisions. Eg. A printer and its consumables Types of inventory models : Types of inventory models EOQ Assumptions under this model The demand is known and is constant and occurs uniformly over time The replenishment is in a single delivery The lead time can be estimated deterministically The cost on the units is the same irrespective of the lot size Unit cost of ordering and storing can be calculated The inventory system pertains to a single inventory.

    Inventory costs : Inventory costs Direct material cost Ordering cost Holding cost Shortage or back order cost Carrying cost = Cc Ordering cost = Co Shortage cost = CB Quantity Total costs Total cost Inventory control : Inventory control All inventory items need not be controlled with equal importance. Some items are very important and require a tight and intensive control. The items are classified on different bases: ABC analysis: Materials are divided into three categories – A, B, C. “A” Category items are high value items and require tight control. B” category items are managed by stock management system and do not require regular control “C” category items are usually common items and requires minimum management. 10% of the items i. e. “A” category items contribute to 60% of the cost. 60% of the items i. e. “C” category items contribute to 10% of the cost. Inventory control : Inventory control Policies for high items Order them more frequently to avoid lock up of capital The items should be delivered promptly from the supplier. Monthly reports must be sent to ensure proper usage of the material.

    Policies for “B” category items They should be ordered less frequently than “A” category items Reorder level, safety stock and such other norms have to be applied to these stock items Policies for “C” category items Liberal quantities are to be ordered which may last for 6 months or more as frequent purchases are time consuming Annual or six monthly orders reduce paper work and the company can avail bulk discounts. Items should be grouped according to requirements like electrical requirements, plumbing requirements, etc to help in easy storage.

    VED classification : VED classification V – Vital E – Essential D – Desirable Vital items are desirable to smooth production operations. Essential items are those whose stock outs adversely affect the efficiency of the production system Desirable items are those which do not hamper the process of production. Other methods : Other methods HML Classification H – High value items M – Medium value items L – Low value items XYZ Classification Based on the inventory valuation of the items as per the closing stock. High investment items are categorised as “X” items and low investment items are categorised as “Z” items.

    Helps the company in planning for storage and maintenance FSND – Fast moving, normal, slow moving and dead items SOS items – Seasonal and non-seasonal items GOLF – Government, Open market, local supplies and foreign market supplies SDE – Scarce, Difficult to obtain and easy to obtain Problems : Problems Yantra India Ltd. is a supplier of speedometers to Speed Auto Ltd. who are manufacturers of 60 cc two-wheelers. It supplies 20,000 speedometers to Speed Auto annually. At Speed Auto, the OC per order is Rs. 5 and the CC is 2. 5% of the average inventory value.

    The price of a single unit is Rs. 200. The company presently has a policy of placing 10 orders every year. Advise the management of Speed Auto as to whether it should continue with its present policy or switch over to the EOQ model? Problems : Problems Zen Bicycles sources 3000 seat covers for its bicycles from an outside supplier. The OC is Rs. 10 per order and the CC is Rs. 6 per unit per year. The company has 300 working days per year. Find the EOQ Number of orders per year Total inventory cost Number of inventory cycles in a year The duration of the inventory cycle

    Problems – quantity discounts : Problems – quantity discounts Trinity hospital at Bangalore sources 20,000 disposable syringes every year from a supplier. The OC per order is Rs. 100 and the CC is Rs. 1 per unit per year. The price of a syringe is Rs. 5. The supplier offers a 5% discount if purchases are made in lots of 10000 syringes or more. Determine whether the discount model is better than the EOQ model in the situation. Problems – differential discounting : Problems – differential discounting Microcosm software Ltd. sources 9000 blank CDs annually from a supplier. The OC per order is Rs. 10 and each CD costs Rs. 20.

    The CC is 10% of the CD price. The supplier offers the following discounts. Quantity Discount 100-499 2% 450-899 4% 900 and above 5% Evaluate the various discount options and also the EOQ option, and advice the management about the best inventory policy for CDs. Problems – Safety stock : Problems – Safety stock For a special component outsourced to a vendor and used in a textile machinery manufactured by Lakshmi Machine tools at Coimbatore, we have the following situation Yearly demand – 3,00,000 units Purchase quantity – 1,00,000 units Safety stock – 50,000 units The ordering cost, independent of purchase quantity is Rs. ,500 for each purchase. The purchase price of the component is Rs. 75. Annual holding cost is 20% of the value of the component. Assuming 230 working days per year, calculate The number of purchases during the year Average inventory level (including safety stock) Inventory turnover Average days of supply in inventory Reorder point if the lead time is 15 working days Total inventory costs per year and the total inventory costs per working day with purchase quantity 1,00,000 units. EOQ total inventory costs with safety stock of 5000

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