Inventory Management. Nature of Inventory Stocks of manufactured products and the material that make up the product. Components: –raw materials –work-in-process.

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Presentation transcript:

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 –stores and spares (supplies)

Need for Inventories Transaction motive Precautionary motive Speculative motive

Objectives of Inventory Management Ensure a continuous supply of raw materials to facilitate uninterrupted production Maintain sufficient stock of raw materials in periods of short supply and anticipate price changes Maintain sufficient finished goods inventory for smooth sales operations and efficient customer service Control inventory investment by maintaining optimum inventory

Inventory Management Techniques Economic order quantity (EOQ) –ordering costs: requisitioning, order placing, transportation, receiving, inspecting and storing, administration –carrying costs: warehousing, handling, clerical and staff, insurance, depreciation and obsolescence –ordering and carrying costs trade-off:

Inventory Management Techniques Reorder point under certainty –lead time –average usage Reorder point = Lead time x average usage Reorder point under uncertainty –safety stock Reorder point = (Lead time x average usage) + safety stock

Inventory Investment Analysis Estimation of incremental operating profit Estimation of incremental investment in inventory Estimation of the incremental rate of return (IRR) Comparison of the incremental rate of return with the required rate of return (RRR) Optimum inventory: IRR = RRR

Selective Inventory Control ABC analysis –classify inventory into three categories according to value –control by importance and exception: maximum attention to “A” items

Inventory Management Process Explicitly state the inventory policy Create an inventory monitoring cell Management group for controlling purchases Periodic meetings between purchase, materials planning and production executives Monthly reviews of total inventory at plant/corporate level Detail inventory control to the total budgeting system Identify critical inventory items for closer scrutiny