(BZU) Department of Business Administration

BAHADUR Sub-Campus Layyah

MBA 2009-12 SEMESTER 5FINAL REPORT

DISTRIBUTION MANAGEMENT

SUBMITTED TO MR MUJEEB SARFRAZ

STUDENTS GROUP

1 Akhtar Hussain Chughtai (MB-09-22)

2 Muhammad Ihsan ul Haq (MB-09-02)

3 Nadeem Akhtar (MB-09-25)

4 Muhammad Rashid (MB-09-41)

Dated January 02 2012

IN THE NAME OF ALLAH THE MOST

MERCIFUL AND THE MOST BENEFICIENT

2 | P a g e

Acknowledgements We are very thankful to Almighty Allah

Who has given us wisdom and power to learn and

seek All praises and admirations to Almighty Allah Who is the creator of every thing

Thanks also to Hazrat Muhammad (PBUH) Who is source of knowledge and leadership for all mankind forever

We are also very thankful to our beloved teacher Mr Mujeeb Sarfaraz who is prompting us towards professionalism Tons of thanks for his valuable support and consistent guidance

Akhtar Hussain Chughtai Muhammad Ihsan ul Haq Nadeem Akhtar Muhammad Rashid

3 | P a g e

Dedication

This

Report

Is

Dedicated

To

Who are always a source of love affection and inspiration for us Whose love and prayers always accompanied us

and guide us like a shining star whenever we

were in darkness and enable us to reach this

stage

4 | P a g e

TABLE OF CONTENTS

1) Introduction 06

2) Inventory in supply chain 09

3) Definitions amp concepts 10

4) Purpose of inventory 12

5) Types of inventory 14

6) Inventory management techniques 19

7) Other techniques 23

8) Five S 28

9) Conclusion 29

10) References 30

5 | P a g e

IntroductionThe word inventory simply means the goods and services that businesses hold in stock There

are however several different categories or types of inventory The first is called materials

and components This usually consists of the essential items needed to create or make a

finished product such as gears for a bicycle microchips for a computer or screens and tubes

for a television set The second type of inventory is called WIP or work in progress

inventory This refers to items that are partially completed but are not the entire finished

product They are on their way to becoming whole items but are not quite their yet The third

and most common form of inventory is called finished goods These are the final products

that are ready to be purchased by customers and consumers Finished goods can range from

cakes to furniture to vehicles Most people think of the finished goods as being part of an

inventory stock but the parts that create them are held accountable in inventory as well

Management is an individual or a group of individuals that accept responsibilities to run an

organisation They Plan Organise Direct and Control all the essential activities of the

organisation Management does not do the work themselves They motivate others to do the

work and co-ordinate (ie bring together) all the work for achieving the objectives of the

organisation Management brings together all Six Ms ie Men and Women Money

Machines Materials Methods and Markets They use these resources for achieving the

objectives of the organisation such as high sales maximum profits business expansion etc

Inventory management is the process of efficiently overseeing the constant flow of units into

and out of an existing inventory This process usually involves controlling the transfer in of

units in order to prevent the inventory from becoming too high or dwindling to levels that

could put the operation of the company into jeopardy Competent inventory management also

seeks to control the costs associated with the inventory both from the perspective of the total

value of the goods included and the tax burden generated by the cumulative value of the

inventory

6 | P a g e

Dated January 02 2012

IN THE NAME OF ALLAH THE MOST

MERCIFUL AND THE MOST BENEFICIENT

2 | P a g e

Acknowledgements We are very thankful to Almighty Allah

Who has given us wisdom and power to learn and

seek All praises and admirations to Almighty Allah Who is the creator of every thing

Thanks also to Hazrat Muhammad (PBUH) Who is source of knowledge and leadership for all mankind forever

We are also very thankful to our beloved teacher Mr Mujeeb Sarfaraz who is prompting us towards professionalism Tons of thanks for his valuable support and consistent guidance

Akhtar Hussain Chughtai Muhammad Ihsan ul Haq Nadeem Akhtar Muhammad Rashid

3 | P a g e

Dedication

This

Report

Is

Dedicated

To

Who are always a source of love affection and inspiration for us Whose love and prayers always accompanied us

and guide us like a shining star whenever we

were in darkness and enable us to reach this

stage

4 | P a g e

TABLE OF CONTENTS

1) Introduction 06

2) Inventory in supply chain 09

3) Definitions amp concepts 10

4) Purpose of inventory 12

5) Types of inventory 14

6) Inventory management techniques 19

7) Other techniques 23

8) Five S 28

9) Conclusion 29

10) References 30

5 | P a g e

IntroductionThe word inventory simply means the goods and services that businesses hold in stock There

are however several different categories or types of inventory The first is called materials

and components This usually consists of the essential items needed to create or make a

finished product such as gears for a bicycle microchips for a computer or screens and tubes

for a television set The second type of inventory is called WIP or work in progress

inventory This refers to items that are partially completed but are not the entire finished

product They are on their way to becoming whole items but are not quite their yet The third

and most common form of inventory is called finished goods These are the final products

that are ready to be purchased by customers and consumers Finished goods can range from

cakes to furniture to vehicles Most people think of the finished goods as being part of an

inventory stock but the parts that create them are held accountable in inventory as well

Management is an individual or a group of individuals that accept responsibilities to run an

organisation They Plan Organise Direct and Control all the essential activities of the

organisation Management does not do the work themselves They motivate others to do the

work and co-ordinate (ie bring together) all the work for achieving the objectives of the

organisation Management brings together all Six Ms ie Men and Women Money

Machines Materials Methods and Markets They use these resources for achieving the

objectives of the organisation such as high sales maximum profits business expansion etc

Inventory management is the process of efficiently overseeing the constant flow of units into

and out of an existing inventory This process usually involves controlling the transfer in of

units in order to prevent the inventory from becoming too high or dwindling to levels that

could put the operation of the company into jeopardy Competent inventory management also

seeks to control the costs associated with the inventory both from the perspective of the total

value of the goods included and the tax burden generated by the cumulative value of the

inventory

6 | P a g e

Acknowledgements We are very thankful to Almighty Allah

Who has given us wisdom and power to learn and

seek All praises and admirations to Almighty Allah Who is the creator of every thing

Thanks also to Hazrat Muhammad (PBUH) Who is source of knowledge and leadership for all mankind forever

We are also very thankful to our beloved teacher Mr Mujeeb Sarfaraz who is prompting us towards professionalism Tons of thanks for his valuable support and consistent guidance

Akhtar Hussain Chughtai Muhammad Ihsan ul Haq Nadeem Akhtar Muhammad Rashid

3 | P a g e

Dedication

This

Report

Is

Dedicated

To

Who are always a source of love affection and inspiration for us Whose love and prayers always accompanied us

and guide us like a shining star whenever we

were in darkness and enable us to reach this

stage

4 | P a g e

TABLE OF CONTENTS

1) Introduction 06

2) Inventory in supply chain 09

3) Definitions amp concepts 10

4) Purpose of inventory 12

5) Types of inventory 14

6) Inventory management techniques 19

7) Other techniques 23

8) Five S 28

9) Conclusion 29

10) References 30

5 | P a g e

IntroductionThe word inventory simply means the goods and services that businesses hold in stock There

are however several different categories or types of inventory The first is called materials

and components This usually consists of the essential items needed to create or make a

finished product such as gears for a bicycle microchips for a computer or screens and tubes

for a television set The second type of inventory is called WIP or work in progress

inventory This refers to items that are partially completed but are not the entire finished

product They are on their way to becoming whole items but are not quite their yet The third

and most common form of inventory is called finished goods These are the final products

that are ready to be purchased by customers and consumers Finished goods can range from

cakes to furniture to vehicles Most people think of the finished goods as being part of an

inventory stock but the parts that create them are held accountable in inventory as well

Management is an individual or a group of individuals that accept responsibilities to run an

organisation They Plan Organise Direct and Control all the essential activities of the

organisation Management does not do the work themselves They motivate others to do the

work and co-ordinate (ie bring together) all the work for achieving the objectives of the

organisation Management brings together all Six Ms ie Men and Women Money

Machines Materials Methods and Markets They use these resources for achieving the

objectives of the organisation such as high sales maximum profits business expansion etc

Inventory management is the process of efficiently overseeing the constant flow of units into

and out of an existing inventory This process usually involves controlling the transfer in of

units in order to prevent the inventory from becoming too high or dwindling to levels that

could put the operation of the company into jeopardy Competent inventory management also

seeks to control the costs associated with the inventory both from the perspective of the total

value of the goods included and the tax burden generated by the cumulative value of the

inventory

6 | P a g e

Dedication

This

Report

Is

Dedicated

To

Who are always a source of love affection and inspiration for us Whose love and prayers always accompanied us

and guide us like a shining star whenever we

were in darkness and enable us to reach this

stage

4 | P a g e

TABLE OF CONTENTS

1) Introduction 06

2) Inventory in supply chain 09

3) Definitions amp concepts 10

4) Purpose of inventory 12

5) Types of inventory 14

6) Inventory management techniques 19

7) Other techniques 23

8) Five S 28

9) Conclusion 29

10) References 30

5 | P a g e

IntroductionThe word inventory simply means the goods and services that businesses hold in stock There

are however several different categories or types of inventory The first is called materials

and components This usually consists of the essential items needed to create or make a

finished product such as gears for a bicycle microchips for a computer or screens and tubes

for a television set The second type of inventory is called WIP or work in progress

inventory This refers to items that are partially completed but are not the entire finished

product They are on their way to becoming whole items but are not quite their yet The third

and most common form of inventory is called finished goods These are the final products

that are ready to be purchased by customers and consumers Finished goods can range from

cakes to furniture to vehicles Most people think of the finished goods as being part of an

inventory stock but the parts that create them are held accountable in inventory as well

Management is an individual or a group of individuals that accept responsibilities to run an

organisation They Plan Organise Direct and Control all the essential activities of the

organisation Management does not do the work themselves They motivate others to do the

work and co-ordinate (ie bring together) all the work for achieving the objectives of the

organisation Management brings together all Six Ms ie Men and Women Money

Machines Materials Methods and Markets They use these resources for achieving the

objectives of the organisation such as high sales maximum profits business expansion etc

Inventory management is the process of efficiently overseeing the constant flow of units into

and out of an existing inventory This process usually involves controlling the transfer in of

units in order to prevent the inventory from becoming too high or dwindling to levels that

could put the operation of the company into jeopardy Competent inventory management also

seeks to control the costs associated with the inventory both from the perspective of the total

value of the goods included and the tax burden generated by the cumulative value of the

inventory

6 | P a g e

TABLE OF CONTENTS

1) Introduction 06

2) Inventory in supply chain 09

3) Definitions amp concepts 10

4) Purpose of inventory 12

5) Types of inventory 14

6) Inventory management techniques 19

7) Other techniques 23

8) Five S 28

9) Conclusion 29

10) References 30

5 | P a g e

IntroductionThe word inventory simply means the goods and services that businesses hold in stock There

are however several different categories or types of inventory The first is called materials

and components This usually consists of the essential items needed to create or make a

finished product such as gears for a bicycle microchips for a computer or screens and tubes

for a television set The second type of inventory is called WIP or work in progress

inventory This refers to items that are partially completed but are not the entire finished

product They are on their way to becoming whole items but are not quite their yet The third

and most common form of inventory is called finished goods These are the final products

that are ready to be purchased by customers and consumers Finished goods can range from

cakes to furniture to vehicles Most people think of the finished goods as being part of an

inventory stock but the parts that create them are held accountable in inventory as well

Management is an individual or a group of individuals that accept responsibilities to run an

organisation They Plan Organise Direct and Control all the essential activities of the

organisation Management does not do the work themselves They motivate others to do the

work and co-ordinate (ie bring together) all the work for achieving the objectives of the

organisation Management brings together all Six Ms ie Men and Women Money

Machines Materials Methods and Markets They use these resources for achieving the

objectives of the organisation such as high sales maximum profits business expansion etc

Inventory management is the process of efficiently overseeing the constant flow of units into

and out of an existing inventory This process usually involves controlling the transfer in of

units in order to prevent the inventory from becoming too high or dwindling to levels that

could put the operation of the company into jeopardy Competent inventory management also

seeks to control the costs associated with the inventory both from the perspective of the total

value of the goods included and the tax burden generated by the cumulative value of the

inventory

6 | P a g e

IntroductionThe word inventory simply means the goods and services that businesses hold in stock There

are however several different categories or types of inventory The first is called materials

and components This usually consists of the essential items needed to create or make a

finished product such as gears for a bicycle microchips for a computer or screens and tubes

for a television set The second type of inventory is called WIP or work in progress

inventory This refers to items that are partially completed but are not the entire finished

product They are on their way to becoming whole items but are not quite their yet The third

and most common form of inventory is called finished goods These are the final products

that are ready to be purchased by customers and consumers Finished goods can range from

cakes to furniture to vehicles Most people think of the finished goods as being part of an

inventory stock but the parts that create them are held accountable in inventory as well

Management is an individual or a group of individuals that accept responsibilities to run an

organisation They Plan Organise Direct and Control all the essential activities of the

organisation Management does not do the work themselves They motivate others to do the

work and co-ordinate (ie bring together) all the work for achieving the objectives of the

organisation Management brings together all Six Ms ie Men and Women Money

Machines Materials Methods and Markets They use these resources for achieving the

objectives of the organisation such as high sales maximum profits business expansion etc

Inventory management is the process of efficiently overseeing the constant flow of units into

and out of an existing inventory This process usually involves controlling the transfer in of

units in order to prevent the inventory from becoming too high or dwindling to levels that

could put the operation of the company into jeopardy Competent inventory management also

seeks to control the costs associated with the inventory both from the perspective of the total

value of the goods included and the tax burden generated by the cumulative value of the

inventory

6 | P a g e

INVENTORY MANAGEMENT

Inventory management includes a companys activities to acquire dispose and control of

inventories that are necessary for the attainment of a companys objectives The management

of inventories concerns the flow to within and from the company and the balance between

shortages and excesses in an uncertain environment (Tersin 1988) According to McPharson

(1987 p360) in apparel manufacturing inventory management systems are designed to

obtain concise and accurate information for control and planning of planned goods issues

cuts projections WIP and finished goods Inventory management has been a concern for

academics as well as practitioners in that overall investment in inventory accounts for

relatively large part of a companys assets Inventory may account for 20 to 40 of total

assets (Tersin 1988 Verwijmeren Vlist amp Donselaar 1996) Inventories tie up money and

success or failure in inventory management impacts a companys financial status Having too

much inventory can be as problematic as having too little inventory Too much inventory

requires unnecessary costs related to issues of storage markdowns and obsolescence while

7 | P a g e

too little results in stockouts or disrupted production Besides long-run production associated

with a high level of inventory conceals production problems (eg quality) which can

damage a companys long term performance (Vergin 1998) Therefore the primary goal of

inventory management has been to maximize a companys profitability by minimizing the

cost tied up with inventory and at the same time meeting the customer service requirements

(Lambert Stock amp Ellram 1998) Decisions on Production and Inventory Management

Many authors have proposed factors which management should consider for better inventory

management Branam (1984) specifically emphasized the importance of in-plant throughput

time reduction because throughput time is the ultimate constraint on inventory turnover ratio

(inventory turnover ratio = annual cost of goods soldaverage on hand inventory) which is

one of the major performance indicators in inventory management The authors

interpretation of the in-plant throughput time is the time span from the point of raw material

receipt to final assembly Tersine (1988) pointed out the factors for better inventory

management as better forecasting improved transportation improved communication

improved technology better scheduling and standardization

Pachura (1998) suggested that management should start the process of improving inventory

management by determining the manufacturing type benchmarking the inventory control

performance validating strategy (ie make-to-order make-to-stock build-to-forecast)

determining underlying causes through the use of an operational review and implementing

corrective action Higginson and Alam (1997) suggested specific techniques for inventory

management by focusing on cycle time

1 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin

2 Increasing inventory turnover -- but not sacrificing the service level3 Keeping stock low -- but not sacrificing service or performance4 Obtaining lower prices by making volume purchases -- but not ending up with slow-

moving inventory and

5 Having an adequate inventory on hand -- but not getting caught with obsolete items

8 | P a g e

INVENTORY MANAGEMENT IN THE SUPPLY CHAIN

Inventory management is one aspect of SCM The main goal of SCM is to better manage

inventory throughout the chain via improved information flow aimed at improved customer

service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)

Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory

Management (p16) for the inventory aspect of SCM The efficiency of SCM can be

measured by inventory performance such as the speed of inventory passing through the chain

and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various

forms from raw materials through WIP to finished goods is fed into the chain from suppliers

production and subsequently distribution centers to customers (Alber amp Walker 1997) This

flow of inventory requires responsibilities of channel members for the planning acquisition

storage movement and control of materials and final products (Tersine 1988) High levels

of inventory are found when the chain members less communicates due to lack of

information sharing between chain members and inefficiency of SCM Manufacturers the

main interest of this study have the most difficult and complex inventory problem as they

deal with raw material acquisition transformation of the material into final finished goods

and movement to the customer These consecutive activities require manufacturers to control

production scheduling and timing that are not easily accomplished due to uncertainties in

supplier performance manufacturing process and customer demand Manufacturers could

not reduce their buffer stocks without trusting in their partnerships and sharing forecasting

information on actual demand at retail level because of the bullwhip effect(Nahmias 1997

p791) which means the effect of retail sales fluctuation grows larger as it traverses to

upstream chain members More customer requirements for broader product coverage and

greater delivery capabilities escalate manufacturers problem in production process

complexity and forecasting of future demand

9 | P a g e

Definitions and concepts

In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are

Demand

The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)

Lead time

The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are

1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods

10 | P a g e

Ordering cost

The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost

Purchasing cost

The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales

Holding cost

The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate

Handling cost

The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses

Shipping cost

The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost

Stockout cost

In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it

11 | P a g e

may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)

Management cost

The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered

Inventory on hand

The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position

The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant

Safety stock

The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses

The Purpose of Inventory

So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are

bull Predictability

In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process

bull Fluctuations in demand

A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand

12 | P a g e

on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum

bull Unreliability of supply

Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs

bull Price protection

Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)

bull Quantity discounts

Often bulk discounts are available if you buy in large rather than in small quantities

bull Lower ordering costs

If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for

13 | P a g e

TYPES OF INVENTORIES

I MATERIAL INVENTORIES -

A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests

WORK IN PROCESS INVENTORIES-

Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for

14 | P a g e

too little results in stockouts or disrupted production Besides long-run production associated

with a high level of inventory conceals production problems (eg quality) which can

damage a companys long term performance (Vergin 1998) Therefore the primary goal of

inventory management has been to maximize a companys profitability by minimizing the

cost tied up with inventory and at the same time meeting the customer service requirements

(Lambert Stock amp Ellram 1998) Decisions on Production and Inventory Management

Many authors have proposed factors which management should consider for better inventory

management Branam (1984) specifically emphasized the importance of in-plant throughput

time reduction because throughput time is the ultimate constraint on inventory turnover ratio

(inventory turnover ratio = annual cost of goods soldaverage on hand inventory) which is

one of the major performance indicators in inventory management The authors

interpretation of the in-plant throughput time is the time span from the point of raw material

receipt to final assembly Tersine (1988) pointed out the factors for better inventory

management as better forecasting improved transportation improved communication

improved technology better scheduling and standardization

Pachura (1998) suggested that management should start the process of improving inventory

management by determining the manufacturing type benchmarking the inventory control

performance validating strategy (ie make-to-order make-to-stock build-to-forecast)

determining underlying causes through the use of an operational review and implementing

corrective action Higginson and Alam (1997) suggested specific techniques for inventory

management by focusing on cycle time

1 Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin

2 Increasing inventory turnover -- but not sacrificing the service level3 Keeping stock low -- but not sacrificing service or performance4 Obtaining lower prices by making volume purchases -- but not ending up with slow-

moving inventory and

5 Having an adequate inventory on hand -- but not getting caught with obsolete items

8 | P a g e

INVENTORY MANAGEMENT IN THE SUPPLY CHAIN

Inventory management is one aspect of SCM The main goal of SCM is to better manage

inventory throughout the chain via improved information flow aimed at improved customer

service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)

Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory

Management (p16) for the inventory aspect of SCM The efficiency of SCM can be

measured by inventory performance such as the speed of inventory passing through the chain

and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various

forms from raw materials through WIP to finished goods is fed into the chain from suppliers

production and subsequently distribution centers to customers (Alber amp Walker 1997) This

flow of inventory requires responsibilities of channel members for the planning acquisition

storage movement and control of materials and final products (Tersine 1988) High levels

of inventory are found when the chain members less communicates due to lack of

information sharing between chain members and inefficiency of SCM Manufacturers the

main interest of this study have the most difficult and complex inventory problem as they

deal with raw material acquisition transformation of the material into final finished goods

and movement to the customer These consecutive activities require manufacturers to control

production scheduling and timing that are not easily accomplished due to uncertainties in

supplier performance manufacturing process and customer demand Manufacturers could

not reduce their buffer stocks without trusting in their partnerships and sharing forecasting

information on actual demand at retail level because of the bullwhip effect(Nahmias 1997

p791) which means the effect of retail sales fluctuation grows larger as it traverses to

upstream chain members More customer requirements for broader product coverage and

greater delivery capabilities escalate manufacturers problem in production process

complexity and forecasting of future demand

9 | P a g e

Definitions and concepts

In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are

Demand

The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)

Lead time

The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are

1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods

10 | P a g e

Ordering cost

The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost

Purchasing cost

The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales

Holding cost

The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate

Handling cost

The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses

Shipping cost

The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost

Stockout cost

In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it

11 | P a g e

may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)

Management cost

The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered

Inventory on hand

The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position

The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant

Safety stock

The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses

The Purpose of Inventory

So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are

bull Predictability

In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process

bull Fluctuations in demand

A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand

12 | P a g e

on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum

bull Unreliability of supply

Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs

bull Price protection

Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)

bull Quantity discounts

Often bulk discounts are available if you buy in large rather than in small quantities

bull Lower ordering costs

If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for

13 | P a g e

TYPES OF INVENTORIES

I MATERIAL INVENTORIES -

A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests

WORK IN PROCESS INVENTORIES-

Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for

14 | P a g e

INVENTORY MANAGEMENT IN THE SUPPLY CHAIN

Inventory management is one aspect of SCM The main goal of SCM is to better manage

inventory throughout the chain via improved information flow aimed at improved customer

service higher product variety and lower costs (Lawrence amp Varma 1999 Vergin 1998)

Verwijmeren Vlist and Donselaar (1996) used the term Networked Inventory

Management (p16) for the inventory aspect of SCM The efficiency of SCM can be

measured by inventory performance such as the speed of inventory passing through the chain

and the load of inventory throughout the chain (Jones amp Riley 1985) Inventory of various

forms from raw materials through WIP to finished goods is fed into the chain from suppliers

production and subsequently distribution centers to customers (Alber amp Walker 1997) This

flow of inventory requires responsibilities of channel members for the planning acquisition

storage movement and control of materials and final products (Tersine 1988) High levels

of inventory are found when the chain members less communicates due to lack of

information sharing between chain members and inefficiency of SCM Manufacturers the

main interest of this study have the most difficult and complex inventory problem as they

deal with raw material acquisition transformation of the material into final finished goods

and movement to the customer These consecutive activities require manufacturers to control

production scheduling and timing that are not easily accomplished due to uncertainties in

supplier performance manufacturing process and customer demand Manufacturers could

not reduce their buffer stocks without trusting in their partnerships and sharing forecasting

information on actual demand at retail level because of the bullwhip effect(Nahmias 1997

p791) which means the effect of retail sales fluctuation grows larger as it traverses to

upstream chain members More customer requirements for broader product coverage and

greater delivery capabilities escalate manufacturers problem in production process

complexity and forecasting of future demand

9 | P a g e

Definitions and concepts

In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are

Demand

The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)

Lead time

The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are

1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods

10 | P a g e

Ordering cost

The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost

Purchasing cost

The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales

Holding cost

The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate

Handling cost

The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses

Shipping cost

The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost

Stockout cost

In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it

11 | P a g e

may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)

Management cost

The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered

Inventory on hand

The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position

The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant

Safety stock

The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses

The Purpose of Inventory

So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are

bull Predictability

In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process

bull Fluctuations in demand

A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand

12 | P a g e

on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum

bull Unreliability of supply

Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs

bull Price protection

Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)

bull Quantity discounts

Often bulk discounts are available if you buy in large rather than in small quantities

bull Lower ordering costs

If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for

13 | P a g e

TYPES OF INVENTORIES

I MATERIAL INVENTORIES -

A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests

WORK IN PROCESS INVENTORIES-

Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for

14 | P a g e

Definitions and concepts

In this section general concepts in inventory management will be described and explained The main sources of uncertainty where inventory management has to deal with are

Demand

The demand for items may fluctuate from day to day (due to stochastic behavior at retailers due to variations in the production plan in a manufacturing environment) from month to month (due to a seasonal pattern) and during the lifetime of a product (an upward trend in the beginning a downward trend towards the end)

Lead time

The total time that elapses between the reorder instant and the instant when goods are ready for use or sale It consists of the handling time at the supplier (the time required for order picking packing and loading) the shipping time from the supplier to the stocking point and the handling time at the stocking point (the time required for unloading unpacking and placing on the shelf) When the goods still have to be produced after the reorder instant it also includes the production time and possibly a set-up time for the production runIn the practical situation of uncertain (stochastic) demand and non negligible lead times stock out occurrences cannot be completely avoided For customers arriving when an item is out of stock two cases are often distinguished1 Any demand is backordered and the backlog is filled as soon as a replenishment is delivered customers are willing to wait if it is difficult to obtain the item elsewhere2 Any demand is lost customers go elsewhere to buy the item or give up the intention of buying the item For some items part of the demand may be backlogged and part may be lost The distinction between the two extreme cases becomes less important when stockouts occur more rarelyThe three most important questions to be answered by an inventory policy are

1 When to review stocksA distinction is made between periodic review policies where stocks are reviewed at fixed time intervals the review periods continuous review policies where stocks are reviewed after each transaction2 When to orderA distinction is made between periodic review policies where orders can only be placed at the periodic review instants continuous review policies which use reorder points in inventory positions3 What to orderA distinction is made between policies with a fixed order quantity policies with a fixed order-up-to levelNext we will discuss costs that may play a role when ordering and storing goods

10 | P a g e

Ordering cost

The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost

Purchasing cost

The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales

Holding cost

The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate

Handling cost

The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses

Shipping cost

The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost

Stockout cost

In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it

11 | P a g e

may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)

Management cost

The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered

Inventory on hand

The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position

The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant

Safety stock

The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses

The Purpose of Inventory

So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are

bull Predictability

In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process

bull Fluctuations in demand

A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand

12 | P a g e

on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum

bull Unreliability of supply

Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs

bull Price protection

Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)

bull Quantity discounts

Often bulk discounts are available if you buy in large rather than in small quantities

bull Lower ordering costs

If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for

13 | P a g e

TYPES OF INVENTORIES

I MATERIAL INVENTORIES -

A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests

WORK IN PROCESS INVENTORIES-

Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for

14 | P a g e

Ordering cost

The fixed cost of placing an order this cost includes the cost of paperwork and accounting associated with an order which is independent of the size of an order if the item is made internally rather than ordered from an external supplier this cost is often called set-up cost and includes the cost of labor material and idle time associated with setting up and shutting down a machine for a production run if goods are ordered from another location within the same company this cost may include internal shipping cost

Purchasing cost

The variable cost associated with purchasing a single unit of a good this cost often includes variable labor cost variable overhead cost and raw material cost associated with producing of handling a single unit if goods are ordered from an external supplier it also includes shipping cost the external supplier may want to stimulate larger orders to save on shipping cost by ordering quantity discounts these cost only depend on the inventory policy in case of quantity discounts or lost sales

Holding cost

The variable cost of holding a single unit of a good on stock during a unit time period this cost often includes variable opportunity cost incurred by investing capital in inventory storage cost insurance cost and cost due to possible theft obsolescence breakage and spoilage the opportunity cost is often assumed to be a certain percentage the so called carrying charge of the purchasing cost the carrying charge is strongly related to the interest rate

Handling cost

The cost associated to the handling of goods in a warehouse as far as this cost is proportional to the number of items handled it does not influence the minimization of the total inventory cost if all demand is satisfied as far as this cost is proportional to the number of orders handled it can be incorporated in the ordering cost this cost is important in the design and control of warehouses

Shipping cost

The cost associated to the transport of goods from one stocking point to another in case ofan external supplier the shipping cost is often included in the purchasing cost

Stockout cost

In case of backlog of demand it is the extra cost associated to the administration and later delivery of goods in case of lost sales it is the opportunity cost of lost profit on unsatisfied demand in all cases it may include a penalty cost for loss of future goodwill it

11 | P a g e

may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)

Management cost

The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered

Inventory on hand

The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position

The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant

Safety stock

The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses

The Purpose of Inventory

So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are

bull Predictability

In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process

bull Fluctuations in demand

A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand

12 | P a g e

on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum

bull Unreliability of supply

Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs

bull Price protection

Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)

bull Quantity discounts

Often bulk discounts are available if you buy in large rather than in small quantities

bull Lower ordering costs

If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for

13 | P a g e

TYPES OF INVENTORIES

I MATERIAL INVENTORIES -

A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests

WORK IN PROCESS INVENTORIES-

Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for

14 | P a g e

may also include extra cost for rush orders or overtime work in many cases stockout costs are difficult to assess and are therefore replaced by service level constraints (see below)

Management cost

The cost incurred by keeping track of inventory levels and by computing order quantities this cost is usually not included in inventory models but should form an incentive to choose for inventory policies that are simple to implement In the stochastic demand models the following two service level constraints will be considered

Inventory on hand

The number of units actually present at the stocking point it is also called the physical Stock this quantity plays a role in determining holding costs Net inventory (net stock) the inventory on hand minus the amount of backlog this quantity can take positive and negative valuesInventory position

The net stock plus the number of units on order but not yet delivered this quantity is required for determining a reorder instant

Safety stock

The average inventory position just before a delivery instant this quantity is used as a pro- tection against uncertainty in demand and against other irregularities like breakage and pilferage it is related to the service level constraint or the cost of stockouts or losses

The Purpose of Inventory

So why do you need inventory As discussed in a just-in-time manufacturing environment inventory is considered waste However in environments where an organization suffers from poor cash flow or lacks strong control over (i)electronic information transfer among all departments and all significant suppliers(ii) lead times and (iii) quality of materials received inventory plays important roles Some of the more important reasons for obtaining and holding inventory are

bull Predictability

In order to engage in capacity planning and production scheduling you need to control how much raw material parts and subassemblies you process at a given time Inventory buffers what you need from what you process

bull Fluctuations in demand

A supply of inventory on hand is protection You donrsquot always know how much you are likely to need at any given time but you still need to satisfy customer or production demand

12 | P a g e

on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum

bull Unreliability of supply

Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs

bull Price protection

Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)

bull Quantity discounts

Often bulk discounts are available if you buy in large rather than in small quantities

bull Lower ordering costs

If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for

13 | P a g e

TYPES OF INVENTORIES

I MATERIAL INVENTORIES -

A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests

WORK IN PROCESS INVENTORIES-

Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for

14 | P a g e

on time If you can see how customers are acting in the supply chain surprises in fluctuations in demand are held to a minimum

bull Unreliability of supply

Inventory protects you from unreliable suppliers or when an item is scarce and it is difficult to ensure a steady supply Whenever possible unreliable suppliers should be rehabilitated through discussions or they should be replaced Rehabilitation can be accomplished through master purchase orders with timed product releases price or term penalties for nonperformance better verbal and electronic communications between the parties etc This will result in a lowering of your on-hand inventory needs

bull Price protection

Buying quantities of inventory at appropriate times helps avoid the impact of cost inflation Note that contracting to assure a price does not require actually taking delivery at the time of purchase Many suppliers prefer to deliver periodically rather than to ship an entire yearrsquos supply of a particular stock keeping unit ( SKU) at one time (Note The acronym ldquoSKUrdquo standing for ldquostock keeping unitrdquo is a common term in the inventory world It generally stands for a specific identifying numeric or alpha-numeric identifier for a specific item)

bull Quantity discounts

Often bulk discounts are available if you buy in large rather than in small quantities

bull Lower ordering costs

If you buy a larger quantity of an item less frequently the ordering costs are less than buying smaller quantities over and over again (The costs of holding the item for a longer period of time however will be greater) In order to hold down ordering costs and to lock in favorable pricing many organizations issue blanket purchase orders coupled with periodic release and receiving dates of the SKUs called for

13 | P a g e

TYPES OF INVENTORIES

I MATERIAL INVENTORIES -

A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests

WORK IN PROCESS INVENTORIES-

Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for

14 | P a g e

TYPES OF INVENTORIES

I MATERIAL INVENTORIES -

A raw material or feedstock is something that is acted upon or used by or by human labor or industry for use as the basis to create some product or structure Often the term is used to denote material that came from nature and is in an unprocessed or minimally processed state Latex iron ore logs and crude oil would be examples The use of raw material by other species other than the human includes twigs and found objects as used by birds to make nests

WORK IN PROCESS INVENTORIES-

Work in process or in-process inventory includes the set at large of unfinished items for products in a production process These items are not yet completed but either just being fabricated or waiting in a queue for

14 | P a g e

further processing or in a buffer storage The term is used in production and supply chain management

SPARE PARTS INVENTORIES-

Maintenance repair and operating supplies which are consumed during the production process and generally do not form part of the product itself are referred to as spare part inventories

15 | P a g e

FINISHED INVENTORIES-

Finished goods are goods that have completed the manufacturing process and ready for sale or distributed to the end user In manufacturing unit they are the final output of the production process They may also be functionally classified as1 Movement inventories 2 Lot size inventories 3 Anticipation inventories 4 Fluctuation inventories

16 | P a g e

Consumables

These are the materials which are needed to smoothen the process of production

Consumables may be classified acc to their consumption and criticality

Top Ten Reduction Practices

1048715 Conduct periodic reviews 65 1048715 Analyze usage and lead times 50 1048715 Reduce safety stocks 42 1048715 Use ABC approach (8020 rule) 37 1048715 Improve cycle counting 37 1048715 Shift ownership to suppliers 34 1048715 Re-determine order quantities 31 1048715 Improve forecast of A and B items 23 1048715 Give schedules to suppliers 22 1048715 Implement new inventory software 21

Inventory Control Records

Inventory control records are essential to making buy-and-sell decisions Some companies control their stock by taking physical inventories at regular intervals monthly or quarterly Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars If your stock is made up of thousands of items as it is for a convenience type store dollar control may be more

17 | P a g e

practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item

Perpetual inventory control records

are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card

Out-of-stock sheets

sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted

Open-to-buy records

help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area

Purchase order files

keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates

Supplier files

are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems

Returned goods files

provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues

18 | P a g e

Price books

maintained in alphabetical order according to supplier provide a record of purchase prices

selling prices markdowns and markups It is important to keep this record completely up to

date in order to be able to access the latest price and profit information on materials

purchased for resale

Inventory Management Techniques

Inventory is maintained as a cushion in soppy of material for continuous production

without causing stock out situation This cushion should not be suicidal to any organization

The following techniques are being use for controlling the inventory

1 Inventory Management Technique

2 Perceptual Inventory system

3 Selective Control Techniques

4 Inventory turnover Ratios

5 Classification and Codification of inventories

Inventory Management Techniques

1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying

costs are equal this is the quantity of material which can be purchased at minimum costs

This model includes two costs

Ordering Costs

Carrying Costs

Ordering Costs These are the costs which are associated with the purchasing or ordering of

materials These costs include

1 Costs of staff posted for ordering of goods

2 Expenses incurred on transportation of goods purchased

3 Inspection costs of incoming materials

4 Cost of stationery typing postage telephone charges etc

These costs are called buying costs and will arise only when some purchases are made The

ordering costs are totaled up for the year and then divided by the number of orders placed

each year

Carrying Costs These are the costs for holding the inventories These costs will not be

incurred of inventories are not carried These costs include

19 | P a g e

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

The ordering costs and carrying costs has reverse relationship the ordering cost goes up

with the increase in number of orders placed On the other hand carrying costs go down per

unit with the increase in number of units purchased and stored

Assumptions of EOQ

1 The supply of goods is satisfactory The goods can be purchased as and when they are

needed

2 The quantity of be purchased by the concern is certain

3 The prices of goods are stable It results to stabilize carrying costs

Total cost of inventory

= (A x P)+(A xO)EOQ+(EOQ x C)2

Where

A= Annual consumption in units

O= Ordering Cost per unit

P= Price per unit

C=carrying cost per unit

2 Selective control techniques

Selective control means selecting the area of control so that required objective is achieved as

early as possible without any lost of time due to taking care of full area-

Minimum lost of energy

At minimum cost without loss of time

There are following selective Techniques

ABC Analysis

V E D analysis

XYZ analysis

ABC Analysis

Indicators that classifies a material as an AB or C part according to its consumption

value The classification process is known as the ABC analysis

The three indictors have the following meanings

A-important part high consumption value

20 | P a g e

B-less important medium consumption value

C-relatively unimportant part low consumption value

The ABC classification process is an analysis of a range of items such as finished products

or customers into three categories A - outstandingly important B - of average importance C

- relatively unimportant as a basis for a control scheme Each category can and sometimes

should be handled in a different way with more attention being devoted to category A less to

B and less to C Usually this means that the firm monitors A items very closely but can

check on B and C items on a periodic basis (for example monthly for B items and quarterly

for C items)

The third element is the most difficult to measure and is often handled by establishing

a service level policy e g certain percentage of demand will be met from stock without

delay The ABC classification system is to grouping items according to annual sales volume

in an attempt to identify the small number of items that will account for most of the sales

volume and that are the most important ones to control for effective inventory management

Class No of Items () Value Of items ()

A 10 70

B 20 20

C 70 10

XYZ analysis

This type of analysis is carried out form the point of view of balance of value stocks lying in

the stock from time to time and classifies all the items as given below

X items are those items whose value of balance stocks lying in the stock are vary high

Y items are those items whose value of balance stocks is moderate

Z items are those items whose value of balance stocks lying in the stock is low

After knowing this type of classification and their items can be taken to control the inventory

as below

1 From security point of view high value items must be stored and kept order lock and

key Items should be kept in such a way that they are always under supervision

2 From inventory point of view we must know why there is high inventory for lsquoXrsquo

items We should review inventory control procedure for each and every item

because stock should be maintained to take acre of lead time consumption and also

21 | P a g e

to provide as safety stocks For high value items lying in the stores we should

review the reasons for long lead time as well as demand variations and see whether

safety stocks can be reduced Thus proper inventory control procedures can be

developed on the basis of XYZ analysis

VED Analysis

The VED analysis is used generally for spare parts The requirements and urgency of

spare parts is different from that of materials From point of view of material it is

classified into three categories

V - Vital

B - Essential

D - Desirable

Vital categories of the items are those for the want of which the production

Come to stop For exp Power in the factory

Essential group of items are those items because of non availability of which the stock

out cost is very high

Desirable group of items are those items because of non availability of which there is no

immediate loss of production and stock cost is very less and it may cause minor

disruption in the production for short time

3 Inventory Turnover Ratio

Inventory turnover ratios are calculated to indicate whether inventories have been used

efficiently or not The purpose is to ensure the blocking of only required minimum funds in

inventory The Inventory turnover ratio ia also known as stock velocity

Inventory Turnover Ratio= Cost of goods sold

Average Inventory at cost

22 | P a g e

Others Important Things

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business owners fail to appreciate fully the true costs of carrying inventory which include not only direct costs of storage insurance and taxes but also the cost of money tied up in inventory This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too

thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving

inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for

others For example computing the inventory turnover ratio is a simple measure of

managerial performance This value gives a rough guideline by which managers can set goals

and evaluate performance but it must be realized that the turnover rate varies with the

function of inventory the type of business and how the ratio is calculated (whether on sales

or cost of goods sold) Average inventory turnover ratios for individual industries can be

obtained from trade associations

THE PURCHASING PLAN

One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product

23 | P a g e

In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale

CONTROLLING YOUR INVENTORY

To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if

additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items

Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis

Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes

Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold

As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives

information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who

uses the information to ship additional items automatically to the buyerinventory manager

The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which

additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely

used method of computing the minimum annual cost for ordering and stocking each item

The EOQ computation takes into account the cost of placing an order the annual sales rate

24 | P a g e

the unit cost and the cost of carrying inventory Many books on management practices

describe the EOQ model in detail

TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery

receipt Carefully examine each carton for visible damage -- If damage is visible note it on the

delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not

moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection

25 | P a g e

Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier

Do not return damaged items without written authorization from shippersupplier

4 Perceptual Inventory System

The chartered Institute of Management Accountants London defines the perceptual

inventory ldquoa system of records maintained by controlling department which reflects the

physical movements of stocks and their current balance ldquo Bind cards add the stores ledger

help the movements of the stock on the receipts and in maintaining this system as they make

a record of to physical movements of the stocks on the receipts and issues of material and

also reflect the balance in the stores Thus it is a system of ascertaining balance after every

receipt and issue of material through stock record to facilitate regular checking and to avoid

closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records

physical verification of the stores is made by bin cards and stores ledger may differ from the

actual balance of stock as ascertained by the physical verification

5 Classification and codification of inventories

The inventories of a manufacturing concern may consist of raw material work in

process finished goods spares consumables stocks etc for proper recording and control of

inventory proper classification of various types of items is essential The inventories should

first be classified and then code numbers should be assigned for their identification The

identification of short names is useful for inventory management not only for large concerns

but also for small concerns The inventories should be classified either acc to their use and

their nature

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are

assembled into the purchasable item Therefore any change in the packaging or product is a

new SKU This level of detailed specification assists in managing inventory

Stock out means running out of the inventory of an SKU

New old stock (sometimes abbreviated NOS) is a term used in business to refer to

merchandise being offered for sale that was manufactured long ago but that has never been

used Such merchandise may not be produced anymore and the new old stock may represent

the only market source of a particular item at the present time

26 | P a g e

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

practical than physical control However even with this method an inventory count must be taken periodically to verify the levels of inventory by item

Perpetual inventory control records

are most practical for big-ticket items With such items it is quite suitable to hand count the starting inventory maintain a card for each item or group of items and reduce the item count each time a unit is sold or transferred out of inventory Periodic physical counts are taken to verify the accuracy of the inventory card

Out-of-stock sheets

sometimes called want sheets notify the buyer that it is time to reorder an item Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted

Open-to-buy records

help to prevent ordering more than is needed to meet demand or to stay within a budget These records adjust your order rate to the sales rate They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels An open-to-buy record is related to the inventory budget It is the difference between what has been budgeted and what has been spent Each time a sale is made open-to-buy is increased (inventory is reduced) Each time merchandise is purchased open-to-buy is reduced (inventory is increased) The net effect is to help maintain a balance among product lies within the business and to keep the business from getting overloaded in one particular area

Purchase order files

keep track of what has been ordered and the status or expected receipt date of materials It is convenient to maintain these files by using a copy of each purchase order that is written Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates

Supplier files

are valuable references on suppliers and can be very helpful in negotiating price delivery and terms Extra copies of purchase orders can be used to create these files organized alphabetically by supplier and can provide a fast way to determine how much business is done with each vendor Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal andor resolve future potential problems

Returned goods files

provide a continuous record of merchandise that has been returned to suppliers They should indicate amounts dates and reasons for the returns This information is useful in controlling debits credits and quality Issues

18 | P a g e

Price books

maintained in alphabetical order according to supplier provide a record of purchase prices

selling prices markdowns and markups It is important to keep this record completely up to

date in order to be able to access the latest price and profit information on materials

purchased for resale

Inventory Management Techniques

Inventory is maintained as a cushion in soppy of material for continuous production

without causing stock out situation This cushion should not be suicidal to any organization

The following techniques are being use for controlling the inventory

1 Inventory Management Technique

2 Perceptual Inventory system

3 Selective Control Techniques

4 Inventory turnover Ratios

5 Classification and Codification of inventories

Inventory Management Techniques

1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying

costs are equal this is the quantity of material which can be purchased at minimum costs

This model includes two costs

Ordering Costs

Carrying Costs

Ordering Costs These are the costs which are associated with the purchasing or ordering of

materials These costs include

1 Costs of staff posted for ordering of goods

2 Expenses incurred on transportation of goods purchased

3 Inspection costs of incoming materials

4 Cost of stationery typing postage telephone charges etc

These costs are called buying costs and will arise only when some purchases are made The

ordering costs are totaled up for the year and then divided by the number of orders placed

each year

Carrying Costs These are the costs for holding the inventories These costs will not be

incurred of inventories are not carried These costs include

19 | P a g e

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

The ordering costs and carrying costs has reverse relationship the ordering cost goes up

with the increase in number of orders placed On the other hand carrying costs go down per

unit with the increase in number of units purchased and stored

Assumptions of EOQ

1 The supply of goods is satisfactory The goods can be purchased as and when they are

needed

2 The quantity of be purchased by the concern is certain

3 The prices of goods are stable It results to stabilize carrying costs

Total cost of inventory

= (A x P)+(A xO)EOQ+(EOQ x C)2

Where

A= Annual consumption in units

O= Ordering Cost per unit

P= Price per unit

C=carrying cost per unit

2 Selective control techniques

Selective control means selecting the area of control so that required objective is achieved as

early as possible without any lost of time due to taking care of full area-

Minimum lost of energy

At minimum cost without loss of time

There are following selective Techniques

ABC Analysis

V E D analysis

XYZ analysis

ABC Analysis

Indicators that classifies a material as an AB or C part according to its consumption

value The classification process is known as the ABC analysis

The three indictors have the following meanings

A-important part high consumption value

20 | P a g e

B-less important medium consumption value

C-relatively unimportant part low consumption value

The ABC classification process is an analysis of a range of items such as finished products

or customers into three categories A - outstandingly important B - of average importance C

- relatively unimportant as a basis for a control scheme Each category can and sometimes

should be handled in a different way with more attention being devoted to category A less to

B and less to C Usually this means that the firm monitors A items very closely but can

check on B and C items on a periodic basis (for example monthly for B items and quarterly

for C items)

The third element is the most difficult to measure and is often handled by establishing

a service level policy e g certain percentage of demand will be met from stock without

delay The ABC classification system is to grouping items according to annual sales volume

in an attempt to identify the small number of items that will account for most of the sales

volume and that are the most important ones to control for effective inventory management

Class No of Items () Value Of items ()

A 10 70

B 20 20

C 70 10

XYZ analysis

This type of analysis is carried out form the point of view of balance of value stocks lying in

the stock from time to time and classifies all the items as given below

X items are those items whose value of balance stocks lying in the stock are vary high

Y items are those items whose value of balance stocks is moderate

Z items are those items whose value of balance stocks lying in the stock is low

After knowing this type of classification and their items can be taken to control the inventory

as below

1 From security point of view high value items must be stored and kept order lock and

key Items should be kept in such a way that they are always under supervision

2 From inventory point of view we must know why there is high inventory for lsquoXrsquo

items We should review inventory control procedure for each and every item

because stock should be maintained to take acre of lead time consumption and also

21 | P a g e

to provide as safety stocks For high value items lying in the stores we should

review the reasons for long lead time as well as demand variations and see whether

safety stocks can be reduced Thus proper inventory control procedures can be

developed on the basis of XYZ analysis

VED Analysis

The VED analysis is used generally for spare parts The requirements and urgency of

spare parts is different from that of materials From point of view of material it is

classified into three categories

V - Vital

B - Essential

D - Desirable

Vital categories of the items are those for the want of which the production

Come to stop For exp Power in the factory

Essential group of items are those items because of non availability of which the stock

out cost is very high

Desirable group of items are those items because of non availability of which there is no

immediate loss of production and stock cost is very less and it may cause minor

disruption in the production for short time

3 Inventory Turnover Ratio

Inventory turnover ratios are calculated to indicate whether inventories have been used

efficiently or not The purpose is to ensure the blocking of only required minimum funds in

inventory The Inventory turnover ratio ia also known as stock velocity

Inventory Turnover Ratio= Cost of goods sold

Average Inventory at cost

22 | P a g e

Others Important Things

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business owners fail to appreciate fully the true costs of carrying inventory which include not only direct costs of storage insurance and taxes but also the cost of money tied up in inventory This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too

thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving

inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for

others For example computing the inventory turnover ratio is a simple measure of

managerial performance This value gives a rough guideline by which managers can set goals

and evaluate performance but it must be realized that the turnover rate varies with the

function of inventory the type of business and how the ratio is calculated (whether on sales

or cost of goods sold) Average inventory turnover ratios for individual industries can be

obtained from trade associations

THE PURCHASING PLAN

One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product

23 | P a g e

In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale

CONTROLLING YOUR INVENTORY

To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if

additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items

Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis

Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes

Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold

As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives

information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who

uses the information to ship additional items automatically to the buyerinventory manager

The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which

additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely

used method of computing the minimum annual cost for ordering and stocking each item

The EOQ computation takes into account the cost of placing an order the annual sales rate

24 | P a g e

the unit cost and the cost of carrying inventory Many books on management practices

describe the EOQ model in detail

TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery

receipt Carefully examine each carton for visible damage -- If damage is visible note it on the

delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not

moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection

25 | P a g e

Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier

Do not return damaged items without written authorization from shippersupplier

4 Perceptual Inventory System

The chartered Institute of Management Accountants London defines the perceptual

inventory ldquoa system of records maintained by controlling department which reflects the

physical movements of stocks and their current balance ldquo Bind cards add the stores ledger

help the movements of the stock on the receipts and in maintaining this system as they make

a record of to physical movements of the stocks on the receipts and issues of material and

also reflect the balance in the stores Thus it is a system of ascertaining balance after every

receipt and issue of material through stock record to facilitate regular checking and to avoid

closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records

physical verification of the stores is made by bin cards and stores ledger may differ from the

actual balance of stock as ascertained by the physical verification

5 Classification and codification of inventories

The inventories of a manufacturing concern may consist of raw material work in

process finished goods spares consumables stocks etc for proper recording and control of

inventory proper classification of various types of items is essential The inventories should

first be classified and then code numbers should be assigned for their identification The

identification of short names is useful for inventory management not only for large concerns

but also for small concerns The inventories should be classified either acc to their use and

their nature

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are

assembled into the purchasable item Therefore any change in the packaging or product is a

new SKU This level of detailed specification assists in managing inventory

Stock out means running out of the inventory of an SKU

New old stock (sometimes abbreviated NOS) is a term used in business to refer to

merchandise being offered for sale that was manufactured long ago but that has never been

used Such merchandise may not be produced anymore and the new old stock may represent

the only market source of a particular item at the present time

26 | P a g e

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

Price books

maintained in alphabetical order according to supplier provide a record of purchase prices

selling prices markdowns and markups It is important to keep this record completely up to

date in order to be able to access the latest price and profit information on materials

purchased for resale

Inventory Management Techniques

Inventory is maintained as a cushion in soppy of material for continuous production

without causing stock out situation This cushion should not be suicidal to any organization

The following techniques are being use for controlling the inventory

1 Inventory Management Technique

2 Perceptual Inventory system

3 Selective Control Techniques

4 Inventory turnover Ratios

5 Classification and Codification of inventories

Inventory Management Techniques

1 Economic Order Quantity EOQ is the point at which the ordering costs and carrying

costs are equal this is the quantity of material which can be purchased at minimum costs

This model includes two costs

Ordering Costs

Carrying Costs

Ordering Costs These are the costs which are associated with the purchasing or ordering of

materials These costs include

1 Costs of staff posted for ordering of goods

2 Expenses incurred on transportation of goods purchased

3 Inspection costs of incoming materials

4 Cost of stationery typing postage telephone charges etc

These costs are called buying costs and will arise only when some purchases are made The

ordering costs are totaled up for the year and then divided by the number of orders placed

each year

Carrying Costs These are the costs for holding the inventories These costs will not be

incurred of inventories are not carried These costs include

19 | P a g e

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

The ordering costs and carrying costs has reverse relationship the ordering cost goes up

with the increase in number of orders placed On the other hand carrying costs go down per

unit with the increase in number of units purchased and stored

Assumptions of EOQ

1 The supply of goods is satisfactory The goods can be purchased as and when they are

needed

2 The quantity of be purchased by the concern is certain

3 The prices of goods are stable It results to stabilize carrying costs

Total cost of inventory

= (A x P)+(A xO)EOQ+(EOQ x C)2

Where

A= Annual consumption in units

O= Ordering Cost per unit

P= Price per unit

C=carrying cost per unit

2 Selective control techniques

Selective control means selecting the area of control so that required objective is achieved as

early as possible without any lost of time due to taking care of full area-

Minimum lost of energy

At minimum cost without loss of time

There are following selective Techniques

ABC Analysis

V E D analysis

XYZ analysis

ABC Analysis

Indicators that classifies a material as an AB or C part according to its consumption

value The classification process is known as the ABC analysis

The three indictors have the following meanings

A-important part high consumption value

20 | P a g e

B-less important medium consumption value

C-relatively unimportant part low consumption value

The ABC classification process is an analysis of a range of items such as finished products

or customers into three categories A - outstandingly important B - of average importance C

- relatively unimportant as a basis for a control scheme Each category can and sometimes

should be handled in a different way with more attention being devoted to category A less to

B and less to C Usually this means that the firm monitors A items very closely but can

check on B and C items on a periodic basis (for example monthly for B items and quarterly

for C items)

The third element is the most difficult to measure and is often handled by establishing

a service level policy e g certain percentage of demand will be met from stock without

delay The ABC classification system is to grouping items according to annual sales volume

in an attempt to identify the small number of items that will account for most of the sales

volume and that are the most important ones to control for effective inventory management

Class No of Items () Value Of items ()

A 10 70

B 20 20

C 70 10

XYZ analysis

This type of analysis is carried out form the point of view of balance of value stocks lying in

the stock from time to time and classifies all the items as given below

X items are those items whose value of balance stocks lying in the stock are vary high

Y items are those items whose value of balance stocks is moderate

Z items are those items whose value of balance stocks lying in the stock is low

After knowing this type of classification and their items can be taken to control the inventory

as below

1 From security point of view high value items must be stored and kept order lock and

key Items should be kept in such a way that they are always under supervision

2 From inventory point of view we must know why there is high inventory for lsquoXrsquo

items We should review inventory control procedure for each and every item

because stock should be maintained to take acre of lead time consumption and also

21 | P a g e

to provide as safety stocks For high value items lying in the stores we should

review the reasons for long lead time as well as demand variations and see whether

safety stocks can be reduced Thus proper inventory control procedures can be

developed on the basis of XYZ analysis

VED Analysis

The VED analysis is used generally for spare parts The requirements and urgency of

spare parts is different from that of materials From point of view of material it is

classified into three categories

V - Vital

B - Essential

D - Desirable

Vital categories of the items are those for the want of which the production

Come to stop For exp Power in the factory

Essential group of items are those items because of non availability of which the stock

out cost is very high

Desirable group of items are those items because of non availability of which there is no

immediate loss of production and stock cost is very less and it may cause minor

disruption in the production for short time

3 Inventory Turnover Ratio

Inventory turnover ratios are calculated to indicate whether inventories have been used

efficiently or not The purpose is to ensure the blocking of only required minimum funds in

inventory The Inventory turnover ratio ia also known as stock velocity

Inventory Turnover Ratio= Cost of goods sold

Average Inventory at cost

22 | P a g e

Others Important Things

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business owners fail to appreciate fully the true costs of carrying inventory which include not only direct costs of storage insurance and taxes but also the cost of money tied up in inventory This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too

thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving

inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for

others For example computing the inventory turnover ratio is a simple measure of

managerial performance This value gives a rough guideline by which managers can set goals

and evaluate performance but it must be realized that the turnover rate varies with the

function of inventory the type of business and how the ratio is calculated (whether on sales

or cost of goods sold) Average inventory turnover ratios for individual industries can be

obtained from trade associations

THE PURCHASING PLAN

One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product

23 | P a g e

In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale

CONTROLLING YOUR INVENTORY

To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if

additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items

Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis

Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes

Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold

As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives

information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who

uses the information to ship additional items automatically to the buyerinventory manager

The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which

additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely

used method of computing the minimum annual cost for ordering and stocking each item

The EOQ computation takes into account the cost of placing an order the annual sales rate

24 | P a g e

the unit cost and the cost of carrying inventory Many books on management practices

describe the EOQ model in detail

TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery

receipt Carefully examine each carton for visible damage -- If damage is visible note it on the

delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not

moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection

25 | P a g e

Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier

Do not return damaged items without written authorization from shippersupplier

4 Perceptual Inventory System

The chartered Institute of Management Accountants London defines the perceptual

inventory ldquoa system of records maintained by controlling department which reflects the

physical movements of stocks and their current balance ldquo Bind cards add the stores ledger

help the movements of the stock on the receipts and in maintaining this system as they make

a record of to physical movements of the stocks on the receipts and issues of material and

also reflect the balance in the stores Thus it is a system of ascertaining balance after every

receipt and issue of material through stock record to facilitate regular checking and to avoid

closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records

physical verification of the stores is made by bin cards and stores ledger may differ from the

actual balance of stock as ascertained by the physical verification

5 Classification and codification of inventories

The inventories of a manufacturing concern may consist of raw material work in

process finished goods spares consumables stocks etc for proper recording and control of

inventory proper classification of various types of items is essential The inventories should

first be classified and then code numbers should be assigned for their identification The

identification of short names is useful for inventory management not only for large concerns

but also for small concerns The inventories should be classified either acc to their use and

their nature

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are

assembled into the purchasable item Therefore any change in the packaging or product is a

new SKU This level of detailed specification assists in managing inventory

Stock out means running out of the inventory of an SKU

New old stock (sometimes abbreviated NOS) is a term used in business to refer to

merchandise being offered for sale that was manufactured long ago but that has never been

used Such merchandise may not be produced anymore and the new old stock may represent

the only market source of a particular item at the present time

26 | P a g e

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

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

The ordering costs and carrying costs has reverse relationship the ordering cost goes up

with the increase in number of orders placed On the other hand carrying costs go down per

unit with the increase in number of units purchased and stored

Assumptions of EOQ

1 The supply of goods is satisfactory The goods can be purchased as and when they are

needed

2 The quantity of be purchased by the concern is certain

3 The prices of goods are stable It results to stabilize carrying costs

Total cost of inventory

= (A x P)+(A xO)EOQ+(EOQ x C)2

Where

A= Annual consumption in units

O= Ordering Cost per unit

P= Price per unit

C=carrying cost per unit

2 Selective control techniques

Selective control means selecting the area of control so that required objective is achieved as

early as possible without any lost of time due to taking care of full area-

Minimum lost of energy

At minimum cost without loss of time

There are following selective Techniques

ABC Analysis

V E D analysis

XYZ analysis

ABC Analysis

Indicators that classifies a material as an AB or C part according to its consumption

value The classification process is known as the ABC analysis

The three indictors have the following meanings

A-important part high consumption value

20 | P a g e

B-less important medium consumption value

C-relatively unimportant part low consumption value

The ABC classification process is an analysis of a range of items such as finished products

or customers into three categories A - outstandingly important B - of average importance C

- relatively unimportant as a basis for a control scheme Each category can and sometimes

should be handled in a different way with more attention being devoted to category A less to

B and less to C Usually this means that the firm monitors A items very closely but can

check on B and C items on a periodic basis (for example monthly for B items and quarterly

for C items)

The third element is the most difficult to measure and is often handled by establishing

a service level policy e g certain percentage of demand will be met from stock without

delay The ABC classification system is to grouping items according to annual sales volume

in an attempt to identify the small number of items that will account for most of the sales

volume and that are the most important ones to control for effective inventory management

Class No of Items () Value Of items ()

A 10 70

B 20 20

C 70 10

XYZ analysis

This type of analysis is carried out form the point of view of balance of value stocks lying in

the stock from time to time and classifies all the items as given below

X items are those items whose value of balance stocks lying in the stock are vary high

Y items are those items whose value of balance stocks is moderate

Z items are those items whose value of balance stocks lying in the stock is low

After knowing this type of classification and their items can be taken to control the inventory

as below

1 From security point of view high value items must be stored and kept order lock and

key Items should be kept in such a way that they are always under supervision

2 From inventory point of view we must know why there is high inventory for lsquoXrsquo

items We should review inventory control procedure for each and every item

because stock should be maintained to take acre of lead time consumption and also

21 | P a g e

to provide as safety stocks For high value items lying in the stores we should

review the reasons for long lead time as well as demand variations and see whether

safety stocks can be reduced Thus proper inventory control procedures can be

developed on the basis of XYZ analysis

VED Analysis

The VED analysis is used generally for spare parts The requirements and urgency of

spare parts is different from that of materials From point of view of material it is

classified into three categories

V - Vital

B - Essential

D - Desirable

Vital categories of the items are those for the want of which the production

Come to stop For exp Power in the factory

Essential group of items are those items because of non availability of which the stock

out cost is very high

Desirable group of items are those items because of non availability of which there is no

immediate loss of production and stock cost is very less and it may cause minor

disruption in the production for short time

3 Inventory Turnover Ratio

Inventory turnover ratios are calculated to indicate whether inventories have been used

efficiently or not The purpose is to ensure the blocking of only required minimum funds in

inventory The Inventory turnover ratio ia also known as stock velocity

Inventory Turnover Ratio= Cost of goods sold

Average Inventory at cost

22 | P a g e

Others Important Things

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business owners fail to appreciate fully the true costs of carrying inventory which include not only direct costs of storage insurance and taxes but also the cost of money tied up in inventory This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too

thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving

inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for

others For example computing the inventory turnover ratio is a simple measure of

managerial performance This value gives a rough guideline by which managers can set goals

and evaluate performance but it must be realized that the turnover rate varies with the

function of inventory the type of business and how the ratio is calculated (whether on sales

or cost of goods sold) Average inventory turnover ratios for individual industries can be

obtained from trade associations

THE PURCHASING PLAN

One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product

23 | P a g e

In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale

CONTROLLING YOUR INVENTORY

To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if

additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items

Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis

Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes

Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold

As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives

information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who

uses the information to ship additional items automatically to the buyerinventory manager

The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which

additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely

used method of computing the minimum annual cost for ordering and stocking each item

The EOQ computation takes into account the cost of placing an order the annual sales rate

24 | P a g e

the unit cost and the cost of carrying inventory Many books on management practices

describe the EOQ model in detail

TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery

receipt Carefully examine each carton for visible damage -- If damage is visible note it on the

delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not

moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection

25 | P a g e

Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier

Do not return damaged items without written authorization from shippersupplier

4 Perceptual Inventory System

The chartered Institute of Management Accountants London defines the perceptual

inventory ldquoa system of records maintained by controlling department which reflects the

physical movements of stocks and their current balance ldquo Bind cards add the stores ledger

help the movements of the stock on the receipts and in maintaining this system as they make

a record of to physical movements of the stocks on the receipts and issues of material and

also reflect the balance in the stores Thus it is a system of ascertaining balance after every

receipt and issue of material through stock record to facilitate regular checking and to avoid

closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records

physical verification of the stores is made by bin cards and stores ledger may differ from the

actual balance of stock as ascertained by the physical verification

5 Classification and codification of inventories

The inventories of a manufacturing concern may consist of raw material work in

process finished goods spares consumables stocks etc for proper recording and control of

inventory proper classification of various types of items is essential The inventories should

first be classified and then code numbers should be assigned for their identification The

identification of short names is useful for inventory management not only for large concerns

but also for small concerns The inventories should be classified either acc to their use and

their nature

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are

assembled into the purchasable item Therefore any change in the packaging or product is a

new SKU This level of detailed specification assists in managing inventory

Stock out means running out of the inventory of an SKU

New old stock (sometimes abbreviated NOS) is a term used in business to refer to

merchandise being offered for sale that was manufactured long ago but that has never been

used Such merchandise may not be produced anymore and the new old stock may represent

the only market source of a particular item at the present time

26 | P a g e

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

B-less important medium consumption value

C-relatively unimportant part low consumption value

The ABC classification process is an analysis of a range of items such as finished products

or customers into three categories A - outstandingly important B - of average importance C

- relatively unimportant as a basis for a control scheme Each category can and sometimes

should be handled in a different way with more attention being devoted to category A less to

B and less to C Usually this means that the firm monitors A items very closely but can

check on B and C items on a periodic basis (for example monthly for B items and quarterly

for C items)

The third element is the most difficult to measure and is often handled by establishing

a service level policy e g certain percentage of demand will be met from stock without

delay The ABC classification system is to grouping items according to annual sales volume

in an attempt to identify the small number of items that will account for most of the sales

volume and that are the most important ones to control for effective inventory management

Class No of Items () Value Of items ()

A 10 70

B 20 20

C 70 10

XYZ analysis

This type of analysis is carried out form the point of view of balance of value stocks lying in

the stock from time to time and classifies all the items as given below

X items are those items whose value of balance stocks lying in the stock are vary high

Y items are those items whose value of balance stocks is moderate

Z items are those items whose value of balance stocks lying in the stock is low

After knowing this type of classification and their items can be taken to control the inventory

as below

1 From security point of view high value items must be stored and kept order lock and

key Items should be kept in such a way that they are always under supervision

2 From inventory point of view we must know why there is high inventory for lsquoXrsquo

items We should review inventory control procedure for each and every item

because stock should be maintained to take acre of lead time consumption and also

21 | P a g e

to provide as safety stocks For high value items lying in the stores we should

review the reasons for long lead time as well as demand variations and see whether

safety stocks can be reduced Thus proper inventory control procedures can be

developed on the basis of XYZ analysis

VED Analysis

The VED analysis is used generally for spare parts The requirements and urgency of

spare parts is different from that of materials From point of view of material it is

classified into three categories

V - Vital

B - Essential

D - Desirable

Vital categories of the items are those for the want of which the production

Come to stop For exp Power in the factory

Essential group of items are those items because of non availability of which the stock

out cost is very high

Desirable group of items are those items because of non availability of which there is no

immediate loss of production and stock cost is very less and it may cause minor

disruption in the production for short time

3 Inventory Turnover Ratio

Inventory turnover ratios are calculated to indicate whether inventories have been used

efficiently or not The purpose is to ensure the blocking of only required minimum funds in

inventory The Inventory turnover ratio ia also known as stock velocity

Inventory Turnover Ratio= Cost of goods sold

Average Inventory at cost

22 | P a g e

Others Important Things

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business owners fail to appreciate fully the true costs of carrying inventory which include not only direct costs of storage insurance and taxes but also the cost of money tied up in inventory This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too

thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving

inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for

others For example computing the inventory turnover ratio is a simple measure of

managerial performance This value gives a rough guideline by which managers can set goals

and evaluate performance but it must be realized that the turnover rate varies with the

function of inventory the type of business and how the ratio is calculated (whether on sales

or cost of goods sold) Average inventory turnover ratios for individual industries can be

obtained from trade associations

THE PURCHASING PLAN

One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product

23 | P a g e

In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale

CONTROLLING YOUR INVENTORY

To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if

additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items

Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis

Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes

Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold

As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives

information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who

uses the information to ship additional items automatically to the buyerinventory manager

The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which

additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely

used method of computing the minimum annual cost for ordering and stocking each item

The EOQ computation takes into account the cost of placing an order the annual sales rate

24 | P a g e

the unit cost and the cost of carrying inventory Many books on management practices

describe the EOQ model in detail

TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery

receipt Carefully examine each carton for visible damage -- If damage is visible note it on the

delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not

moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection

25 | P a g e

Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier

Do not return damaged items without written authorization from shippersupplier

4 Perceptual Inventory System

The chartered Institute of Management Accountants London defines the perceptual

inventory ldquoa system of records maintained by controlling department which reflects the

physical movements of stocks and their current balance ldquo Bind cards add the stores ledger

help the movements of the stock on the receipts and in maintaining this system as they make

a record of to physical movements of the stocks on the receipts and issues of material and

also reflect the balance in the stores Thus it is a system of ascertaining balance after every

receipt and issue of material through stock record to facilitate regular checking and to avoid

closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records

physical verification of the stores is made by bin cards and stores ledger may differ from the

actual balance of stock as ascertained by the physical verification

5 Classification and codification of inventories

The inventories of a manufacturing concern may consist of raw material work in

process finished goods spares consumables stocks etc for proper recording and control of

inventory proper classification of various types of items is essential The inventories should

first be classified and then code numbers should be assigned for their identification The

identification of short names is useful for inventory management not only for large concerns

but also for small concerns The inventories should be classified either acc to their use and

their nature

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are

assembled into the purchasable item Therefore any change in the packaging or product is a

new SKU This level of detailed specification assists in managing inventory

Stock out means running out of the inventory of an SKU

New old stock (sometimes abbreviated NOS) is a term used in business to refer to

merchandise being offered for sale that was manufactured long ago but that has never been

used Such merchandise may not be produced anymore and the new old stock may represent

the only market source of a particular item at the present time

26 | P a g e

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

to provide as safety stocks For high value items lying in the stores we should

review the reasons for long lead time as well as demand variations and see whether

safety stocks can be reduced Thus proper inventory control procedures can be

developed on the basis of XYZ analysis

VED Analysis

The VED analysis is used generally for spare parts The requirements and urgency of

spare parts is different from that of materials From point of view of material it is

classified into three categories

V - Vital

B - Essential

D - Desirable

Vital categories of the items are those for the want of which the production

Come to stop For exp Power in the factory

Essential group of items are those items because of non availability of which the stock

out cost is very high

Desirable group of items are those items because of non availability of which there is no

immediate loss of production and stock cost is very less and it may cause minor

disruption in the production for short time

3 Inventory Turnover Ratio

Inventory turnover ratios are calculated to indicate whether inventories have been used

efficiently or not The purpose is to ensure the blocking of only required minimum funds in

inventory The Inventory turnover ratio ia also known as stock velocity

Inventory Turnover Ratio= Cost of goods sold

Average Inventory at cost

22 | P a g e

Others Important Things

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business owners fail to appreciate fully the true costs of carrying inventory which include not only direct costs of storage insurance and taxes but also the cost of money tied up in inventory This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too

thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving

inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for

others For example computing the inventory turnover ratio is a simple measure of

managerial performance This value gives a rough guideline by which managers can set goals

and evaluate performance but it must be realized that the turnover rate varies with the

function of inventory the type of business and how the ratio is calculated (whether on sales

or cost of goods sold) Average inventory turnover ratios for individual industries can be

obtained from trade associations

THE PURCHASING PLAN

One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product

23 | P a g e

In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale

CONTROLLING YOUR INVENTORY

To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if

additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items

Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis

Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes

Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold

As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives

information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who

uses the information to ship additional items automatically to the buyerinventory manager

The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which

additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely

used method of computing the minimum annual cost for ordering and stocking each item

The EOQ computation takes into account the cost of placing an order the annual sales rate

24 | P a g e

the unit cost and the cost of carrying inventory Many books on management practices

describe the EOQ model in detail

TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery

receipt Carefully examine each carton for visible damage -- If damage is visible note it on the

delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not

moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection

25 | P a g e

Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier

Do not return damaged items without written authorization from shippersupplier

4 Perceptual Inventory System

The chartered Institute of Management Accountants London defines the perceptual

inventory ldquoa system of records maintained by controlling department which reflects the

physical movements of stocks and their current balance ldquo Bind cards add the stores ledger

help the movements of the stock on the receipts and in maintaining this system as they make

a record of to physical movements of the stocks on the receipts and issues of material and

also reflect the balance in the stores Thus it is a system of ascertaining balance after every

receipt and issue of material through stock record to facilitate regular checking and to avoid

closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records

physical verification of the stores is made by bin cards and stores ledger may differ from the

actual balance of stock as ascertained by the physical verification

5 Classification and codification of inventories

The inventories of a manufacturing concern may consist of raw material work in

process finished goods spares consumables stocks etc for proper recording and control of

inventory proper classification of various types of items is essential The inventories should

first be classified and then code numbers should be assigned for their identification The

identification of short names is useful for inventory management not only for large concerns

but also for small concerns The inventories should be classified either acc to their use and

their nature

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are

assembled into the purchasable item Therefore any change in the packaging or product is a

new SKU This level of detailed specification assists in managing inventory

Stock out means running out of the inventory of an SKU

New old stock (sometimes abbreviated NOS) is a term used in business to refer to

merchandise being offered for sale that was manufactured long ago but that has never been

used Such merchandise may not be produced anymore and the new old stock may represent

the only market source of a particular item at the present time

26 | P a g e

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

Others Important Things

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of inventory Many small business owners fail to appreciate fully the true costs of carrying inventory which include not only direct costs of storage insurance and taxes but also the cost of money tied up in inventory This fine line between keeping too much inventory and not enough is not the managers only concern Others include Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too

thin Increasing inventory turnover -- but not sacrificing the service level Keeping stock low -- but not sacrificing service or performance Obtaining lower prices by making volume purchases -- but not ending up with slow-moving

inventory and Having an adequate inventory on hand -- but not getting caught with obsolete items The degree of success in addressing these concerns is easier to gauge for some than for

others For example computing the inventory turnover ratio is a simple measure of

managerial performance This value gives a rough guideline by which managers can set goals

and evaluate performance but it must be realized that the turnover rate varies with the

function of inventory the type of business and how the ratio is calculated (whether on sales

or cost of goods sold) Average inventory turnover ratios for individual industries can be

obtained from trade associations

THE PURCHASING PLAN

One of the most important aspects of inventory control is to have the items in stock at the moment they are needed This includes going into the market to buy the goods early enough to ensure delivery at the proper time Thus buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination For retailers planning ahead is very crucial Since they offer new items for sale months before the actual calendar date for the beginning of the new season it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season For example many retailers view March 21 as the end of the spring season June 21 as the end of summer and December 21 as the end of winter Part of your purchasing plan must include accounting for the depletion of the inventory Before a decision can be made as to the level of inventory to order you must determine how long the inventory you have in stock will last For instance a retail firm must formulate a plan to ensure the sale of the greatest number of units Likewise a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product

23 | P a g e

In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale

CONTROLLING YOUR INVENTORY

To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if

additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items

Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis

Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes

Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold

As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives

information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who

uses the information to ship additional items automatically to the buyerinventory manager

The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which

additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely

used method of computing the minimum annual cost for ordering and stocking each item

The EOQ computation takes into account the cost of placing an order the annual sales rate

24 | P a g e

the unit cost and the cost of carrying inventory Many books on management practices

describe the EOQ model in detail

TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery

receipt Carefully examine each carton for visible damage -- If damage is visible note it on the

delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not

moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection

25 | P a g e

Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier

Do not return damaged items without written authorization from shippersupplier

4 Perceptual Inventory System

The chartered Institute of Management Accountants London defines the perceptual

inventory ldquoa system of records maintained by controlling department which reflects the

physical movements of stocks and their current balance ldquo Bind cards add the stores ledger

help the movements of the stock on the receipts and in maintaining this system as they make

a record of to physical movements of the stocks on the receipts and issues of material and

also reflect the balance in the stores Thus it is a system of ascertaining balance after every

receipt and issue of material through stock record to facilitate regular checking and to avoid

closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records

physical verification of the stores is made by bin cards and stores ledger may differ from the

actual balance of stock as ascertained by the physical verification

5 Classification and codification of inventories

The inventories of a manufacturing concern may consist of raw material work in

process finished goods spares consumables stocks etc for proper recording and control of

inventory proper classification of various types of items is essential The inventories should

first be classified and then code numbers should be assigned for their identification The

identification of short names is useful for inventory management not only for large concerns

but also for small concerns The inventories should be classified either acc to their use and

their nature

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are

assembled into the purchasable item Therefore any change in the packaging or product is a

new SKU This level of detailed specification assists in managing inventory

Stock out means running out of the inventory of an SKU

New old stock (sometimes abbreviated NOS) is a term used in business to refer to

merchandise being offered for sale that was manufactured long ago but that has never been

used Such merchandise may not be produced anymore and the new old stock may represent

the only market source of a particular item at the present time

26 | P a g e

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

In summary the purchasing plan details When commitments should be placed When the first delivery should be received When the inventory should be peaked When reorders should no longer be placed and When the item should no longer be in stock Well planned purchases affect the price delivery and availability of products for sale

CONTROLLING YOUR INVENTORY

To maintain an in-stock position of wanted items and to dispose of unwanted items it is necessary to establish adequate controls over inventory on order and inventory in stock There are several proven methods for inventory control They are listed below from simplest to most complex Visual control enables the manager to examine the inventory visually to determine if

additional inventory is required In very small businesses where this method is used records may not be needed at all or only for slow moving or expensive items

Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis

Click sheet control enables the manager to record the item as it is used on a sheet of paper Such information is then used for reorder purposes

Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold The manager can then use the stub to record the item that was sold

As a business grows it may find a need for a more sophisticated and technical form of inventory control Today the use of computer systems to control inventory is far more feasible for small business than ever before both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer Point-of-sale terminals relay information on each item used or sold The manager receives

information printouts at regular intervals for review and action Off-line point-of-sale terminals relay information directly to the suppliers computer who

uses the information to ship additional items automatically to the buyerinventory manager

The final method for inventory control is done by an outside agency A manufacturers representative visits the large retailer on a scheduled basis takes the stock count and writes the reorder Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined authorized procedure A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item Two major control values are used 1) the order quantity that is the size and frequency of orders and 2) the reorder point that is the minimum stock level at which

additional quantities are ordered The Economic Order Quantity (EOQ) formula is one widely

used method of computing the minimum annual cost for ordering and stocking each item

The EOQ computation takes into account the cost of placing an order the annual sales rate

24 | P a g e

the unit cost and the cost of carrying inventory Many books on management practices

describe the EOQ model in detail

TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery

receipt Carefully examine each carton for visible damage -- If damage is visible note it on the

delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not

moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection

25 | P a g e

Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier

Do not return damaged items without written authorization from shippersupplier

4 Perceptual Inventory System

The chartered Institute of Management Accountants London defines the perceptual

inventory ldquoa system of records maintained by controlling department which reflects the

physical movements of stocks and their current balance ldquo Bind cards add the stores ledger

help the movements of the stock on the receipts and in maintaining this system as they make

a record of to physical movements of the stocks on the receipts and issues of material and

also reflect the balance in the stores Thus it is a system of ascertaining balance after every

receipt and issue of material through stock record to facilitate regular checking and to avoid

closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records

physical verification of the stores is made by bin cards and stores ledger may differ from the

actual balance of stock as ascertained by the physical verification

5 Classification and codification of inventories

The inventories of a manufacturing concern may consist of raw material work in

process finished goods spares consumables stocks etc for proper recording and control of

inventory proper classification of various types of items is essential The inventories should

first be classified and then code numbers should be assigned for their identification The

identification of short names is useful for inventory management not only for large concerns

but also for small concerns The inventories should be classified either acc to their use and

their nature

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are

assembled into the purchasable item Therefore any change in the packaging or product is a

new SKU This level of detailed specification assists in managing inventory

Stock out means running out of the inventory of an SKU

New old stock (sometimes abbreviated NOS) is a term used in business to refer to

merchandise being offered for sale that was manufactured long ago but that has never been

used Such merchandise may not be produced anymore and the new old stock may represent

the only market source of a particular item at the present time

26 | P a g e

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

the unit cost and the cost of carrying inventory Many books on management practices

describe the EOQ model in detail

TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery Verify count -- Make sure you are receiving as many cartons as are listed on the delivery

receipt Carefully examine each carton for visible damage -- If damage is visible note it on the

delivery receipt and have the driver sign your copy After delivery immediately open all cartons and inspect for merchandise damage When damage is discovered Retain damaged items -- All damaged materials must be held at the point received Call carrier to report damage and request inspection Confirm call in writing--This is not mandatory but it is one way to protect yourself Carrier inspection of damaged items Have all damaged items in the receiving area -- Make certain the damaged items have not

moved from the receiving area prior to inspection by carrier After carrierinspector prepares damage report carefully read before signing After inspection

25 | P a g e

Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier

Do not return damaged items without written authorization from shippersupplier

4 Perceptual Inventory System

The chartered Institute of Management Accountants London defines the perceptual

inventory ldquoa system of records maintained by controlling department which reflects the

physical movements of stocks and their current balance ldquo Bind cards add the stores ledger

help the movements of the stock on the receipts and in maintaining this system as they make

a record of to physical movements of the stocks on the receipts and issues of material and

also reflect the balance in the stores Thus it is a system of ascertaining balance after every

receipt and issue of material through stock record to facilitate regular checking and to avoid

closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records

physical verification of the stores is made by bin cards and stores ledger may differ from the

actual balance of stock as ascertained by the physical verification

5 Classification and codification of inventories

The inventories of a manufacturing concern may consist of raw material work in

process finished goods spares consumables stocks etc for proper recording and control of

inventory proper classification of various types of items is essential The inventories should

first be classified and then code numbers should be assigned for their identification The

identification of short names is useful for inventory management not only for large concerns

but also for small concerns The inventories should be classified either acc to their use and

their nature

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are

assembled into the purchasable item Therefore any change in the packaging or product is a

new SKU This level of detailed specification assists in managing inventory

Stock out means running out of the inventory of an SKU

New old stock (sometimes abbreviated NOS) is a term used in business to refer to

merchandise being offered for sale that was manufactured long ago but that has never been

used Such merchandise may not be produced anymore and the new old stock may represent

the only market source of a particular item at the present time

26 | P a g e

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier

Do not return damaged items without written authorization from shippersupplier

4 Perceptual Inventory System

The chartered Institute of Management Accountants London defines the perceptual

inventory ldquoa system of records maintained by controlling department which reflects the

physical movements of stocks and their current balance ldquo Bind cards add the stores ledger

help the movements of the stock on the receipts and in maintaining this system as they make

a record of to physical movements of the stocks on the receipts and issues of material and

also reflect the balance in the stores Thus it is a system of ascertaining balance after every

receipt and issue of material through stock record to facilitate regular checking and to avoid

closing down the firm for stocktaking to ensure the accuracy of perceptual inventory records

physical verification of the stores is made by bin cards and stores ledger may differ from the

actual balance of stock as ascertained by the physical verification

5 Classification and codification of inventories

The inventories of a manufacturing concern may consist of raw material work in

process finished goods spares consumables stocks etc for proper recording and control of

inventory proper classification of various types of items is essential The inventories should

first be classified and then code numbers should be assigned for their identification The

identification of short names is useful for inventory management not only for large concerns

but also for small concerns The inventories should be classified either acc to their use and

their nature

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are

assembled into the purchasable item Therefore any change in the packaging or product is a

new SKU This level of detailed specification assists in managing inventory

Stock out means running out of the inventory of an SKU

New old stock (sometimes abbreviated NOS) is a term used in business to refer to

merchandise being offered for sale that was manufactured long ago but that has never been

used Such merchandise may not be produced anymore and the new old stock may represent

the only market source of a particular item at the present time

26 | P a g e

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

JIT

For years American manufacturers have strived for improved inventory management systems The closer they get to carry zero inventories the closer they get to reach the manufacturing efficiency Such thinking combined with todayrsquos available technology has brought inventory management systems to a new level Manufacturers can now meet their customersrsquo demand without incurring the costs and burdens that come from stocking excess inventory Features such as effective forecasting vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency These features enable manufacturers to seek to manage inventory as a financial investment as well as a method for putting more money in their pockets

There are seven types of waste JIT

systems strive to eliminatebull Overproductionmdashproducing more than needed Wastedmoney effort space etcbull Waiting timemdashdecreases productivity and efficiencybull Transportationmdashdouble and even triple handling of anitem from one storage position to anotherbull Processingmdash what are the interfaces between parties de-partments you and your suppliers The fewer andfaster the betterbull Inventorymdashstock simply sitting around does no one anygoodbull Motionmdashreduce motions such as those involved in lookingfor materialsbull Defectsmdashdefective goods not only cost money directly

27 | P a g e

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

Five lsquoSrsquosbull Seiri gt Sort remove unnecessary materials and toolsbull Seiton gt Simplify neatly arrange tools and materialsbull Seiso gt Sweep conduct a cleanup campaignbull Seiketsu gt Standardize perform the above three lsquoSrsquos atfrequent intervals (daily)bull Shitsuke gt Self‐discipline make a habit of alwaysfollowing the first four lsquoSrsquos

28 | P a g e

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

CONCLUSION

A better inventory management will surely be helpful in solving the problems the

company is facing with respect to inventory and will pave way for reducing the huge

investment or blocking of money in inventory From the analysis we can conclude that the

Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it can

maintain safety stock for its components in order to avoid stock-out conditions amp help in

continuous production flow This would reduce the cost and enhance the profit Also there

should be tight control exercised on stock levels based on ABC analysis amp maintain high

percentage in fast moving items in inventories as per on FSN analysis for efficient running of

the inventory Since the inventory Turnover ratio shows the increasing trend there will be

more demand for the products in the future periods If they could properly implement and

follow the norms and techniques of inventory management they can enhance the profit with

minimum cost

29 | P a g e

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records

ReferencesArnold J R Tony and Stephen N Chapman Introduction to MaterialsManagement fourth edition Upper Saddle River NJ Prentice Hall 2001Bernard Paul Integrated Inventory Management New York NY JohnWiley amp Sons Inc 1999Brooks Roger B and Larry W Wilson Inventory Record Accuracy Unleashingthe Power of Cycle Counting New York NY John Wiley amp SonsInc 1995Collins David Jarrett and Nancy Nasuti Whipple Using Bar CodingWhy Itrsquos Taking Over second edition Duxbury MA Data Capture Institute1994Cullinane Thomas P James A Tompkins and Jerry D Smith Howto Plan and Manage Warehouse Operations second edition Watertown MAAmerican Management Association 1994Delaney Patrick R James R Adler Barry J Epstein and Michael FForan GAAP 98 Interpretation and Application of Generally Accepted AccountingPricinples 1998 New York NY John Wiley amp Sons Inc 1998Eisen Peter J Accounting the Easy Way third edition New York NYBarronrsquos Educational Series Inc 1995Feld William M Lean Manufacturing Tools Techniques and How toUse Them Boca Raton FL The St Lucie PressAPICS Series on ResourceManagement 2001

30 | P a g e

• Acknowledgements
• Dedication
• Dedicated
• To
• Inventory Control Records