There are three types of inventories —
Raw materials, work-in-process and finished goods. Decisions relating to inventories
are taken primarily by executives in Production, Purchasing and Marketing Departments.
Raw material – Purchasing and production
executives
Work-in-process – Production executives
Finished goods – Marketing executives
Finance manager has the responsibility to
ensure that inventories are properly monitored and controlled. He has to emphasize
the financial point of view and initiate programmes with the participation and
involvement of others for effective management of inventories.
Types of inventories
‘Process or Movement’ inventories
‘Organisation’ inventories
Benefits of holding inventories
Availing quantity discounts.
Reducing ordering cost.
Avoiding losses on sales.
Achieving efficient production runs.
Objectives of inventory management
To have continuous, uninterrupted production.
To take advantage of quantity discount.
To ensure effective utilisation of the
space.
To provide right materials at right time.
To protect the quality of input and
output.
To meet the demand for finished products.
Costs associated with holding inventory
Financial cost
Cost of storage
Risk of obsolescence
Risk of fluctuation in the prices
Deterioration in quality
Theft, pilferage, accidents etc.
Order placing and carrying cost
Cost of shortage of stock
Techniques of inventory management
Fixation of levels
Minimum level
Maximum level
Re-Order level
Danger level
ABC analysis : Selective control over inventory
items. [Proportional value analysis]
Grouping the materials according to their value.
Economic Order Quantity – EOQ
EOQ is that quantity of materials to be ordered where it will have least order
placing and carrying cost.
Perpetual Inventory System
Periodic Inventory System
VED analysis : Vital-Essential-Desirable
Most suitable method for automobile industry especially to maintain spare
parts.
FSN analysis : Inventories are grouped according
to their movements. Fast moving, Slow moving and Non-moving.
Just-in-Time inventory control : The firm should
maintain a minimal level of inventory and rely on suppliers to provide parts
and components “just-in-time” to meet its assembly requirements.Developed by Taichi Okno.
Criteria for judging the inventory system
Comprehensibility : The system
should be clearly understood by all affected parties.
Adaptability : Is the system
responsive to change? A certain degree of flexibility and adaptability should
be built into the system to make it versatile.
Timeliness : The inventory system
should be capable of inducing timely action.
