29926935 presentation of inventory system new
TRANSCRIPT
-
8/2/2019 29926935 Presentation of Inventory System New
1/36
-
8/2/2019 29926935 Presentation of Inventory System New
2/36
INTRODUCTION
Inventories constitute a major component in current assets. Itconstitutes around 60% in the public limited companies, in India.
For the smooth running, every enterprises needs inventory.Inventory serve as a link between production processes. Due to its
major composition in current assets, the management ofinventories occupies a key role in working capital management.
So, inventory management is essential to allow the firm to avail the
opportunities to improve and at the time does not impair itsliquidity, with excessive or unproductive investment.
-
8/2/2019 29926935 Presentation of Inventory System New
3/36
-
8/2/2019 29926935 Presentation of Inventory System New
4/36
Inventory Management
Inventory is one of themost expensive assets of
many companies.
It represents as much
as 40% of total investedcapital.
-
8/2/2019 29926935 Presentation of Inventory System New
5/36
SOME IMAGES
-
8/2/2019 29926935 Presentation of Inventory System New
6/36
MEANING AND NATURE OF INVENTORY
Inventory means stock of finished goods, in accounting language.
However, it includes raw materials, work in process, finished goodand stores in a manufacturing organization.
-
8/2/2019 29926935 Presentation of Inventory System New
7/36
Inventory
managementsystem
Warehousemanagement
ProductionPlanning
control
Sales &marketing
Customerrelationship
Decisionsupport/Business
analysis
Resourcemanagement
Accountingmanagement
Purchasemanagement
Inventorymanagement
-
8/2/2019 29926935 Presentation of Inventory System New
8/36
TYPES OF INVENTORY
RAW MATERIALS
WORK IN PROCESS
FINISHED GOODS
CASH AND MARKETABLE SECURITIES
-
8/2/2019 29926935 Presentation of Inventory System New
9/36
MOTIVES FOR HOLDING INVENTORIESHolding of inventories is expensive in the form of storage costs,
interest charges, deterioration of quality in holding stocks, theft and
pilferage. Firms hold inventories, basically, for the followingreasons
TRANSACTION MOTIVES
PRECAUTION MOTIVES
SPECULATIVE MOTIVE
-
8/2/2019 29926935 Presentation of Inventory System New
10/36
ORDERING COSTEvery time an order is placed stock replenishment, certain costs areinvolved. The ordering cost may vary, dependent upon the type of
item. However, an estimated of ordering cost can be obtained for agiven range of item.
THIS COST OF ORDERING INCLUDES:-
1.PAPER WORK COST2.FOLLOW UP COST
3.COST INVOLVED IN RECEIVING THE ORDER INSPECTION
4.ANY SET UP COST OF MACHINES5.SALARIES AND WAGES TO THE PURCHASE DEPARTMENT
-
8/2/2019 29926935 Presentation of Inventory System New
11/36
CARRYING COSTCarrying cost constitute all the costs of holding items in inventoryfor a given period of time. They are expressed either in rupees per
unit per period or as a percentage of the inventory value per period.components of this cost include the following
STORAGE AND HANDLING COST
OBSOLESCENCE AND DETERIOTION COSTS
INSURANCE
TAXES THE COST OF THE FUNDS INVESTED ININVENTORIES
-
8/2/2019 29926935 Presentation of Inventory System New
12/36
STOCK OUT COSTS
stock out costs are incurred whenever a business is unableto fill orders because the demand for an item is greater
than the amount currently available in inventory.
EXAMPLE:-stock out costs include the expenses ofplacing special orders and expediting incoming orders.
-
8/2/2019 29926935 Presentation of Inventory System New
13/36
OTHER CHARACTERSTICS OF INVENTORYSITUATIONS
LEAD TIMES
SOURCE AND LEVELS OF RISK
STATIC VERSUS DYNAMIC PROBLEMS
REPLESHMENT RATE
-
8/2/2019 29926935 Presentation of Inventory System New
14/36
OBJECTIVES OF INVENTORYMANAGEMENT
The primary objective of inventory management is to maintainthe quantity of stocks, in right location, at right time to ensure
the uninterrupted and, at the same time, minimize theinvestment in stock holding. Every firm is faced with two
conflicting issues:
1.Maximize investment, by maintaining excessive quantity sothat production is not affected and business opportunities are
not lost, for want of stocks.
2.Minimize investment in inventories as they involve costs andaffect profitability, adversely.
-
8/2/2019 29926935 Presentation of Inventory System New
15/36
TO SUM.THE OBJECTIVE OF INVENTORYMANAGEMENT CAN BE SUMMARIZED:-
Minimize the carrying costs and lead time in supplies
Maintain the sufficient stocks of finished goods forsmooth sales operations.
Ensure perpetual inventory control so that physicalstocks are always in agreement, with stocks shown in
records
Facilitate furnishing of data for short term and longterm planning and inventory control.
-
8/2/2019 29926935 Presentation of Inventory System New
16/36
TOOLS AND TECHNIQUES OFINVENTORY MANAGEMENT
A. Determination of stock levels
B. Determination of economic order quantity
C. A.B.C analysisD. V E D Analysis
E. Perpetual inventory system
F. JIT control system
G. Inventory turnover ratios
-
8/2/2019 29926935 Presentation of Inventory System New
17/36
DETERMINATION OF STOCK LEVELSMinimum level
Minimum level quantity that must be maintained, at alltimes if the stock holding falls below this level,production stops due to shortage of materials. This levelis fixed, considering the following factors
1.Lead time
2.Rate of consumption. Nature of materials
FORMULA FOR COMPUTATION OF MINIMUM STOCK IS:-minimum stock level-
Re ordering level-(normal consumption*Maximum re order period)
-
8/2/2019 29926935 Presentation of Inventory System New
18/36
B)REORDER LEVEL:-When the stock level reachesthe re ordering level, the order is placed for replenishment
of stocks. This level is fixed between the maximum stockand minimum stock.
THE FORMULA FOR CALCULATION IS:-
REORDERING STOCK LEVEL: Maximum consumption per day * Maximum re order
period
-
8/2/2019 29926935 Presentation of Inventory System New
19/36
MAXIMUM LEVEL: It is the level, beyond which the
stock level should not exceed. If this level is exceeded,there would be blockage of working capital, loss due to
wastage, risk of obsolescence and more rent for storagespace etc
FORMULA IS:Maximum stock level= Re ordering level+ Reordering quantity-(minimum consumption*
Minimum reordering period)
-
8/2/2019 29926935 Presentation of Inventory System New
20/36
SAFETY STOCK
There should be safety stock to take care of fluctuations inconsumptions pattern of raw materials. safety stock is to
meet unforeseen contingencies.
-
8/2/2019 29926935 Presentation of Inventory System New
21/36
DETERMINATION OF ECONOMIC ORDERQUANTITY
1.Ordering cost: The costs that are associated withpurchasing and placing an order is called ordering costs.
2.Carrying costs: These are the costs for holdinginventories. Higher the stock holding, larger would be
carrying costs and they would be lower if the stocks are
lower.
-
8/2/2019 29926935 Presentation of Inventory System New
22/36
The economic order size of inventory brings atrade off between carrying costs and ordering
costs.
FORMULA:
EOQ=(2AO/C)
WHERE A= Annual consumption of unit ,in rupees
O= Cost of placing order
C= Inventory carrying costs, per one unit
-
8/2/2019 29926935 Presentation of Inventory System New
23/36
GRAPHICAL PRESENTATION OF EOQ
The EOQ model can be presented graphically. To explain
it, there is example of placing an order of mangoes. ifannual consumption of an item is 1000 units and order isplaced for 200 units, each time, orders have to be placedfive times in a year. If we increase the size of the order
from 200 to 500 units, the number of orders has to bereduced from 5 to 2. The ordering costs would be lowerfor two orders, compared to five orders. In other words,with the increase in size of the order, total ordering costwould reduce..
-
8/2/2019 29926935 Presentation of Inventory System New
24/36
total cost
carrying cost
carrying cost
size of order
Graphical presentation of EOQ
-
8/2/2019 29926935 Presentation of Inventory System New
25/36
THE ABC ANALYSIS IS BASED ON THEFOLLOWING PRESUMPTIONS:
1.Managerial time and efforts is scare and limitedand limited
2. Some items of inventory are more important
than others
-
8/2/2019 29926935 Presentation of Inventory System New
26/36
ABC ANALYSIS
Under ABC analysis, the item is allocated to the group,depending on the amount of attention it deserves. Agroup requires the maximum concentrations of the
finance manager. This group constitutes a higher % in
terms of value, while it occupies lesser significance, interms of number of units. B group requires lesser
attention, compared to A group. The last group C hasto be given the least attention, as it constitutes less value
in the total annual consumptions.
ItemItem Annual consumptionAnnual consumption Rate (perRate (per Total value ofTotal value of
-
8/2/2019 29926935 Presentation of Inventory System New
27/36
ItemItem
No.No.Annual consumptionAnnual consumption
In terms of unitsIn terms of units
Rate (perRate (per
unit)rs.unit)rs.Total value ofTotal value of
consumptions(Rs.)consumptions(Rs.)
11 60006000 100100 600000600000
22 1000010000 6565 650000650000
33 50005000 5050 250000250000
44 2500025000 22 500005000055 40004000 2525 100000100000
66 1500015000 1010 150000150000
77 2500025000 66 150000150000
88 1000010000 55 5000050000
TotTot
alal100000100000 20 00 00020 00 000
PriorityPriority ItemItem % each item in% each item in Total value ofTotal value of % of each item in% of each item in cumulativecumulative
-
8/2/2019 29926935 Presentation of Inventory System New
28/36
PriorityPriority
orderorderItemItem
no.no.% each item in% each item in
total no. oftotal no. of
unitsunits
Total value ofTotal value of
consumpconsump% of each item in% of each item in
total valuetotal valuecumulativecumulative
11 10%10% 650000650000 33%33% 33%33%
22 6%6% 600000600000 30%30% 63%63%
33 5%5% 250000250000 12%12% 75%75%
44 15%15% 150000150000 8%8% 83%83%
55 25%25% 150000150000 8%8% 91%91%
66 4%4% 100000100000 5%5% 96%96%
77 25%25% 5000050000 2%2% 98%98%
88 10%10% 5000050000 2%2% 100%100%
TotalTotal 100%100% 20000002000000
GROUPGROUP ITEM NOITEM NO % ITEMS% ITEMS % ITEMS% ITEMS
-
8/2/2019 29926935 Presentation of Inventory System New
29/36
GROUPGROUP ITEM NO.ITEM NO. % ITEMS% ITEMS
(IN UNITS)(IN UNITS)
% ITEMS% ITEMS
(In value)(In value)
A.).) 2,1,32,1,3 21%21% 75%75%
B)B) 6,76,7 40%40% 16%16%
C)C) 5,4,85,4,8 39%39% 9%9%
-
8/2/2019 29926935 Presentation of Inventory System New
30/36
VED ANALYSIS
The VED analysis is used for control of spare parts. A-B-C
analysis is concerned with materials and is not totally andproperly suitable for spares. So, the spares are divided are into
three categories. Vital, desirable and essentials.
-
8/2/2019 29926935 Presentation of Inventory System New
31/36
PERPETUAL INVENTORY SYSTEMTHE PROCEDURE IS AS UNDERA). Stock taking team selects the storerooms, where
stock taking is to be done, on a random basis.B). All the bins in that storeroom are checked.
C). The physical balances in the bins is countered ormeasured , dependent on the type of the material.D). The actual stock is recorded in the sheets provided
for this purposes.
E). There is no prior intimation to the storesdepartment to maintain surprise element.
F) .All the stores are checked, at least, three or fourtimes in a year.
-
8/2/2019 29926935 Presentation of Inventory System New
32/36
JUST IN TIME INVENTORY CONTROL
SYSTEM
The basic philosophy of JIT is to keep only enough
quantity of stock on hand to meet the immediateproduction requirements. This concepts relies on thesuppliers to furnish stock just in time, as and when
needed.
Just in Time inventory control system aims ateliminating wastages, from every aspect of
manufacturing. This was first introduced in Japan in1950. Toyota was the first company to practice this
technique.
-
8/2/2019 29926935 Presentation of Inventory System New
33/36
OBJECTIVES OF JIT
Minimum/Zero inventory and associated costs.
Zero breakdown and continuous productions.
Manufacturing the right quantity, at right time
Ensure timely delivery of inputs as well as outputs.
-
8/2/2019 29926935 Presentation of Inventory System New
34/36
MAJOR ADVANTAGES OF JIT
Right quantities are purchased and produced, in right time
Wastage are eliminated, totally
Investment in inventory is controlled
Carrying cost is reduced.
-
8/2/2019 29926935 Presentation of Inventory System New
35/36
INVENTORY TURNOVER RATIOS
Inventory turnover ratio indicate the efficiency in using thinventory. Inventory turnover ratio indicates the number otimes the stock has turned, over a period of one year. More
the number of times. More efficient the organization is.The inventory conversion period shows the number of day
the stock is blocked.
-
8/2/2019 29926935 Presentation of Inventory System New
36/36