Inventory management
A proper planning of purchase of raw material, handling, storing and recording is to be considered as a part of inventory manager. T means management of raw material and related items. Inventory management considers what to purchase, how to purchase, how much to purchase, from where to purchase, were to store and when to use for production.
Methods of Inventory Management
- FIFO (first in first out)
- LIFO
- HIFO.
Approaches of inventory management
ABC Analysis
The ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control. It provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls. The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance.
- 'A' items are very important for an organization. Because of the high value of these ‘A’ items, frequently value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity.
- 'B' items are important, but of course less important, than ‘A’ items and more important than ‘C’ items. Therefore ‘B’ items are intergroup items.
- 'C' items are marginally important.
The process of ABC analysis is given below:
- Step 1: Obtain the list of the items along with information on their unit cost and the periodic consumption (usually annual)
- Step 2: Determine the annual usage value for each of the items by multiplying the unit cost with number of units and rank them in descending order on the basis of their respective usage values
- Step 3: Express the value for each item as a percentage of the aggregate usage value. Then cumulate the percent of annual usage value
- Step 4: Obtain the percentage value for each of the items. For n items, each item should represent 100/n percent. For example, if there are 20 items involved in the classification, then each item would represent 100/20= 5% of the materials. Cumulate these percentage values as well.
- Step 5: Using the data on cumulated values of items and the cumulated percentage usage values, plot the curve by showing these, respectively in X and Y axes.
- Step 6: Determine the appropriate divisions for the A, B and C categories. The curve would rise steeply up to a point. This point is marked and the items up to that point constitute the A- type items. The curve would be moderately sloped towards upright. The point beyond which the slope of the curve is negligible is marked. The items covered beyond that point are classified as category C type. The items falling between point A and C will be items under category B.
Economic order quantity (EOQ)
EOQ is the level of inventory order that minimize the total cost associated with inventory management. The objective is to find out and maintain optimum level of investment in inventory to minimize the total cost associated with it. The total cost include –
- Carrying cost – are associated with the maintenance / holding of inventory.
- Ordering cost – are associated with acquisition of planning order of inventory.
The quantity to be ordered is fixed under this method. Reorder are made once the stock reaches a certain predetermined level called Reorder level. This typically fixed based on the average consumption deriving the lead time plus some buffer stock. The best way to determine the fixed quantity to be ordered would be using the concept of EOQ. This concept is designed in a manner to ensure that the overall inventory cost is lowest. In other words, EOQ is the quantity level to be ordered each time so as to keep the inventory cost minimum. There are three alternate methods to determine the EOQ namely.
- Algebraic method
- Tabular method
- Graphical method.
EOQ = √2CO/S
Where,
- C = Annual consumption of material,
- O = ordering cost per order,
- S=Annual storage cost per unit.
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