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INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets of the business concern.
It is also essential for smooth running of the business activities. A proper planning of
purchasing of raw material, handling, storing and recording is to be considered as a part of
inventory management. Inventory management means, management of raw materials and
related items. Inventory management considers what to purchase, how to purchase, how much
to purchase, from where to purchase, where to store and When to use for production etc.

MEANING
The dictionary meaning of the inventory is stock of goods or a list of goods. In
accounting language, inventory means stock of finished goods. In a manufacturing point of
view, inventory includes, raw material, work in process, stores, etc.

KINDS OF INVENTORIES
Inventories can be classified into five major categories.

A. Raw Material: It is basic and important part of inventories. These are goods which have not
yet been committed to production in a manufacturing business concern.

B. Work in Progress: These include those materials which have been committed to production
process but have not yet been completed.

C. Consumables: These are the materials which are needed to smooth running of the
manufacturing process.

D. Finished Goods: These are the final output of the production process of the business
concern. It is ready for consumers.

E. Spares: It is also a part of inventories, which includes small spares and parts.

OBJECTIVES OF INVENTORY MANAGEMENT

Inventory occupies 30–80% of the total current assets of the business concern. It is also
very essential part not only in the field of Financial Management but also it is closely associated
with production management. Hence, in any working capital decision regarding the inventories,
it will affect both financial and production function of the concern. Hence, efficient
management of inventories is an essential part of any kind of manufacturing process concern.
The major objectives of the inventory management are as follows:

• To efficient and smooth production process.

• To maintain optimum inventory to maximize the profitability.

• To meet the seasonal demand of the products..

• To ensure the level and site of inventories required.

 • To plan when to purchase and where to purchase • To avoid both over stock and
under stock of inventory.

•To avoid price increase in future.

TECHNIQUES OF INVENTORY MANAGEMENT

Inventory management consists of effective control and administration of inventories.
Inventory control refers to a system which ensures supply of required quantity and quality of
inventories at the required time and at the same time prevents unnecessary investment in
inventories. It needs the following important techniques.

Techniques based on the order quantity of Inventories

Order quantity of inventories can be determined with the help of the following
techniques:

1. Stock Level:
Stock level is the level of stock which is maintained by the business concern at all times.
Therefore, the business concern must maintain optimum level of stock to smooth running of the
business process. Different level of stock can be determined based on the volume of the stock.

2. Minimum Level:
The business concern must maintain minimum level of stock at all times. If the stocks are
less than the minimum level, then the work will stop due to shortage of material.

3. Re-order Level
Re-ordering level is fixed between minimum level and maximum level. Re-order level is
the level when the business concern makes fresh order at this level. Re-order level=maximum
consumption × maximum Re-ord
4. Maximum Level
It is the maximum limit of the quantity of inventories, the business concern must
maintain. If the quantity exceeds maximum level limit then it will be overstocking. Maximum
level = Re-order level + Re-order quantity – (Minimum consumption × Minimum delivery
period

5. Danger Level
It is the level below the minimum level. It leads to stoppage of the production process.
Danger level=Average consumption × Maximum re-order period for emergency purchase

6. Average Stock Level

It is calculated such as, Average stock level= Minimum stock level + ½ of reorder
quantity

7. Lead Time
Lead time is the time normally taken in receiving delivery after placing order s with
suppliers. The time taken in processing the order and then executing it is known as lead time.
 8. Safety Stock
Safety stock implies extra inventories that can be drawn down when actual lead time
and/ or usage rates are greater than expected. Safety stocks are determined by opportunity cost
and carrying cost of inventories. If the business concerns maintain low level of safety stock, it
will lead to larger opportunity cost and the larger quantity of safety stock involves higher
carrying costs.