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Financial Management
Notes The optimum strategy is to carry enough safety stocks that the cost of carrying the safety stock
equals the expected cost of a stock out with a carrying cost of 12 per unit; the optimum safety
stock is (525/12) i.e., 44 tyres. With a 30 per cent chance of a stockout, the arbitrary 100-unit safety
stock is excessively sophisticated-Statistical models may be developed to address the issue of
optimum safety stocks and reorder points.
Self Assessment
Fill in the blanks:
1. Inventory ordering costs and inventory carrying costs are used to compute the ………………
inventory.
2. Inventories are tied to the firm’s pool of working capital through three specific lags,
namely Creation lag Storage lag and …………..
3. In order to avoid stockout costs, firms sometimes carry a……………., which is additional
inventory above what is needed.
11.2 Inventory Management
The main objective of inventory management is to achieve maximum efficiency in production
and sales with the minimum investment in inventory.
Inventory consists of stock of materials, components, work-in-progress, finished products and
stores and spares. The techniques commonly used for inventory management are as follows:
1. Setting of various stock levels
2. ABC analysis
3. Establishment of system of budgets
4. Use of perpetual inventory records and continuous stock verification
5. Determination of economic order quantity
6. Review of slow and non-moving items
7. Use of control ratios
8. Just-in-time (JIT) System
9. Material Requirement Planning (MRP) system
Self Assessment
Fill in the blanks:
4. Inventory consists of stock of materials, components, work-in-progress, finished products
and…………………...
5. The objective of inventory management is to achieve maximum efficiency in production
and sales with the ……………investment in inventory
11.3 Various Techniques of Inventory Management
11.3.1 Setting of Various Stock Levels
Minimum Level
It indicates the lowest figure of inventory balance which must be maintained in hand at all
times, so that there is no stoppage of production due to non-availability of inventory.
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