Page 259 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 11: Inventory Management

Notes
Daily usage rate in tonnes Probability Lead time in days Probability
4 0.3 5 .6
6 0.5 10 .2
8 0.2 15 .2

The stockout cost is estimated to be 4,000 per tonne. The carrying cost is 1,000 per tonne
per year.
Required
1. What is the optimal level of safety stock?

2. What is the probability of stockout?
Source: Nitin Balwani, Accounting and Finance for Managers, Excel Books, New Delhi.

11.7 Summary

 Inventory is composed of assets that will be sold in the future in the normal course of
business operations.
 Inventories provide a ‘buffer’ between purchasing, producing and marketing goods

 Four types of inventories may be identified which are Raw material inventory, Stores and
spares, Work-in-process inventory and Finished goods inventory.
 The main objective of inventory management is to achieve maximum efficiency in
production and sales with the minimum investment in inventory.
 Minimum level indicates the lowest figure of inventory balance which must be maintained
in hand at all times, so that there is no stoppage of production

 In ABC Analysis (called Always Better Control)ABC Analysis (called Always Better Control)
the items are divided into three categories according to their importance, value and
frequency of replenishment during a period.
 Economic Order Quantity (EOQ) is the order size for some particular inventory item that
results in lowest total inventory cost for the period.

 The Just-in-Time (JIT) system philosophy is that materials should arrive exactly the time
they are needed for production.

 Many companies used a Material Requirement Planning (MRP) system to determine what
materials to order and when to order.
 The methods used for moving the inventory is first in first out (FIFO), last in, first out
(LIFO) system.

11.8 Keywords

Economic Order Quantity (EOQ): It refers to that level of inventory at which the total cost of
inventory is minimum

Inventory: The stockpile of the products a firm is offering for sales and the components that
make up the product.
Optimum Level of Inventory: It is the level where the total costs of inventory is less.

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