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Unit 12: Inventory Management

manager is responsible for selling the product and wants to minimize the chances of running Notes
out of inventory. The financial manager is concerned about achieving an appropriate overall
rate of return. Funds invested in inventory are idle and do not earn a return.

Notes Poor inventory management results in an illiquid corporation – one that must the
turnover of the inventory releases cash in a timely manner, and this cash flow is then used
to make payment on payables as they come due.

12.1 Tools and Techniques of Inventory Management

The responsibility for inventory management is not wholly assignable to any one group of
people, any one department or any one function. In plants with a store department or section,
the inventory management function is more or less centralized. But the constant flow of material
into stores and then into production and out again making inventory management a joint
responsibility of many departments. Purchasing naturally has a vested interest in inventories,
even to the extent that the purchasing and stores functions are often combined. Production could
look after work in progress, no other arrangement would be satisfactory. Quality control is
concerned with the condition of incoming materials, since all purchased items must meet quality
specifications. Where there are much sections, traffic and receiving play an important inventory
control role. The economic importance of inventories causes more than a passing interest on the
part of accounting and finance. The fact that parts and materials must be moved from one plant
location to another to be properly utilized brings in the material handling function into play,
both to exercise control and to physically move parts and material.
With so many people from so many different plants areas exercising direct and indirect control
over inventories, it is essential that the right hand always know that the left hand is doing. This
requires continuous communication, which, in turn, requires standard procedures forms and
other management devices. All these are essential to inventory management. These problems
are eased somewhat in plants that use data processing systems inventory accounting but they
are not eliminated. The complexity of any inventory management system is directly proportional
to the number of items carried in stock and the number of interdepartmental transactions
necessary to keep track of material movement and disposition.

Did u know? What is ultimate goal of an inventory management programme?
The ultimate goal of an inventory management programme is to provide maximum
customer service at a minimum cost.

For determining material requirements, the methods used are:

Explosion Process

In many manufacturing organizations, production requirements are based directly on the sales
forecast. For each of its products, the company prepares a bill of materials – a list of the parts
needed for various products. To determine overall material requirements, each sub-assembly
or part on the bill of materials is extended or multiplied by the planned number of finished
products. This yields the total requirement for each time listed.
The explosion process is greatly simplified if electronics data-processing equipment is available.
After the production level is set, cards are punched to initiate a manufacturing order for each
product. It is possible to obtain, in very short-order, cards representing each part or sub-assembly

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