Page 178 - DMGT409Basic Financial Management

Unit 10: Inventory Management

Average Stock Level: Notes

Average Stock Level = Minimum level + [Reorder Quantity ÷ 2]
5. Danger Stock Level: Danger level is that level of materials beyond which materials should
not fall in any situation. When it falls in danger level it will disturb production. Hence, the
fi rm should not allow the stock level to go to danger level, if at all falls in that level then
immediately stock should be arranged even if it costly.
Danger Level = Average Usage x Minimum Deliver Time [for emergency purchase]

Two-Bin Technique

It is the oldest techniques of inventory control. Generally, it is used to control ‘C’ category
inventories. According to this technique, stock of each item is separated into two piles, bins or
groups. First bin contains stock, just enough to last from the date a new order is placed until it is
received for inventory. The second bin contains stock, which is enough to meet current demand

over the period of replenishment. First stock is issued from first bin whenever the first bin is

completed, then an order for replenishment is placed, and the stock in the second is utilized until
the ordered material is received.
VED Classifi cation

According to this classification, inventories are grouped based on the effect of production and

inventories are grouped into three, they are Vital, Essential and Desirable inventories. It is
specially used for classification of spare parts. If a part is vital, in production, then it is classifi ed

as ‘V’, if it is essential, then it is assigned ‘E’ and if it is not so essential, desirable that is given ‘D’.
‘V’ category item are stocked high and category ‘D’ items are maintained at minimum level.

Just in Time (JIT)

Popularly known in its acronym JIT. JIT may be applied for either raw materials purchase or
producing finished goods. From raw materials purchases it means that no inventories are held at

any stage of production and the exact requirement is bought in each and every successive stage of
production of the right time. In other words, maintenance of a minimum level of raw materials,
where by the inventory carrying cost could be minimized, and the risk of loss due to stock-out
position could be well avoided. From production of goods view, JIT means goods are produced

only when the orders are received, there by no storage of finished goods, can avoid costs of
carrying finished goods. JIT is also known as “Zero Inventory Production System” (ZIPS), Zero

Inventories (ZIN), Materials as Needed (MAN), or Neck of Time (NOT).

Task The annual cash requirement of a company is ` 20 lakhs, fi rm has short-term
marketable securities is lot size of ` 50,000; ` 1,00,000; ` 1,50,000; ` 2,00,000; ` 2,50,000; `
5,00,000 and ` 5,50,000. The cost of conversion of marketable securities is ` 4,000 per lot.
The company’s opportunity cost is 6 per cent. Determine the economic lot size.

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