Abhishikth Lakkaraju

GROUP NO –067
6
Mohammed Mahadik 068
AnuragControl
MIS for Inventory Mahankarand 069
Aniruddha Masdekar 070
Material Management
Jash Mehta 071
QUESTIONS Vatsal Mehta
AND ANSWERS 072
Ashish Metkar 073
Dushyanta Mishra 074
Harshvardhan Mishra 075
Q 1. How can ABC analysis help organizations improve inventory handling?

An analysis of a range of items that have different levels of significance and should be handled

or controlled differently. It is a form of Pareto analysis in which the items (such
as activities, customers, documents, inventory items, sales territories) are grouped into three
categories (A, B, and C) in order of their estimated importance. 'A' items are very important, 'B'
items are important, 'C' items are marginally important. For example, the best customers
who yield highest revenue are given the 'A' rating, are usually serviced by the sales manager,
and receive most attention. 'B' and 'C' customers warrant progressively less attention and are
serviced accordingly. It is an inventory control method based upon a statistical principle
discovered by a 19th century economist, Vilfredo Pareto. He observed that a small number of
situations in a population would often dominate the results achieved. Therefore, controlling the
vital few would go a long way to controlling the whole. This observation is known as the
“Management Principle of Materiality” and is recognized today as Pareto’s Law.

When ABC analysis is applied to an inventory situation, it determines the importance of items
and the level of controls placed on the item. By dividing a company’s inventory into different
classifications– A, B, C; managers can focus on the items that account for the majority of the
inventory. The adaptation of Pareto’s Law of the vital few and trivial many follows a pattern:

 A inventory accounts for about 20% of the items and 80% of the dollar usage
 B inventory accounts for about 30% of the items and 15% of the dollar usage
 C inventory accounts for about 50% of the items and 5% of the dollar usage

These percentages are approximate and vary from company to company. Normally the
classifications are based upon annual dollar usage, but other criteria can be used, such as
transaction usage, unit cost, lead time, and others.

The steps in doing the ABC analysis are: determine annual quantity usage of each item, multiply
the annual quantity usage by the cost of the item to get the total annual dollar usage, add the total
dollar usage of all items to get aggregate annual dollar inventory expenditure, divide the total
dollar usage of each item by the aggregate inventory expenditure to reach the percentage of total
usage for any item, list the in rank order by percentage of aggregate usage, and review annual
usage distribution and classify items as A, B, or C.

When doing an ABC classification, separate analysis should be performed for different types of
inventory. ABC analysis provides the means for identifying those items that make the largest
impact on a company’s overall inventory cost performance. Different controls are used for each
classification to improve inventory performance. ‘A’ items have tighter controls on inventory
records and more frequent reviews of forecasting, demand requirements, order quantities, safety
stocks, and cycle counts. ‘B’ items have similar controls to ‘A’ items but reviews are less
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frequent. ‘C’ items have the simplest controls. They are only important if there is a shortage of
one of them. Thus, ‘C’ items can be ordered in larger quantities and have higher safety stocks.

ABC analysis puts emphasis on “where the value is”. By focusing efforts on higher value
inventory, a company can assign proper resources to attain the optimum inventory levels,
reducing inventory costs, and ensuring customers’ needs are met.

An important aspect of managing inventory is to have a way to classify it based on its

importance. All items in the supply chain are not of equal importance. Some are very important,
such as specialized surgical equipment. Others are less important, such as latex gloves in a
hospital. The first step in managing inventory is to classify inventory based on its degree of
importance to manage it properly. The tool for this is ABC classification. Classifying inventory
based on degree of importance allows us to give priority to important inventory items and
manage those with care. It also prevents us from wasting precious resources on managing items
that are of less importance.

ABC classification is based on Pareto’s Law, which states that a small percentage of items
accounts for a large percentage of value. This value can be sales, profits, or other measure of
importance. Roughly 10 percent to 20 percent of inventory items account for 70 percent to 80
percent of inventory value. These highly valuable items are classified as A inventory items.
Moderate value items account for approximately 30 percent of inventory items and contribute to
roughly 35 percent of the total. They are called B items. Finally, approximately 50 percent of the
items only contribute to roughly 10 percent of total inventory value. These are called C items and
are of least importance. Figure 1-9 provides an example of ABC analysis.

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The steps to conduct an ABC analysis are as follows:

 Determine annual usage or sales for each item.

 Determine the percentage of the total usage or sales by item.
 Rank the items from highest to lowest percentage.
 Classify the items into groups.

After ranking the items from highest to lowest percentage, do not force groups to fit the preset
percentages, as these are rough estimates. Rather, there are typically natural breaking points that
will occur. The data will naturally group itself and these are groupings that should be used.

ABC analysis is extremely important for determining order policies. The most sophisticated
inventory systems should be used for A items. In fact, many managers personally oversee these.
By contrast, C items are typically left for automated ordering systems as they do not warrant the
cost of managerial involvement.

A reasonable degree of care may be taken in order to control these items. In the last category i.e.
group ‘Q’ about 70 to 80% of the items is covered costing about 20% of the total value. This can
be referred to as residuary category. A routine type of care may be taken in the case of third
category.

This method is also known as ‘stock control according to value method’, ‘selective value
approach’ and ‘proportional parts value approach’.

If this method is applied with care, it ensures considerable reduction in the storage expenses and
it is also greatly helpful in preserving costly items.

Advantages of A.B.C. method of Inventory Control:

 It ensures control over the costly items in which a large amount of capital is invested.
 It helps in developing scientific method of controlling inventories. Clerical costs are
considerably reduced and stock is maintained at optimum level.
 It helps in maintaining stock turnover rate at comparatively higher level through scientific
control of inventories.
 It ensures considerable reduction in the storage expenses. It results in stock carrying stock.
 It helps in maintaining enough safety stock for C category of items. The following graph
demonstrates ABC inventory classification.

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Disadvantages:

This analysis suffers from the following drawbacks:

 This technique can be successfully employed only, if there is proper standardisation of

materials in the store.
 A good system of codification of materials should be in operation for the success of this
analysis.
 The analysis is based on monetary value of the items in use. Other important factors one
ignored.

In spite of the above mentioned limitations, the ABC analysis is very popular method of
inventory control. It is an effective instrument in reducing the cost of materials in the store
house.

Q 2. Explain in brief different models of inventory control.

Once items are shipped through the distribution network, inventory is replenished. This is
especially true for make-to-stock situations. Several models are available to help determine how
much inventory should be brought in to restock the products or parts.

The forms of inventories existing in a manufacturing enterprise can be classified into three
categories:

 Raw Materials: These are those goods which have been purchased and stored for future
productions. These are the goods which have not yet been committed to production at all.

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 Work-in-Progress: These are the goods which have been committed to production but the
finished goods have not yet been produced. In other words, work-in-progress inventories
refer to ‘semi-manufactured products.’
 Finished Goods: These are the goods after production process is complete. Say, these are the
final products of the production process ready for sale. In case of wholesaler or retailer,
inventories are generally referred to as ‘merchandise inventories.’ Some firms also maintain
the fourth type of inventories called ‘supplies.’ Examples of supplies are office and plant
cleaning materials, oil, fuel, light bulbs and the like.

Needless to mention, maintaining the required size of inventory is necessary for the smooth and
effective functioning of production activity. Holding required inventories provides certain
advantages to the entrepreneur. For example, it helps in avoiding losses of sales, reducing
ordering costs, and achieving efficient production run.

However, against these benefits are some costs as well associated with inventories? It is said that
every noble acquisition is attended with risk; he who fears to encounter the one must not expect
to obtain the other. This is true of inventories also.

There are broadly two costs involved in holding inventories:

(i) Ordering Costs: These include costs which are associated with placing of orders to purchase
raw materials and components. Clerical and administrative salaries, rent for the space occupied,
postage, telegrams, bills, stationery, etc. are the examples of ordering costs. The more the orders,
the more will be the ordering costs and vice versa.

(ii) Carrying Costs: These include costs involved in holding or carrying inventories like
insurance charges for covering risks, rent for the floor space occupied, wages of labourers,
wastages, obsolescence, or deterioration, thefts, pilferages, etc. These also include ‘opportunity
costs.’ This simply means had the money blocked in inventories been invested elsewhere in the
business, it would have earned a certain return. Hence, the loss of such return may be considered
as an ‘opportunity costs.’

Models of Inventory Management:

While it is very necessary to maintain the optimum level of inventory, it is not so easy as well.
Nonetheless, some models or methods have been developed in the recent past for determining
the optimum level of inventories to be maintained in the enterprise.

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All models are classified into two major types:

 Deterministic Models
 Probabilistic Models.

In brief, the deterministic models are built on the assumption that there is no uncertainty
associated with demand and replenishment of inventories. On the contrary, the probabilistic
models take cognizance of the fact that there is always some degree of uncertainty associated
with the demand pattern and lead time of inventories.

Economic Ordering Quantity (EOQ) Model:

One of the important decisions to be taken by a firm in inventory management is how much
inventory to buy at a time.

This is called ‘Economic Ordering Quantity (EOQ). EOQ also gives solutions to other
problems like:

 How frequently to buy?

 When to buy?
 What should be the reserve stock?

Assumptions:

Like other economic models, EOQ Model is also based on certain assumptions:

 That the firm knows with certainty how much items of particular inventories will be used or
demanded for within a specific period of time.
 That the use of inventories or sales made by the firm remains constant or unchanged
throughout the period.
 That the moment inventories reach to the zero level, the order of the replenishment of
inventory is placed without delay.

The above assumptions are also called as limitations of the EOQ Model.

Determination of EOQ:

EOQ Model is based on Baumol’s cash management model. How much to buy at a time, or
say, how much will be EOQ is to be decided on the basis of the two costs.

The above two costs are inversely associated. If holding inventory cost increases, ordering cost
decreases and vice versa. A balance is, therefore, struck between the two opposing costs and

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economic ordering quantity is determined at a level for which the aggregate of two costs is the
minimum.

The various components of ordering costs and carrying costs are shown in the following

Ordering Costs Carrying Costs

Requisitioning Warehousing
Order Placing Handling
Transportation Administrative
Storing Insurance
Administrative Deterioration and Obsolesce
EOQ can be determined by applying the following commonly used formula:

Q = 2UxP/S

Where:

Q = Economic Ordering Quantity (EOQ)

U = Quantity purchased in a year or month

P = Cost of placing an order

S = Annual or monthly cost of storage of one unit known as ‘carrying cost.’

Inventory Turnover Ratio:

Inventory can also be managed by using accounting ratios like Inventory Turnover Ratio.
Inventory ratio establishes relationship between average inventory and cost of inventory
consumed or sold during the particular period.

Fast-Moving Items:

This is indicated by a high inventory ratio. This also means that such items of inventory enjoy
high demand. Obviously, in order to have smooth production, adequate inventories of these items
should be maintained. Otherwise, both production and sales will be adversely affected through
uninterrupted supply of these items.

Slow-Moving Items:

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That some items are slowly moving is indicated by a low turnover ratio. These items are,
therefore, needed to be maintained at a minimum level.

Dormant or Obsolete Items:

These refer to items having no demand. These should be disposed of as early as possible to curb
further losses caused by them.

Single-period ordering

Single-period ordering occurs when an item is purchased one time, such as a daily newspaper
purchase or holiday season order. This method balances the trade-off associated with an
insufficient order (and the resulting loss in profit) and ordering too much (and the resulting costs
of disposing of the excess).

Replenishment models

Distribution inventories and independent demand environments use different types of

replenishment models based on dependent demand situations.

Reorder point. A reorder point is calculated for each independent demand item. When inventory
levels drop to the reorder point, a signal is sent to replenish inventory in a fixed quantity amount.
The reorder point is equal to the expected demand during lead time plus safety stock to cover
demand in excess of expectations.

Periodic review. A periodic review occurs when inventory is ordered at fixed intervals, such as
weekly. This is desirable when vendors make routine visits to customers and take orders for a
complete line of products, or when buyers want to combine orders to save transportation costs.
The order quantity is determined by subtracting the current inventory position from a maximum
quantity calculated to protect against stockouts during the review period and lead time.

Safety calculations. Safety stock for independent demand items protects against fluctuations in
customer demand. Safety stock calculations use statistics to mitigate the risk of stockout. A
service criterion measures risk as the probability of not stocking out during the order cycle. The
fill rate criterion measures risk as a function of the expected percentage of demand met.

Normal distribution

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The normal distribution can be used to characterize in-dependent demand. It is defined by the
mean and standard deviation of demand over a specified period of time to help calculate safety
stock in inventory control systems.

Quantity discounts/price breaks/promotions

Purchasing decisions often are influenced by quantity discounts, price breaks and other
promotions. Specialized techniques help analyze these decisions by considering trade-offs
between purchasing and transporting costs, inventory carrying costs, and fixed ordering costs.

Low-volume items

Specialized techniques and distributions may be required for low-volume items, since the normal
distribution assumption might not be applicable.

ABC inventory control

ABC inventory control is a method of ranking items by their importance, as focusing on the most
important items is crucial when resources are limited. Criteria for determining item importance
in include annual cost, annual usage, revenue generated, and usage by priority customers. In a
typical situation, about 20 percent of items make up 80 percent of the yearly cost and become A
items. Another 30 percent of the items make up 15 percent of the cost and become B items. C
items make up the remaining 50 percent of items and consume only the remaining 5 percent of
the cost. In ABC inventory control, A items are carefully managed and ordered frequently to
minimize investment; less time and resources are devoted to the B items; a very low amount of
time and resources are dedicated to the C items.

ABC Inventory control also is used in cycle counting. For example, the A items are counted
often—once per month, for example. The B items are counted less often—once per calendar
quarter, for example. The C items may be counted even less often—once per year, for example.

Inventory accuracy

High inventory accuracy is mandatory for optimal operation of production and automated
systems. The inventory physically located in distribution must be reflected accurately in the
system. Due to the automation and integration of enterprise resources planning (ERP) systems,
inventory is linked to other functions within a company, such as the tracking of dollars in
accounting for inventory receipts and shipments. ERP implementation demands inventory
accuracies as high as 99 percent.

Auditing. Along with maintaining peak operational functionality, another reason distribution
inventories must be kept accurate is to satisfy accounting and government reporting

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 requirements. In order to comply with these strict practices, some companies choose to audit
their inventories. In an audit, stocks of a particular item are counted and compared to a system
balance. If an inaccuracy is found, the system is adjusted.

Cycle counting

Cycle counting takes the audit concept one step further. In cycle counting, after an audit is
performed, the cycle counting process will search for a root cause for the inaccuracy. Once
resolved, inventory accuracy is increased, because the problem will not reoccur for that item and
other items affected by the improvement.

Some companies will work alongside finance and implement a cycle counting schedule similar
to an ABC inventory control process. This type of counting schedule works best when inventory
physically resides in fixed locations. Lean distribution environments work towards eliminating
cycle counting and annual physical inventory counts, as inventory levels are minimized. Some
organizations can eliminate cycle counting entirely, if high inventory accuracy can be
demonstrated without cycle counting.

Pooling inventory

In a multiple-warehouse distribution architecture, decisions as to where items are warehoused are

of particular importance. Stocking every item in every warehouse often is not required. Pooling
strategies are employed when items have highly variable demand in certain warehouses. If
inventory can be consolidated in a centralized warehouse rather than stocked in all warehouses,
the variability of customer demand will be reduced. However, this strategy may result in longer
delivery lead times and increased expediting and shipping costs.

Postponement:

Postponement strategies delay the completion of assembly at some point in the supply chain until
the customer order is received.

Q 3. What are the types of reports generated in inventory management?

Commonly used enquiries in inventory management

 Reorder Report: This is ideal for viewing all of your products and their associated
suppliers, along with the relevant stock level information. The report enables you to see
when your stock is running low, so you can determine when you need to replenish stock.

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 Transaction Enquiry: This is ideal for anyone who wants to view a list of
transactions based on the filters available. This filters include: transaction type, warehouse,
product or reference.

 Margin Enquiry: This report is ideal for anyone who wants to view sales, credit
lines, and turnover and profit information.

 Sales Enquiry: This report can provide you with simple sales information, regardless
of their status (parked, completed or deleted). You can use a number of filters to refine your
search.

 Backorder Enquiry: This is ideal for admin staff to manage the creation and
deployment of shipments.

Types of reports (MICROs)

1. Stock status reports: As and when the orders are placed, the number of stock required to
be shipped will be turned into ‘Stock Committed’ status.
2. Warehouse user activity report: Keeping track of what’s happening in your stock storage
house is of much importance. User Activity Log tracks every action of a user in a
inventory management network so that the activities can be retrieved for future reference.
3. Consumers-based orders: Customers order history can be retrieved to know each
customer-specific demands, time of purchase and average order value so that you can
have you stocks replenished accordingly.
4. Sales reports: Orders can be analyzed based on sales reps which provides a clarity over
every individual’s sales performance.

Types of reports (MACROs)

1. Product Movement Summary Report – shows the Products’ traffic in the Inventory
System within a given period of time. It includes the Quantities On Hand, number of
products that went In and Out of the inventory, Cost and Stock On Hand.
2. Product Movement Details Report – shows the Products’ detailed traffic in the Inventory
System within a given period of time. It includes Reference numbers and which location
it went in and went out.
3. Balance Sheet – shows the summary of each account’s financial position including
Opening & Closing Balances.
4. Job Costing Details – shows the list of materials sent to a job within a given period of
time. Report details include Quantity, Price and applicable Tax.
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3 Great Inventory Management Reports for Small Businesses

Companies in a product-oriented business usually struggle to manage inventory at optimum

levels. There’s a constant tug-of-war going on between the need to have sufficient product to
fulfill demand, and the desire to avoid the very costly pitfalls associated with overstocking.

This issue is often tougher for small business owners, trying to manage inventory without senior
management expertise and sophisticated tools at their disposal. Additionally, without
professional purchasing personnel, a business owner is more prone to the pitfalls of “deals” –
buy more when the price is good, without relating that to the question of how long the “more”
will sit on the shelf, or how much slow-moving or dead stock actually costs.

To help with this issue, here are 3 really useful inventory management reports that can help the
small business owner in making better decisions about inventory levels, what to purchase, and
more particularly what to get rid of.

1. Inventory Ranking Report

This type of report ranks your products in descending order by gross margin generated over the
past year (or other appropriate period), and compares the profitability with the holding cost. It’s
really useful to see which products are occupying more space in your warehouse and more value
on your balance sheet than is justified by their contribution to profits. While you have to factor in
other criteria in deciding on products to cut or reduce, this at least gives you an objective starting
point for your evaluation.

2. Inventory “Hits” Report

The word “hits” brings back memories of Top 40 charts to this old codger, but in this case we’re
not talking music. The word “hits” here means the number of times over the reporting period that
the item has appeared on an invoice, and this is again compared with the holding value and costs,
to identify products that appear very infrequently while constituting a significant chunk of
inventory on hand. Ideally this should be used in conjunction with the ranking report.

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3. Daily Average Sales Reports

These type of reports will show average daily sales (in units) over different periods, for example,
last month, last quarter and last year, usually side by side. This helps to uncover trends. A
common flaw in some software is that these reports only show items that have sales in the
periods in question – ideally we should see all items that have either been sold, or that remain on
hand, and their current inventory levels and value. This can help identify products where reorder
levels and purchasing policies should be reviewed.

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