Inventory

Hi Folks! Today we will be discussing about Inventory. It is a very interesting topic that we are going to discuss.

Basics of Inventory – These is inflow which means procuring something and outflow means you are selling something, so inventory is actually the mismatch of inflow and outflow. Generally, three things can happen.

Inflow > Outflow (Inventory goes up)

Inflow< Outflow (Inventory comes up)

Inflow = Outflow, (No change in Inventory)

We have control only on Inflow not on outflow.

Now, we are going to learn some basic definition of terms.

Raw material – Not yet entered into the production process.

Work in Progress (WIP) – not yet finished.

Finished Goods – not yet sold.

Cycle Inventory – Average inventory that is the mismatch in the timings of receipts and sales.

Safety Inventory – It is the additional inventory carried to deal with uncertainty in demand and supply. (Suppose you have a car and generally car has one additional wheel called stepney. Use of stepney is “waiting for something to be done/used”, so this is called safety inventory. So, there is an uncertainty that puncture may happen.

Suppose you are going to writing an exam, you would be carrying additional pens. One pen is sufficient, you can write your paper, but additional pens is actually the safety inventory. Safety inventory depends upon how server uncertainty is and its consequences.

Economic Order Quantity (EOQ) – How much to Order?

Minimize = Annual material purchase cost +Annual ordering cost + Annual holding cost

D= Annual demand of the project

S= Fixed cost incurred per order

C= Cost per unit

h= Holding cost per year as a fraction of product

Order Quantity = Q

Annual material cost = C*D