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Monday, December 10, 2007

Inventory Management

Inventory Management


To have the right material / products at the right time to meet production / customer demand while optimizing the overall inventory investment.

It aims at:

  • Minimizing average inventory level
  • Maximizing utilization of stores / warehouse capacity
  • Reduce lead time
  • Increase production efficiency
  • Improve customer satisfaction

Main functions of Inventory Management:

  • Inventory analysis.
    • ABC - based on consumption and value
    • XYZ - based on stock value of item
    • VED - (Vital Essential Desirable) based on criticality

· Determine ordering policy

    • Determine stock parameters like safely stock, Re-order point, Economic order quantity, minimum stock, Review Period.

· Stock accounting

    • Inventory maintenance and stock valuation

· Physical stock verification

Inventory classification according to material group:

· Raw material

· Semi-finished good

· Sub-contracted items

· Bought-out parts

· Consumables

· Tools & gauges

· Jigs & fixtures

· Machine spares

Stock parameters used for controlling inventory:

· Lead time of procurement

· Safety stock or minimum stock to handle unexpected demand, changed rejection rate, to avoid stock out condition

· Re-order point

· Maximum stock

· Economic order quantity (EOQ)

· Average consumption for the period

· Review period

· ABC, XYZ, VED classification

Different stores where material is stored:

  • Inward store
  • Raw material store
  • Semi-finished stock store
  • Finished parts store
  • Finished goods store
  • Rejection store
  • Scrap store
  • Maintenance store
  • Tools store
  • Jigs, fixtures, patterns etc store

Inventory Transactions:

Material receipts:

  • Goods Receipt Report (GRR)
  • Goods Receipt & Inspection Report (GRIR)
  • Supplementary GRR
  • Customer’s Material return note
  • Material return note from Production (MRN) against excess or wrong material issue
  • Delivery note from Production (DN)
  • Transfer Note from other store location (TN)
  • Material Rejection Note
  • Positive Stock Adjustment update store record after physical counting

Material Issues:

  • Material issues note to part production (MIN)
  • Material transfer note to other stores
  • Assembly issue note to assembly production
  • Dispatch challan to sub-contractor for returnable material
  • Dispatch challan to customer for Finished Goods /Spares
  • Material rejection challan for sending rejected material to supplier
  • Negative Stock Adjustment

Reference documents for Inventory transactions:

  • Purchase Order (PO)
  • Sales Order (SO)
  • Material Requisition Note
  • Production Work Order
  • Goods Receipt Report

Need of Lot Traceability / Serial Tracking:

  • Inventory stored by Lot/ Serial Number on receipt and also issued
  • Inventory can also be stored by Grade, Potency, etc.
  • Keep track on inventory w.r.t. Shelf life, Sell-by Date, Display until Date, Best before Date
  • Used for forward / backward traceability w.r.t. Quantity, Rejection, etc.

Stock control systems:

Different methods for stock control

  • Re-order level system
  • Two bin system
  • Review system of replenishment

Re-order Level System (ROL):

  • Item is replenished as soon as stock of item falls to or below ROL
  • ROL = min. stock + (LT * Average Consumption)
  • Quantity ordered is EOQ which might be modified due to constraints like lot size, discount on Qty.
  • Max Level = Stock-on-hand + EOQ

Two bin System (Kanban):

  • Physically entire stock is segregated into two bins.
  • First the stock is been consumed from Bin-I
  • The empty Bin-I indicates that stock has reached ROL
  • Bin-II contains stock equivalent to ROL
  • The quantity ordered is divided into both the bins

Review system of Replenishment:

  • Stock is reviewed at a pre-fixed period
  • Ordered quantity varies as per the stock at the time of review.
  • Computation of Economic Review Period so as to minimize Total Procurement & Inventory carrying cost.

Economic Order Quantity (EOQ):

It is the quantity where inventory carrying cost equals cost of procurement

Inventory carrying cost = Cost of procurement

  • Inventory carrying cost includes
    • Investment cost (Interest on capital)
    • Storage cost (Storage, Insurance Handling, Obsolescence, Loss due to deterioration)

· Inventory procurement cost includes

    • Cost of processing Purchase Order (PO) or Work Order (WO)
    • Cost of handling

Calculation of EOQ:

EOQ = SQRT (2 * R * S / K * C)


R = Annual requirement or Consumption

S = Set-up cost in production or Procurement cost

K = Carrying cost as a % of average inventory cost

C = Unit cost of Item

EOQ is modified due to following constraints:

  • Suppliers minimum order quantity conditions
  • Lead time
  • Seasonal availability
  • Packing restrictions
  • Risk of obsolescence or deterioration
  • Price discount
  • Market condition
  • Government restrictions

A-B-C Analysis:

Classification is based on consumption value

  • A-class items
    • Usually 5-10% items accounts for 70-75% of money spent on material
    • These items require detailed & rigid control
    • Need to be stocked in smaller quantities
  • B-class items
    • Usually 10-15% items accounts for 10-15% of money spent on material
    • These items do not need detailed & rigid control
    • Normally stock are reviewed once in 1 or 2 months
  • C-class items
    • Usually 70-80% items accounts for 5-10% of money spent on material
    • Do not require close control
    • These items need to be procured infrequently in bulk to get quantity discount
  • Application of A-B-C Analysis:
    • Degree of control
    • Stock records
    • Safety stock level
    • Price discounts
    • Value engineering


  1. Hi,
    This site is very usefull for oracle apps guy's , devendra i need your help in distribution part i need the demo of implimentation of any module in inv, po and om, so if you can help me then pls suggest me that where i can get the study material for this, my mail id id


  2. Please draw some overview of Inventory like Purchasing.


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