Horti-Business Management (2+0)

2. Inventory control of raw materials

• The use of inventory is to take care of seasonal variations in demand. The inventory of materials, parts, goods and supplies represent a high investment in all business. Many companies failed because their inventories locked up too much money or the items in inventory become obsolete, impaired or lost. The purpose of inventory is to disconnect one segment of a process from another, so that each segment can operate at its optimum level of performance.
Types of Inventories

a) Purchased materials, parts, products
b) Goods in process or between operations
c) Finished goods at the factory, warehouse or store
d) Repair parts for machines
e) Supplies for the office, shop or factory
f) Tools

• Each of these types of inventory is performing basically the same function and can be studied in the same way. Some of the inventories represent a much greater investment, cause more serious trouble if the items are not in stock and are more costly to restock than others.
Determining Economic Inventory Level

• The detailed analysis made to determine economical inventory level must consider total inventory which should not be so great hat it make it difficult to pay current bills in cash. The fig 8.2 shows how the number of units of a purchased item varies over a period of time. When a purchased item is received the inventory increases instantly. The units are removed from inventory, as they are demanded. At certain levels or when inventory falls to a specific level, a purchase order is sent to the vendor. The order will be received sometime later. In the meantime, more units may be drawn from inventory. This cycle is repeated for each item purchased.
• For items in process and in finished goods, the inventory builds up over a period of time as goods are produced so that the vertical line in the figure will be sloping upwards to the right. The inventory builds up because production is greater than demand. Too little inventory may cause stock-outs (shortage of the material or product when it is required for production or sale). The problem is to strike the optimum inventory to carry converted in terms of Economic Order Quantity (EOQ) for consumption materials and economic lot size for batch production.
• The variables are
a) Annual requirement of the item (c)
b) Ordering cost(S)
c) Inventory carrying cost per unit (I)

• The model is given by the equation,
EOQ = _______________

Uses of the model

• The model is an excellent guide in scientitfic inventory management. This compels the manager to analyze the requirements and cost of inventory holding. It is useful in the inventory management by fixing.
1. Maximum and minimum level of stock holding.
2. Ordering level I (that is, the stock point when reordering is required, and
3. The most economic quantity to order.
• The above is a simple and deterministic model, which assumes constant rate of consumption, constant cost of ordering and holding inventory and uniform lead-time (that is, the time lag between replenishment, action and actual supply or availability of the items).